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Self-serving biased reference points

Andrea Gallice ()

No 223, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: This paper formalizes the pervasive phenomenon of the self-serving bias within the framework of reference dependent preferences. This formulation allows the stating of a simple rule to assess the existence of the bias at the aggregate level as well as a procedure that identifies the minimum number of biased agents. We apply the model to two standard situations: a litigation between a plaintiff and a defendant and a bankruptcy problem. In the litigation case, we show how the combination of self-serving bias and reference dependent preferences increases the likelihood that a dispute proceeds to trial. In the bankruptcy case, we show how the existence of individuals with self-serving biased reference points exacerbates the conflict between equity and efficiency of the final allocation.

Keywords: self-serving bias; reference dependent preferences; litigation; trial vs settlement; bankruptcy problem; optimal allocation (search for similar items in EconPapers)
JEL-codes: D03 D63 K41 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2011
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Working Paper: Self-serving biased reference points (2009) Downloads
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