Expectations-Based Reference-Dependence and Choice Under Risk

David Freeman

The Economic Journal, 2019, vol. 129, issue 622, 2424-2458

Abstract: This article characterises the behavioural content of a model of choice under risk with reference-dependent preferences and endogenous expectations-based reference points based on the preferred personal equilibrium model of Kőszegi and Rabin (2006). The combination of reference-dependent preferences and endogenous reference points leads to violations of the Independence Axiom and can also lead to violations of the Weak Axiom of Revealed Preference. An axiomatic characterisation shows that the model places testable restrictions on choice under risk.

Date: 2019
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