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A theory of reference-dependent behavior

  • Jose Apesteguia

    ()

  • Miguel Ballester

    ()

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

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File URL: http://hdl.handle.net/10.1007/s00199-008-0387-z
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 40 (2009)
Issue (Month): 3 (September)
Pages: 427-455

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Handle: RePEc:spr:joecth:v:40:y:2009:i:3:p:427-455
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  1. Huck, Steffen & Kirchsteiger, Georg & Oechssler, Jörg, 1997. "Learning to like what you have: Explaining the endowment effect," SFB 373 Discussion Papers 1997,38, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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  18. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December.
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