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Loss Aversion in a Multi-Period Model

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  • Jonathan Shalev

    (CORE)

Abstract

An individual faces a choice between streams of outcomes in several periods in the future. This paper examines an axiomatization of preference relations over these streams that leads to a simple functional representation of these preferences. Motivated by the loss- aversion aspects of Tversky and Kahneman's prospect theory, the axioms lead to a representation that takes into account not only the utility of the per-period outcomes (instantaneous payoffs,) but also the differences between the utility of pairs of adjacent outcomes, and the direction of the differences (gains or losses). In this framework loss aversion is defined and characterized.

Suggested Citation

  • Jonathan Shalev, 1994. "Loss Aversion in a Multi-Period Model," Game Theory and Information 9407001, EconWPA, revised 18 Mar 1997.
  • Handle: RePEc:wpa:wuwpga:9407001
    Note: 31 pages, Postscript file from LaTeX. Major revision of paper entitled An Axiomatization of Loss Aversion in a Multi-Period Model
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kareen Rozen, 2010. "Foundations of Intrinsic Habit Formation," Econometrica, Econometric Society, vol. 78(4), pages 1341-1373, July.
    2. Tadashi Sekiguchi & Katsutoshi Wakai, 2016. "Repeated Games with Recursive Utility:Cournot Duopoly under Gain/Loss Asymmetry," Discussion papers e-16-006, Graduate School of Economics , Kyoto University.
    3. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
    4. De Waegenaere, Anja & Wakker, Peter P., 2001. "Nonmonotonic Choquet integrals," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 45-60, September.
    5. Jonathan Shalev, 1998. "Loss Aversion in Repeated Games," Game Theory and Information 9802005, EconWPA.
    6. Hojman, Daniel & Kast, Felipe, 2009. "On the Measurement of Poverty Dynamics," Working Paper Series rwp09-035, Harvard University, John F. Kennedy School of Government.
    7. Chateauneuf, Alain & Ventura, Caroline, 2013. "G-continuity, impatience and myopia for Choquet multi-period utilities," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 97-105.
    8. Han Bleichrodt & José Luis Pinto, 2000. "An experimental test of loss aversion and scale compatibility," Economics Working Papers 467, Department of Economics and Business, Universitat Pompeu Fabra.
    9. De Waegenaere, A.M.B. & Wakker, P.P., 1997. "Choquet Integrals With Respect to Non-Monotonic Set Functions," Discussion Paper 1997-44, Tilburg University, Center for Economic Research.
    10. Diecidue, Enrico & Wakker, Peter P, 2001. "On the Intuition of Rank-Dependent Utility," Journal of Risk and Uncertainty, Springer, vol. 23(3), pages 281-298, November.
    11. André Lapied & Robert Kast, 2005. "Updating Choquet valuation and discounting information arrivals," Working Papers 05-09, LAMETA, Universtiy of Montpellier, revised Jan 2005.
    12. Han Bleichrodt & José Luis Pinto, 2000. "An experimental test of loss aversion and scale compatibility," Working Papers, Research Center on Health and Economics 467, Department of Economics and Business, Universitat Pompeu Fabra.
    13. Chateauneuf, Alain & Rebille, Yann, 2004. "Some characterizations of non-additive multi-period models," Mathematical Social Sciences, Elsevier, vol. 48(3), pages 235-250, November.

    More about this item

    Keywords

    loss-aversion; utility; multi-period decisions.;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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