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Note on intertemporal preference with loss aversion

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  • Choi, Kyoung Jin
  • Jeon, Junkee
  • Koo, Hyeng Keun

Abstract

We study two models of intertemporal preferences exhibiting loss aversion: one based on utility changes relative to a reference point, and another incorporating mental adjustment costs. Within a multi-period (possibly infinite-horizon) framework, we show that the two formulations are theoretically equivalent. The resulting preferences are neither monotone nor concave in general. We derive necessary and sufficient conditions for monotonicity and concavity, and provide a continuous-time extension that preserves the equivalence. Our results offer a tractable and rigorous foundation for modeling intertemporal behavior under reference-dependent preferences.

Suggested Citation

  • Choi, Kyoung Jin & Jeon, Junkee & Koo, Hyeng Keun, 2025. "Note on intertemporal preference with loss aversion," Mathematical Social Sciences, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:matsoc:v:138:y:2025:i:c:s0165489625000848
    DOI: 10.1016/j.mathsocsci.2025.102469
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    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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