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A Theory of Reference-Dependent Behavior

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Author Info
Jose Apesteguia ()
Miguel A. Ballester

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Abstract

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

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Publisher Info
Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1056.

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Date of creation: Oct 2007
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Handle: RePEc:upf:upfgen:1056

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Web page: http://www.econ.upf.edu/

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Related research
Keywords: Individual rationality; reference-dependence; rationalization; path independence; status-quo bias; addiction; habit formation; LeeX;

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Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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  1. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September. [Downloadable!] (restricted)
  2. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December. [Downloadable!] (restricted)
  3. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March. [Downloadable!] (restricted)
  4. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March. [Downloadable!] (restricted)
  5. Mandler, Michael, 2005. "Incomplete preferences and rational intransitivity of choice," Games and Economic Behavior, Elsevier, vol. 50(2), pages 255-277, February. [Downloadable!] (restricted)
  6. Knetsch, Jack L & Sinden, J A, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 507-21, August. [Downloadable!] (restricted)
  7. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December. [Downloadable!] (restricted)
  8. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April. [Downloadable!] (restricted)
  9. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November. [Downloadable!] (restricted)
  10. Rubinstein, Ariel & Zhou, Lin, 1999. "Choice problems with a 'reference' point," Mathematical Social Sciences, Elsevier, vol. 37(3), pages 205-209, May. [Downloadable!] (restricted)
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  11. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju. [Downloadable!] (restricted)
  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  13. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August. [Downloadable!] (restricted)
  14. Steffen Huck & Georg Kirchsteiger & Jörg Oechssler, 2005. "Learning to like what you have - explaining the endowment effect," Economic Journal, Royal Economic Society, vol. 115(505), pages 689-702, 07. [Downloadable!] (restricted)
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  15. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, vol. 80(1), pages 204-17, March. [Downloadable!] (restricted)
  16. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  17. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
  18. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August. [Downloadable!] (restricted)
    Other versions:
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