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Loss aversion in a multi-period model

  • Shalev, Jonathan

An individual faces a choice between streams of outcomes in several periods in the future. This paper examines an axiomatization of preference relations over these streams that leads to a simple functional representation of these preferences. Motivated by the loss- aversion aspects of Tversky and Kahneman's prospect theory, the axioms lead to a representation that takes into account not only the utility of the per-period outcomes (instantaneous payoffs,) but also the differences between the utility of pairs of adjacent outcomes, and the direction of the differences (gains or losses). In this framework loss aversion is defined and characterized.

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File URL: http://www.sciencedirect.com/science/article/B6V88-3SWYC4V-2/2/c96a6ce16b0e95aef57a874b51807c1a
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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 33 (1997)
Issue (Month): 3 (June)
Pages: 203-226

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Handle: RePEc:eee:matsoc:v:33:y:1997:i:3:p:203-226
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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  1. Gilboa, Itzhak, 1989. "Expectation and Variation in Multi-period Decisions," Econometrica, Econometric Society, vol. 57(5), pages 1153-69, September.
  2. Wakker, Peter, 1993. "Savage's Axioms Usually Imply Violation of Strict Stochastic Dominance," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 487-93, April.
  3. Wakker, Peter, 1990. "Characterizing optimism and pessimism directly through comonotonicity," Journal of Economic Theory, Elsevier, vol. 52(2), pages 453-463, December.
  4. 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.
  5. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  6. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
  7. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  8. Kahneman, Daniel & Thaler, Richard H, 1991. "Economic Analysis and the Psychology of Utility: Applications to Compensation Policy," American Economic Review, American Economic Association, vol. 81(2), pages 341-46, May.
  9. F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
  10. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-52, May.
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