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Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Author

Listed:
  • Bruce G. S. Hardie

    (The Wharton School, University of Pennsylvania)

  • Eric J. Johnson

    (The Wharton School, University of Pennsylvania)

  • Peter S. Fader

    (The Wharton School, University of Pennsylvania)

Abstract

Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice. We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.

Suggested Citation

  • Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
  • Handle: RePEc:inm:ormksc:v:12:y:1993:i:4:p:378-394
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    File URL: http://dx.doi.org/10.1287/mksc.12.4.378
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    References listed on IDEAS

    as
    1. Hauser, John R. & Urban, Glen L., 1975. "A normative methodology for modeling consumer response to innovation," Working papers 785-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Griffin, Abbie. & Hauser, John R., 1991. "The marketing and R & D interface," Working papers #48-91. Working paper (Sl, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Green, Paul E & Srinivasan, V, 1978. " Conjoint Analysis in Consumer Research: Issues and Outlook," Journal of Consumer Research, Oxford University Press, vol. 5(2), pages 103-123, Se.
    4. George P. Huber, 1974. "Multi-Attribute Utility Models: A Review of Field and Field-Like Studies," Management Science, INFORMS, vol. 20(10), pages 1393-1402, June.
    5. John R. Hauser, 1977. "Testing the Accuracy," Discussion Papers 286, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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