IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v68y2019i3d10.1007_s00199-018-1138-4.html
   My bibliography  Save this article

Asymmetric gain–loss reference dependence and attitudes toward uncertainty

Author

Listed:
  • Juan Sebastián Lleras
  • Evan Piermont

    (Royal Holloway, University of London)

  • Richard Svoboda

    (The Lewin Group)

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.

Suggested Citation

  • Juan Sebastián Lleras & Evan Piermont & Richard Svoboda, 2019. "Asymmetric gain–loss reference dependence and attitudes toward uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 669-699, October.
    • Handle: RePEc:spr:joecth:v:68:y:2019:i:3:d:10.1007_s00199-018-1138-4
    DOI: 10.1007/s00199-018-1138-4
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00199-018-1138-4
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00199-018-1138-4?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Johannes Abeler & Armin Falk & Lorenz Goette & David Huffman, 2011. "Reference Points and Effort Provision," American Economic Review, American Economic Association, vol. 101(2), pages 470-492, April.
    2. Simone Cerreia‐Vioglio & David Dillenberger & Pietro Ortoleva, 2015. "Cautious Expected Utility and the Certainty Effect," Econometrica, Econometric Society, vol. 83, pages 693-728, March.
    3. Grant, Simon & Polak, Ben, 2013. "Mean-dispersion preferences and constant absolute uncertainty aversion," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1361-1398.
    4. Jose Apesteguia & Miguel Ballester, 2009. "A theory of reference-dependent behavior," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 40(3), pages 427-455, September.
    5. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    6. Riella, Gil & Teper, Roee, 2014. "Probabilistic dominance and status quo bias," Games and Economic Behavior, Elsevier, vol. 87(C), pages 288-304.
    7. Roee Teper, 2015. "Subjective Independence and Concave Expected Utility," Working Paper 5865, Department of Economics, University of Pittsburgh.
    8. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(2), pages 269-287.
    9. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
    10. Heiko Karle & Martin Peitz, 2014. "Competition under consumer loss aversion," RAND Journal of Economics, RAND Corporation, vol. 45(1), pages 1-31, March.
    11. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
    12. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-2477, December.
    13. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    14. Lange, Andreas & Ratan, Anmol, 2010. "Multi-dimensional reference-dependent preferences in sealed-bid auctions - How (most) laboratory experiments differ from the field," Games and Economic Behavior, Elsevier, vol. 68(2), pages 634-645, March.
    15. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    16. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    17. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
    18. Raphaël Giraud, 2004. "Reference-dependent preferences: rationality, mechanism and welfare implications," Cahiers de la Maison des Sciences Economiques v04087, Université Panthéon-Sorbonne (Paris 1).
    19. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    20. Quiggin, John & Chambers, Robert G, 1998. "Risk Premiums and Benefit Measures for Generalized-Expected-Utility Theories," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 121-137, November.
    21. Marciano Siniscalchi, 2009. "Vector Expected Utility and Attitudes Toward Variation," Econometrica, Econometric Society, vol. 77(3), pages 801-855, May.
    22. Ehud Lehrer, 2009. "A new integral for capacities," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(1), pages 157-176, April.
    23. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    24. David E. Bell, 1985. "Disappointment in Decision Making Under Uncertainty," Operations Research, INFORMS, vol. 33(1), pages 1-27, February.
    25. Dillenberger, David, 2008. "Preferences for One-Shot Resolution of Uncertainty and Allais-Type Behavior," MPRA Paper 8342, University Library of Munich, Germany.
    26. Lehrer, Ehud & Teper, Roee, 2015. "Subjective independence and concave expected utility," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 33-53.
    27. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
    28. Roee Teper, 2015. "Subjective Independence and Concave Expected Utility," Working Paper 5866, Department of Economics, University of Pittsburgh.
    29. Raphaël Giraud, 2004. "Framing under risk: Endogenizing the Reference Point and Separating Cognition and Decision," Cahiers de la Maison des Sciences Economiques bla04090, Université Panthéon-Sorbonne (Paris 1).
    30. Yusufcan Masatlioglu & Collin Raymond, 2016. "A Behavioral Analysis of Stochastic Reference Dependence," American Economic Review, American Economic Association, vol. 106(9), pages 2760-2782, September.
    31. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
    32. Ortoleva, Pietro, 2010. "Status quo bias, multiple priors and uncertainty aversion," Games and Economic Behavior, Elsevier, vol. 69(2), pages 411-424, July.
    33. Quiggin, John & Chambers, R.G.Robert G., 2004. "Invariant risk attitudes," Journal of Economic Theory, Elsevier, vol. 117(1), pages 96-118, July.
    34. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
    35. Graham Loomes & Robert Sugden, 1986. "Disappointment and Dynamic Consistency in Choice under Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(2), pages 271-282.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard Peter, 2021. "Who should exert more effort? Risk aversion, downside risk aversion and optimal prevention," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1259-1281, June.
    2. Grant, Simon & Rich, Patricia & Stecher, Jack, 2022. "Bayes and Hurwicz without Bernoulli," Journal of Economic Theory, Elsevier, vol. 199(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dato, Simon & Grunewald, Andreas & Müller, Daniel & Strack, Philipp, 2017. "Expectation-based loss aversion and strategic interaction," Games and Economic Behavior, Elsevier, vol. 104(C), pages 681-705.
    2. Jong-Hee Hahn & Jinwoo Kim & Sang-Hyun Kim & Jihong Lee, 2018. "Price discrimination with loss averse consumers," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(3), pages 681-728, May.
    3. Mihm, Maximilian, 2016. "Reference dependent ambiguity," Journal of Economic Theory, Elsevier, vol. 163(C), pages 495-524.
    4. Meisner, Vincent & von Wangenheim, Jonas, 2019. "School Choice and Loss Aversion," Rationality and Competition Discussion Paper Series 208, CRC TRR 190 Rationality and Competition.
    5. Aurélien Baillon & Zhenxing Huang & Asli Selim & Peter P. Wakker, 2018. "Measuring Ambiguity Attitudes for All (Natural) Events," Econometrica, Econometric Society, vol. 86(5), pages 1839-1858, September.
    6. Meisner, Vincent & von Wangenheim, Jonas, 2023. "Loss aversion in strategy-proof school-choice mechanisms," Journal of Economic Theory, Elsevier, vol. 207(C).
    7. González-Jiménez, Víctor, 2024. "Incentive design for reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 493-518.
    8. Vincent Meisner & Jonas von Wangenheim, 2022. "Loss aversion in strategy-proof school-choice mechanisms," Papers 2207.14666, arXiv.org.
    9. Antonio Rosato, 2016. "Selling substitute goods to loss-averse consumers: limited availability, bargains, and rip-offs," RAND Journal of Economics, RAND Corporation, vol. 47(3), pages 709-733, August.
    10. Xi Zhi Lim, 2021. "Ordered Reference Dependent Choice," Papers 2105.12915, arXiv.org, revised Feb 2024.
    11. Macera, Rosario, 2018. "Intertemporal incentives under loss aversion," Journal of Economic Theory, Elsevier, vol. 178(C), pages 551-594.
    12. Katarzyna M. Werner & Horst Zank, 2019. "A revealed reference point for prospect theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 731-773, June.
    13. Qin, Dan, 2024. "Differentiating roles of the reference alternative," Games and Economic Behavior, Elsevier, vol. 146(C), pages 196-221.
    14. Karni, Edi & Maccheroni, Fabio & Marinacci, Massimo, 2015. "Ambiguity and Nonexpected Utility," Handbook of Game Theory with Economic Applications,, Elsevier.
    15. Daniele Pennesi, 2013. "Endogenous Status Quo," Carlo Alberto Notebooks 314, Collegio Carlo Alberto.
    16. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    17. König-Kersting, Christian & Kops, Christopher & Trautmann, Stefan T., 2023. "A test of (weak) certainty independence," Journal of Economic Theory, Elsevier, vol. 209(C).
    18. Georgalos, Konstantinos & Paya, Ivan & Peel, David, 2024. "The Kőszegi–Rabin expectations-based model and risk-apportionment tasks for elicitation of higher order risk preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 749-770.
    19. Stefan Trautmann & Peter P. Wakker, 2018. "Making the Anscombe-Aumann approach to ambiguity suitable for descriptive applications," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 83-116, February.
    20. Rosato, Antonio & Tymula, Agnieszka A., 2019. "Loss aversion and competition in Vickrey auctions: Money ain't no good," Games and Economic Behavior, Elsevier, vol. 115(C), pages 188-208.

    More about this item

    Keywords

    Reference-dependent preferences; Endogenous reference points; Gain–loss attitudes; Subjective expected utility; Belief distortion;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:68:y:2019:i:3:d:10.1007_s00199-018-1138-4. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.