A Behavioral Analysis of Stochastic Reference Dependence
AbstractWe examine the reference-dependent risk preferences of Koszegi and Rabin (2007), focusing on their choice-acclimating personal equilibria. Although their model has only a trivial intersection (expected utility) with other reference-dependent models, it has very strong connections with models that rely on different psychological intuitions. We prove that the intersection of rank-dependent utility and quadratic utility, two well-known generalizations of expected utility, is exactly monotone linear gain-loss choice-acclimating personal equilibria. We use these relationships to identify parameters of the model, discuss loss and risk aversion, and demonstrate new applications.
CitationMasatlioglu, Yusufcan, and Collin Raymond. 2016. "A Behavioral Analysis of Stochastic Reference Dependence." American Economic Review, 106 (9): 2760-82. DOI: 10.1257/aer.20140973
- D11 Consumer Economics: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty