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Caution and Reference Effects

Author

Listed:
  • Simone Cerreia-Vioglio

    (Bocconi University)

  • David Dillenberger

    (University of Pennsylvania)

  • Pietro Ortoleva

    (Princeton University)

Abstract

We introduce the Cautious Utility model and show that it provides a new approach to three phenomena at the core of behavioral economics: the endowment effect, loss aversion, and violations of Expected Utility due to the certainty effect. In our model, all three phenomena stem from uncertainty about which utility to use and caution. We show how this model can help organize empirical evidence, some of which is incompatible with leading alternatives, and is both conceptually and behaviorally distinct from other popular approaches.

Suggested Citation

  • Simone Cerreia-Vioglio & David Dillenberger & Pietro Ortoleva, 2022. "Caution and Reference Effects," PIER Working Paper Archive 22-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:22-015
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    More about this item

    Keywords

    Cautious Utility; Endowment Effect; Loss Aversion; Certainty Effect; Non-Expected Utility; Cumulative Prospect Theory;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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