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Axiomatic reference-dependence in behavior toward others and toward risk

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  • William Neilson

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Abstract

This paper considers the applicability of the standard separability axiom for both risk and other-regarding preferences, and advances arguments why separability might fail. An alternative axiom, which is immune to these arguments, leads to a preference representation that is additively separable in a reference variable and the differences between the other variables and the reference variable. For other-regarding preferences the reference variable is the decision-maker’s own payoff, and the resulting representation coincides with the Fehr-Schmidt model. For risk preferences the reference variable is initial wealth, and the resulting representation is a generalization of prospect theory. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 681-692, August.
  • Handle: RePEc:spr:joecth:v:28:y:2006:i:3:p:681-692
    DOI: 10.1007/s00199-005-0643-4
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