IDEAS home Printed from https://ideas.repec.org/p/hum/wpaper/sfb649dp2008-011.html
   My bibliography  Save this paper

Don’t aim too high: the potential costs of high aspirations

Author

Listed:
  • Astrid Matthey
  • Nadja Dwenger

Abstract

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on the factor found to be crucial: the adjustment of reference states to changes in expectations. The results suggest that the costs of high aspirations can be significant, since reference states do not adjust quickly. We use a novel, indirect approach that allows us to infer the determinants of the reference state from observed behavior, rather than to rely on cheap talk.

Suggested Citation

  • Astrid Matthey & Nadja Dwenger, 2008. "Don’t aim too high: the potential costs of high aspirations," SFB 649 Discussion Papers SFB649DP2008-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2008-011
    as

    Download full text from publisher

    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2008-011.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. McBride, Michael, 2010. "Money, happiness, and aspirations: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 262-276, June.
    3. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
    4. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    5. George A. Akerlof & Rachel E. Kranton, 2000. "Economics and Identity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(3), pages 715-753.
    6. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    7. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(2), pages 269-287.
    8. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    9. Martin Weber & Heiko Zuchel, 2005. "How Do Prior Outcomes Affect Risk Attitude? Comparing Escalation of Commitment and the House-Money Effect," Decision Analysis, INFORMS, vol. 2(1), pages 30-43, March.
    10. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
    11. Ng, Yew-Kwang & Wang, Jianguo, 2001. "Attitude choice, economic change, and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 279-291, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Ambition hurts
      by chris dillow in Stumbling and Mumbling on 2007-12-10 21:00:50

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Koch, Alexander K. & Nafziger, Julia & Suvorov, Anton & van de Ven, Jeroen, 2014. "Self-rewards and personal motivation," European Economic Review, Elsevier, vol. 68(C), pages 151-167.
    2. Hsiaw, Alice, 2013. "Goal-setting and self-control," Journal of Economic Theory, Elsevier, vol. 148(2), pages 601-626.
    3. Koch, Alexander K. & Nafziger, Julia, 2011. "Goals and Psychological Accounting," IZA Discussion Papers 5802, Institute of Labor Economics (IZA).
    4. Alice Hsiaw, 2012. "Goal-Setting and Self-Control," Working Papers 1404, College of the Holy Cross, Department of Economics, revised Aug 2014.
    5. Quang Nguyen, 2011. "Does nurture matter: Theory and experimental investigation on the effect of working environment on risk and time preferences," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 245-270, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    2. Patricio S. Dalton & Sayantan Ghosal & Anandi Mani, 2016. "Poverty and Aspirations Failure," Economic Journal, Royal Economic Society, vol. 126(590), pages 165-188, February.
    3. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    4. Astrid Matthey, 2005. "Getting Used to Risks: Reference Dependence and Risk Inclusion," SFB 649 Discussion Papers SFB649DP2005-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. Katarzyna M. Werner & Horst Zank, 2019. "A revealed reference point for prospect theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 731-773, June.
    6. Caporale, Guglielmo Maria & Georgellis, Yannis & Tsitsianis, Nicholas & Yin, Ya Ping, 2009. "Income and happiness across Europe: Do reference values matter?," Journal of Economic Psychology, Elsevier, vol. 30(1), pages 42-51, February.
    7. Aronsson, Thomas & Johansson-Stenman, Olof, 2014. "Positional preferences in time and space: Optimal income taxation with dynamic social comparisons," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 1-23.
    8. Clark, Andrew E. & D'Ambrosio, Conchita, 2014. "Attitudes to Income Inequality: Experimental and Survey Evidence," IZA Discussion Papers 8136, Institute of Labor Economics (IZA).
    9. Andrea Lippi & Laura Barbieri & Mariacristina Piva & Werner De Bondt, 2018. "Time-varying risk behavior and prior investment outcomes: Evidence from Italy," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 13(5), pages 471-483, September.
    10. Adrian de la Garza & Giovanni Mastrobuoni & Atsushi Sannabe & Katsunori Yamada, 2010. "The Relative Utility Hypothesis With and Without Self-reported Reference Wages," ISER Discussion Paper 0798, Institute of Social and Economic Research, Osaka University, revised Jul 2012.
    11. Seeun Jung & Carole Treibich, 2014. "Is Self-Reported Risk Aversion Time Varying?," Working Papers halshs-00965549, HAL.
    12. Binzel, Christine & Carvalho, Jean-Paul, 2013. "Education, Social Mobility and Religious Movements: A Theory of the Islamic Revival in Egypt," IZA Discussion Papers 7259, Institute of Labor Economics (IZA).
    13. Colin Jennings & Hein Roelfsema, 2008. "Civil Conflict, Federalism and Strategic Delegation of Leadership," Journal of Peace Research, Peace Research Institute Oslo, vol. 45(4), pages 557-573, July.
    14. Roelof Salomons, 2008. "A Theoretical And Practical Perspective On The Equity Risk Premium," Journal of Economic Surveys, Wiley Blackwell, vol. 22(2), pages 299-329, April.
    15. Emmerling, Johannes & Qari, Salmai, 2017. "Car ownership and hedonic adaptation," Journal of Economic Psychology, Elsevier, vol. 61(C), pages 29-38.
    16. Banerji A & Jeevant Rampal, 2015. "Loss Aversion and Willingness to Pay for New Products," Working Papers id:7798, eSocialSciences.
    17. Diriwaechter, Patric & Shvartsman, Elena, 2018. "The anticipation and adaptation effects of intra- and interpersonal wage changes on job satisfaction," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 116-140.
    18. Leonardo Bursztyn & Robert Jensen, 2017. "Social Image and Economic Behavior in the Field: Identifying, Understanding, and Shaping Social Pressure," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 131-153, September.
    19. Schade, Christian & Schroeder, Andreas & Krause, Kai Oliver, 2010. "Coordination after gains and losses: Is prospect theory’s value function predictive for games?," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 59524, Humboldt University Berlin, Department of Agricultural Economics.
    20. Yun Shi & Xiangyu Cui & Jing Yao & Duan Li, 2015. "Dynamic Trading with Reference Point Adaptation and Loss Aversion," Operations Research, INFORMS, vol. 63(4), pages 789-806, August.

    More about this item

    Keywords

    aspirations; reference state; expectations; individual utility; experiments;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hum:wpaper:sfb649dp2008-011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: RDC-Team (email available below). General contact details of provider: https://edirc.repec.org/data/sohubde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.