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A Behavioral Analysis of Stochastic Reference Dependence

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  • Yusufcan Masatlioglu
  • Collin Raymond

Abstract

We examine the reference-dependent risk preferences of Koszegi and Rabin (2007), focusing on their choice-acclimating personal equilibria. Although their model has only a trivial intersection (expected utility) with other reference-dependent models, it has very strong connections with models that rely on different psychological intuitions. We prove that the intersection of rank-dependent utility and quadratic utility, two well-known generalizations of expected utility, is exactly monotone linear gain-loss choice-acclimating personal equilibria. We use these relationships to identify parameters of the model, discuss loss and risk aversion, and demonstrate new applications.

Suggested Citation

  • Yusufcan Masatlioglu & Collin Raymond, 2016. "A Behavioral Analysis of Stochastic Reference Dependence," American Economic Review, American Economic Association, vol. 106(9), pages 2760-2782, September.
  • Handle: RePEc:aea:aecrev:v:106:y:2016:i:9:p:2760-82
    Note: DOI: 10.1257/aer.20140973
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    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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