Exogenous endowment - Endogenous reference point

We develop a reference dependent model with an initial endowment and in a world where alternatives are grouped into categories. The model creates a link between the agent's exogenous endowment and her endogenous reference point. The actual refer- ence point is the best feasible alternative, according to the agent's preferences, which belongs to her endowment's category. This endogenous reference point induces a con- straint set from which the nal choice is made according to utility maximization. The model gives rise to category bias which generalizes the status quo bias by attracting the agent to her endowment's category but not necessarily to the endowment itself. We show that it accommodates recent experimental ndings regarding the presence and absence of status quo bias in the realm of uncertainty. We apply the model to a stylized nancial setup and show that it may lead to a risk premium even with risk neutral agents