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Choosing with the worst in mind: A reference-dependent model

Gerelt Tserenjigmid

Journal of Economic Behavior & Organization, 2019, vol. 157, issue C, 631-652

Abstract: This paper focuses on choices from menus of two-attribute alternatives and develops a reference-dependent model with endogenous reference points. The reference point for a given menu is a vector that consists of the minimum of each dimension of the menu. The model is characterized by a novel weakening of the Weak Axiom of Revealed Preference in addition to separability axioms. We show an equivalence between the attraction and compromise effects, two well-known choice reversals, and diminishing sensitivity, a widely-used behavioral property. We provide bounds on choice reversals, theoretically justify using minimums as references, and apply the model to intertemporal choice.

Keywords: Reference dependence; Menu-dependent reference; WARP; Attraction effect; Compromise effect; Diminishing sensitivity; Intertemporal choice (search for similar items in EconPapers)
JEL-codes: D01 D11 D81 D91 (search for similar items in EconPapers)
Date: 2019
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