Inter-temporal choices with temporal reference dependence

I develop an intertemporal choice model for rational deviators whose preferences depend not only on their actual consumption but also on comparison to their beliefs about the optimal consumption. The standard decision maker is loss averse with respect to this belief-dependent reference point. When psychologically weighted loss aversion is low, a decision maker deviates from the standard intertemporal choice behavior and over-consumption, as well as the alternative possibility of under-consumption can be rationalized. When the decision maker has time-varying degrees of loss aversion, he re-optimizes the consumption plan through adjusted beliefs as subsequent selves realize that past decision for the present period is no longer optimal. In the dynamic model, I solve for consistent intertemporal optimization rules by which a dynamic deviator should meet rational intertemporal consistency at each point in time. Finally, I demonstrate that the dynamic reference dependent model can solve a puzzling feature in lifecycle consumption data.