Reference dependent ambiguity

Maximilian Mihm

Journal of Economic Theory, 2016, vol. 163, issue C, 495-524

Abstract: Motivated by experimental and empirical evidence, I study a framework where reference-points – such as a status quo, endowment, or default option – can distort the way an individual responds to ambiguity. I characterize a model of reference-dependent maxmin expected utility, and provide behavioral foundations for comparing reference-dependent ambiguity attitudes. I also illustrate some implications of reference-dependent ambiguity for trade in an asset market, including underdiversification, no-trade, and the potential for a market collapse.

Keywords: Ambiguity; Reference-points; Market collapse (search for similar items in EconPapers)
JEL-codes: D51 D53 D81 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:163:y:2016:i:c:p:495-524

DOI: 10.1016/j.jet.2016.02.006

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