Asymmetric gain–loss reference dependence and attitudes toward uncertainty

Juan Sebastián Lleras (), Evan Piermont () and Richard Svoboda ()
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Richard Svoboda: The Lewin Group

Economic Theory, 2019, vol. 68, issue 3, No 6, 669-699

Abstract: Abstract This paper characterizes a model of reference dependence, where a state-contingent contract (act) is evaluated by its expected value and its expected gain–loss utility. The expected utility of an act serves as the reference point; hence, gains (resp., losses) occur when the act provides an outcome that is better (worse) than expected. The utility representation is characterized by a belief regarding the state space and a degree of reference dependence; both are uniquely identified from behavior. We establish a link between this type of reference dependence and attitudes toward uncertainty. We show that loss aversion and reference dependence are equivalent to max–min and concave expected utility.

Keywords: Reference-dependent preferences; Endogenous reference points; Gain–loss attitudes; Subjective expected utility; Belief distortion (search for similar items in EconPapers)
JEL-codes: D80 D81 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00199-018-1138-4

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