American Economic Review: Vol. 97 No. 4 (September 2007)
Print Article Summary Export Citation
Sign up for Email Alerts Follow us on Twitter
Reference-Dependent Risk Attitudes
Kőszegi, Botond, and Matthew Rabin. 2007. "Reference-Dependent Risk Attitudes." American Economic Review, 97(4): 1047-1073.
We use Koszegi and Rabin's (2006) model of reference-dependent utility, and an extension of it that applies to decisions with delayed consequences, to study preferences over monetary risk. Because our theory equates the reference point with recent probabilistic beliefs about outcomes, it predicts specific ways in which the environment influences attitudes toward modest-scale risk. It replicates "classical" prospect theoryincluding the prediction of distaste for insuring losseswhen exposure to risk is a surprise, but implies first-order risk aversion when a risk, and the possibility of insuring it, are anticipated. A prior expectation to take on risk decreases aversion to both the anticipated and additional risk. For large-scale risk, the model allows for standard "consumption utility" to dominate reference-dependent "gain-loss utility," generating nearly identical risk aversion across situations. (JEL D81)
Article Full-Text Access