Exogenous endowment - Endogenous reference point

Amnon Maltz

No WP2016/5, Working Papers from University of Haifa, Department of Economics

Abstract: We develop a reference dependent model with an initial endowment and in a world where alternatives are grouped into categories. The model creates a link between the agent's exogenous endowment and her endogenous reference point. The actual refer- ence point is the best feasible alternative, according to the agent's preferences, which belongs to her endowment's category. This endogenous reference point induces a con- straint set from which the nal choice is made according to utility maximization. The model gives rise to category bias which generalizes the status quo bias by attracting the agent to her endowment's category but not necessarily to the endowment itself. We show that it accommodates recent experimental ndings regarding the presence and absence of status quo bias in the realm of uncertainty. We apply the model to a stylized nancial setup and show that it may lead to a risk premium even with risk neutral agents

Keywords: Categories; Status Quo Bias; Reference Dependence; Risk Premium; Re- vealed Preference (search for similar items in EconPapers)
JEL-codes: D03 D11 (search for similar items in EconPapers)
Pages: 33
New Economics Papers: this item is included in nep-dcm, nep-mic and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Exogenous Endowment-Endogenous Reference Point (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:haf:huedwp:wp201605

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