Testing reference dependence, loss aversion and diminishing sensitivity in Spanish tourism

Juan L. Nicolau

Investigaciones Economicas, 2008, vol. 32, issue 2, pages 231-255

Abstract: Based on Tversky and Kahneman’s Prospect Theory, we test the existence of reference dependence, loss aversion and diminishing sensitivity in Spanish tourism. To do this, we incorporate the reference-dependent model into a Multinomial Logit Model with Random Parameters -which controls for heterogeneity- and apply it to a sample of vacation choices made by Spaniards. We find that the difference between reference price and actual price is considered to make decisions, confirming that reference dependence exists; that people react more strongly to price increases than to price decreases relative to their reference price, which represents evidence in favor of the loss aversion phenomenon; and that there is diminishing sensitivity for losses only, showing convexity for these negative values.

Keywords: Prospect theory; tourism prices. (search for similar items in EconPapers)
JEL-codes: D12 L83 (search for similar items in EconPapers)
Date: 2008

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