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Caution and Reference Effects

Simone Cerreia-Vioglio, David Dillenberger () and Pietro Ortoleva ()
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David Dillenberger: University of Pennsylvania
Pietro Ortoleva: Princeton University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We introduce the Cautious Utility model and show that it provides a new approach to three phenomena at the core of behavioral economics: the endowment effect, loss aversion, and violations of Expected Utility due to the certainty effect. In our model, all three phenomena stem from uncertainty about which utility to use and caution. We show how this model can help organize empirical evidence, some of which is incompatible with leading alternatives, and is both conceptually and behaviorally distinct from other popular approaches.

Keywords: Cautious Utility; Endowment Effect; Loss Aversion; Certainty Effect; Non-Expected Utility; Cumulative Prospect Theory (search for similar items in EconPapers)
JEL-codes: D80 D81 D90 D91 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2022-05-06
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