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Investment in education under disappointment aversion

Author

Listed:
  • Dan Anderberg

    (Department of Economics, Royal Holloway University of London)

  • Claudia Cerrone

    (Max Planck Institute for Research on Collective Goods)

Abstract

This paper develops a model of risky investment in education under disappointment aversion, modelled as loss aversion around one's endogenous expectation. The model shows that disappointment aversion reduces the optimal investment in education for lower ability people and increases it for higher ability people, thereby magnifying the investment gap between them generated by the riskiness of education. Policies aimed at influencing students' expectations can reduce early dropout.

Suggested Citation

  • Dan Anderberg & Claudia Cerrone, 2016. "Investment in education under disappointment aversion," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2016_16, Max Planck Institute for Behavioral Economics.
    • Handle: RePEc:mpg:wpaper:2016_16
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    References listed on IDEAS

    as
    1. Björn Bartling & Leif Brandes & Daniel Schunk, 2015. "Expectations as Reference Points: Field Evidence from Professional Soccer," Management Science, INFORMS, vol. 61(11), pages 2646-2661, November.
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    4. Dan Anderberg & Claudia Cerrone, 2014. "Education, Disappointment and Optimal Policy," CESifo Working Paper Series 5141, CESifo.
    5. 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.
    6. Guilhem Lecouteux & Léonard Moulin, 2015. "To gain or not to lose? Tuition fees for loss averse students," Economics Bulletin, AccessEcon, vol. 35(2), pages 1005-1019.
    7. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
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    9. Robert Jensen, 2010. "The (Perceived) Returns to Education and the Demand for Schooling," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(2), pages 515-548.
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    More about this item

    Keywords

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    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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