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A Theory Of Reference-Dependent Beavior

There is extensive field and experimental evidence in a wide variety of environments showing that behavior depends on a reference point. This paper provides an axiomatic characterization for such behavior. Our approach is dual, we study choice behavior and preference relations. We proceed by gradually imposing more structure on behavior, requiring higher levels of rationality, that free the decision-maker from certain types of manipulations. Depending on the phenomena one wants to model, one degree of behavioral structure will be appropriate or another. We provide two applications of the theory: one to model the status-quo bias, and another to model addictive behavior.

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File URL: ftp://ftp.econ.unavarra.es/pub/DocumentosTrab/DT0402.PDF
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Paper provided by Departamento de Economía - Universidad Pública de Navarra in its series Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra with number 0402.

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Length: 35 pages
Date of creation: Feb 2004
Date of revision:
Publication status: Published in
Handle: RePEc:nav:ecupna:'0402'
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  1. A. Rubinstein & L. Zhou, 1998. "Choice Problems with a "Reference" Point," Princeton Economic Theory Papers 00s3, Economics Department, Princeton University.
  2. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  3. Walter Bossert & Yves Sprumont, 2009. "Non-Deteriorating Choice," Economica, London School of Economics and Political Science, vol. 76(302), pages 337-363, 04.
  4. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Mandler, Michael, 2005. "Incomplete preferences and rational intransitivity of choice," Games and Economic Behavior, Elsevier, vol. 50(2), pages 255-277, February.
  6. Knetsch, Jack L & Sinden, J A, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, MIT Press, vol. 99(3), pages 507-21, August.
  7. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  8. Steffen Huck & Georg Kirchsteiger & Jörg Oechssler, 2005. "Learning to like what you have - explaining the endowment effect," Economic Journal, Royal Economic Society, vol. 115(505), pages 689-702, 07.
  9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  10. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  11. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 479-505, May.
  12. Raphaël Giraud, 2012. "Money matters: an axiomatic theory of the endowment effect," Economic Theory, Springer, vol. 50(2), pages 303-339, June.
  13. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, vol. 79(5), pages 1277-84, December.
  14. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
  15. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, vol. 80(1), pages 204-17, March.
  16. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  17. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
  18. Raphaël Giraud, 2004. "Reference-dependent preferences : rationality, mechanism and welfare implications," Cahiers de la Maison des Sciences Economiques v04087, Université Panthéon-Sorbonne (Paris 1).
  19. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
  20. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April.
  21. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
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