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A Theory of Reference-Dependent Behavior

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  • Jose Apesteguia
  • Miguel Ángel Ballester

Abstract

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.

Suggested Citation

  • Jose Apesteguia & Miguel Ángel Ballester, 2007. "A Theory of Reference-Dependent Behavior," Working Papers 323, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:323
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    References listed on IDEAS

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    More about this item

    Keywords

    individual rationality; reference-dependence; Rationalization; path independence; status-quo bias; addiction; Habit formation;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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