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On the theory of reference-dependent preferences (revised)

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Abstract

A theory is proposed in which preferences are conditional on reference points. It is related to Tversky and Kahneman's reference-dependent preference theory, but is simpler and deviates less from conventional consumer theory. Preferences conditional on any given reference point satisfy standard assumptions. Apart from a continuity condition, the only additional restriction is to rule out cycles of pairwise choice. The theory is consistent with observations of status quo bias and related effects. Reference points are treated as subject to change during the course of trade. The implications of endogeneity of reference points for behaviour in markets are investigated.

Suggested Citation

  • Alistair Munro & Robert Sugden, 2001. "On the theory of reference-dependent preferences (revised)," University of East Anglia Discussion Papers in Economics 9803, School of Economics, University of East Anglia, Norwich, UK..
  • Handle: RePEc:uea:papers:9803
    Note: This is an updated version of the original 1998 paper.
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    Keywords

    status quo bias; behavioral economics; loss aversion; reference-dependence; prospect theory; general equilibrium;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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