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

  • Astrid Matthey

    ()

    (Max-Planck-Institute of Economics Jena, Germany)

  • Nadja Dwenger

    (DIW Berlin, Germany)

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 ?rst 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 signi?cant, 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.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-097.

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Date of creation: 04 Dec 2007
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Handle: RePEc:jrp:jrpwrp:2007-097
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  1. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  2. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1133-1165, November.
  3. Alois Stutzer, . "The Role of Income Aspirations in Individual Happiness," IEW - Working Papers 124, Institute for Empirical Research in Economics - University of Zurich.
  4. Michael McBride, 2007. "Money, Happiness, and Aspirations: An Experimental Study," Working Papers 060721, University of California-Irvine, Department of Economics, revised Jul 2008.
  5. Selten, Reinhard, 1996. "Aspiration Adaptation Theory," Discussion Paper Serie B 389, University of Bonn, Germany.
  6. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 1-90, Wharton School Rodney L. White Center for Financial Research.
  7. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer, vol. 29(2), pages 269-287.
  8. 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.
  9. 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.
  10. 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.
  11. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  12. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
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