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Choosing with the worst in mind: A reference-dependent model

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  • Tserenjigmid, Gerelt

Abstract

This paper focuses on choices from menus of two-attribute alternatives and develops a reference-dependent model with endogenous reference points. The reference point for a given menu is a vector that consists of the minimum of each dimension of the menu. The model is characterized by a novel weakening of the Weak Axiom of Revealed Preference in addition to separability axioms. We show an equivalence between the attraction and compromise effects, two well-known choice reversals, and diminishing sensitivity, a widely-used behavioral property. We provide bounds on choice reversals, theoretically justify using minimums as references, and apply the model to intertemporal choice.

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  • Tserenjigmid, Gerelt, 2019. "Choosing with the worst in mind: A reference-dependent model," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 631-652.
    • Handle: RePEc:eee:jeborg:v:157:y:2019:i:c:p:631-652
    DOI: 10.1016/j.jebo.2018.11.001
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    Cited by:

    1. Fabio Galeotti & Maria Montero & Anders Poulsen, 2022. "The Attraction and Compromise Effects in Bargaining: Experimental Evidence," Management Science, INFORMS, vol. 68(4), pages 2987-3007, April.
    2. Varun Bansal, 2024. "Random Attention and Unobserved Reference Alternatives," Papers 2407.01528, arXiv.org, revised Jan 2025.
    3. Kovach, Matthew & Suleymanov, Elchin, 2023. "Reference dependence and random attention," Journal of Economic Behavior & Organization, Elsevier, vol. 215(C), pages 421-441.
    4. Landry, Peter & Webb, Ryan, 2021. "Pairwise normalization: A neuroeconomic theory of multi-attribute choice," Journal of Economic Theory, Elsevier, vol. 193(C).
    5. Kovach, Matthew, 2020. "Twisting the truth: foundations of wishful thinking," Theoretical Economics, Econometric Society, vol. 15(3), July.
    6. Andrew Ellis & Yusufcan Masatlioglu, 2022. "Choice with Endogenous Categorization," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 240-278.
    7. Kremena Valkanova, 2024. "Markov Stochastic Choice," Papers 2410.22001, arXiv.org.
    8. Özgür Kıbrıs & Yusufcan Masatlioglu & Elchin Suleymanov, 2023. "A theory of reference point formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 75(1), pages 137-166, January.
    9. Helfrich, Magdalena & Herweg, Fabian, 2020. "Context-dependent preferences and retailing: Vertical restraints on internet sales," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 87(C).
    10. Bhavook Bhardwaj & Kriti Manocha, 2021. "Choice by Rejection," Papers 2108.07424, arXiv.org.
    11. Gerelt Tserenjigmid, 2020. "On the characterization of linear habit formation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 49-93, July.
    12. Heydari, Pedram, 2021. "Luce arbitrates: Stochastic resolution of inner conflicts," Games and Economic Behavior, Elsevier, vol. 126(C), pages 33-74.

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    More about this item

    Keywords

    Reference dependence; Menu-dependent reference; WARP; Attraction effect; Compromise effect; Diminishing sensitivity; Intertemporal choice;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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