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

Author

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  • Astrid Matthey

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

  • Nadja Dwenger

    (DIW Berlin, Germany)

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 ?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.

Suggested Citation

  • Astrid Matthey & Nadja Dwenger, 2007. "Don't aim too high: the potential costs of high aspirations," Jena Economic Research Papers 2007-097, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2007-097
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    File URL: http://www2.wiwi.uni-jena.de/Papers/jerp2007/wp_2007_097.pdf
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    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.
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    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, Oxford University Press, vol. 121(4), pages 1133-1165.
    5. George A. Akerlof & Rachel E. Kranton, 2000. "Economics and Identity," The Quarterly Journal of Economics, Oxford University Press, 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. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
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    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

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    Cited by:

    1. Koch, Alexander K. & Nafziger, Julia, 2011. "Goals and Psychological Accounting," IZA Discussion Papers 5802, Institute of Labor Economics (IZA).
    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 & Suvorov, Anton & van de Ven, Jeroen, 2014. "Self-rewards and personal motivation," European Economic Review, Elsevier, vol. 68(C), pages 151-167.
    4. 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.

    More about this item

    Keywords

    aspirations; reference state; expectations; individual utility; experiments;

    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

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