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Loss aversion equilibrium

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  • SHALEV, Jonathan

Abstract

The Nash equilibrium solution concept for games is based on the assumption of expected utility maximization. Reference dependent utility functions (in which utility is determined not only by an outcome, but also by the relationship of the outcome to a reference point) are a better predictor of behavior than expected utility. In particular, loss aversion is an important element of such utility functions. We extend games to include loss aversion characteristics of the players. We define two types of loss-aversion equilibrium, a solution concept endogenizing reference points. The two types reflect different types of updating of reference points during the game. In equilibrium, reference points emerge as expressions of anticipation which are fulfilled. We show existence of myopic loss-aversion equilibrium for any extended game, and compare it to Nash equilibrium. Comparative statics show that an increase in loss aversion of one player can affect his and other players' payoffs in different directions.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • SHALEV, Jonathan, 2000. "Loss aversion equilibrium," LIDAM Reprints CORE 1456, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvrp:1456
    DOI: 10.1007/s001820000038
    Note: In : International Journal of Game Theory, 29, 269-287, 2000
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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