A Model of Reference-Dependent Preferences
Open accessAbstract
We develop a model of reference-dependent preferences and loss aversion where “gain-loss utility” is derived from standard “consumption utility” and the reference point is determined endogenously by the economic environment. We assume that a person's reference point is her rational expectations held in the recent past about outcomes, which are determined in a personal equilibrium by the requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, but gain-loss utility influences behavior when there is uncertainty. Applying the model to consumer behavior, we show that willingness to pay for a good is increasing in the expected probability of purchase and in the expected prices conditional on purchase. In within-day labor-supply decisions, a worker is less likely to continue work if income earned thus far is unexpectedly high, but more likely to show up as well as continue work if expected income is high.
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The subsidy in the authors' context may be interpreted differently by consumers than if it were a premium.
“It is worth noting that the subsidy in our context may be interpreted differently by consumers than if it were a premium (see, e.g.,Kőszegi and Rabin 2006 or Kahneman and Tversky 1979) for work that illustrates this point).”
From Health Insurance for “Humans”: Information Frictions, Plan Choice, and Consumer Welfare (2015) · cites this paper as Kőszegi and Rabin 2006
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- Authors
- Koszegi, B., & Rabin, M.
- Affiliations
- University of California, Berkeley (US)
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 2006-11-01
- Volume
- 121
- Issue
- 4
- Pages
- 1133-1165
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W1501279792
- Cited by
- 2,728
- References
- 7
- Citations by year
- 2026: 39 · 2025: 134 · 2024: 180 · 2023: 147 · 2022: 174 · 2021: 162 · 2020: 147 · 2019: 201 · 2018: 191 · 2017: 192 · 2016: 170 · 2015: 176 · 2014: 153 · 2013: 131 · 2012: 117
- FWCI
- 40.12
- Type
- journal article
- Language
- en
- Open access
- green
- escholarship.org
- Locations
- The Quarterly Journal of Economics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- eScholarship (California Digital Library) (submittedVersion)
- Topics
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Safety Research › Experimental Behavioral Economics Studies
- Social Sciences › Business, Management and Accounting › Accounting › Financial Literacy, Pension, Retirement Analysis
- Keywords
- reference-dependent preferences, loss aversion, endogenous reference points, rational expectations, consumer behavior, willingness to pay, purchase probability, labor supply, income risk, expected income
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