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Loss Aversion in Repeated Games

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Author Info
Jonathan Shalev (CORE)

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Abstract

The Nash equilibrium solution concept for strategic form games is based on the assumption of expected utility maximization. Reference dependent utility functions (in which utility is determined not only by an outcome, but also by the relationship of the outcome to a reference point) are a better predictor of behavior than expected utility. In a repeated situation, the value of the previous payoff is a natural reference point for evaluating each period's payoff, and loss aversion implies that decreases are treated more severely than increases. We characterize the equilibria of infinitely repeated games for the case of extreme loss aversion, and show how these are related to the equilibria of stochastic games with state-independent transitions.

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Publisher Info
Paper provided by EconWPA in its series Game Theory and Information with number 9802005.

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Length: 22 pages
Date of creation: 10 Feb 1998
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Handle: RePEc:wpa:wuwpga:9802005

Note: Type of Document - LaTeX; prepared on IBM PC ; to print on PostScript; pages: 22 ; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: loss aversion repeated games reference dependence prospect theory;

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gilboa, Itzhak, 1989. "Expectation and Variation in Multi-period Decisions," Econometrica, Econometric Society, vol. 57(5), pages 1153-69, September. [Downloadable!] (restricted)
  2. SHALEV Jonathan ,, 1997. "Loss aversion equilibrium," CORE Discussion Papers 1997023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    Other versions:
  3. MERTENSÊ, Jean-Franois & SORINÊ, Sylvain & ZAMIRÊ, Shmuel, 1994. "Repeated Games. Part B : The Central Results," CORE Discussion Papers 1994021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. MERTENSÊ, Jean-Franois & SORINÊ, Sylvain & ZAMIRÊ, Shmuel, 1994. "Repeated Games. Part A : Background Material," CORE Discussion Papers 1994020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. MERTENS, Jean-Franois & SORINÊ, Sylvain & ZAMIRÊ, Shmuel, 1994. "Repeated Games. Part C : Further Developments," CORE Discussion Papers 1994022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Shalev, Jonathan, 1997. "Loss aversion in a multi-period model," Mathematical Social Sciences, Elsevier, vol. 33(3), pages 203-226, June. [Downloadable!] (restricted)
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  7. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  8. 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)
  9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1991. "The Endowment Effect, Loss Aversion, and Status Quo Bias: Anomalies," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter. [Downloadable!] (restricted)
  10. 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)
  11. J.L. Ferreira, 1992. "Credible Equilibria in Games with Utilities Changing During the Play," Discussion Papers 988, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  12. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November. [Downloadable!] (restricted)
  13. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December. [Downloadable!] (restricted)
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