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Expectations-Based Reference-Dependence and Choice Under Risk

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  • David J Freeman

Abstract

This article characterises the behavioural content of a model of choice under risk with reference-dependent preferences and endogenous expectations-based reference points based on the preferred personal equilibrium model of Kőszegi and Rabin (2006). The combination of reference-dependent preferences and endogenous reference points leads to violations of the Independence Axiom and can also lead to violations of the Weak Axiom of Revealed Preference. An axiomatic characterisation shows that the model places testable restrictions on choice under risk.

Suggested Citation

  • David J Freeman, 2019. "Expectations-Based Reference-Dependence and Choice Under Risk," The Economic Journal, Royal Economic Society, vol. 129(622), pages 2424-2458.
    • Handle: RePEc:oup:econjl:v:129:y:2019:i:622:p:2424-2458.
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    File URL: http://hdl.handle.net/10.1111/ecoj.12639
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    Cited by:

    1. Meng, Charlotte C., 2023. "The price paid: Heuristic thinking and biased reference points in the housing market," Journal of Urban Economics, Elsevier, vol. 134(C).
    2. Zhihua Li & Songfa Zhong, 2023. "Reference Dependence in Intertemporal Preference," Management Science, INFORMS, vol. 69(1), pages 475-490, January.
    3. Armouti-Hansen, Jesper & Kops, Christopher, 2024. "Managing anticipation and reference-dependent choice," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    4. Daijiro Kawanaka, 2023. "Mixture Attitudes of Expectation-Based Loss Aversion," Discussion Papers in Economics and Business 23-02, Osaka University, Graduate School of Economics.
    5. Dillenberger, David & Raymond, Collin, 2019. "On the consensus effect," Journal of Economic Theory, Elsevier, vol. 183(C), pages 384-416.

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