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On the theory of reference-dependent preferences (revised)

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Abstract

A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahneman’s reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy standard assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.

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Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Discussion Papers in Economics with number 9803.

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Length: pages
Date of creation: 21 Mar 2001
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Handle: RePEc:uea:papers:9803

Note: This is an updated version of the original 1998 paper.
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Postal: Helen Chapman, School of Economics, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK
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Keywords: status quo bias; behavioral economics; loss aversion; reference-dependence; prospect theory; general equilibrium;

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