Modeling Loss Aversion and Reference Dependence Effects on Brand Choice
Open accessAbstract
Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice. We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.
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Real-world data show loss-averse behavior in stock markets, pricing and purchasing of consumables and condominiums, and choice of work hours by cabdrivers.
“This work has been supported by analyses of real world data that show similar behavior in, among other situations, stock markets (26–28), the pricing and purchasing of consumables (29, 30) and condominiums (31), and the choice of work hours by cabdrivers (32).”
From Thinking like a trader selectively reduces individuals' loss aversion (2009) · cites this paper as [30]
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“Hardie, Johnson, and Fader (1993) propose that the current price of the brand chosen on the previous purchase occasion is a relevant ERP.”
BackgroundLoss Aversion Under Prospect Theory: A Parameter-Free Measurement
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“1992, Hardie et al. 1993, Kalyanaram and Little 1994) that provide support for this generalization. The general approach of framing this problem is that consumers perceive prices above the reference price as losses, and prices below the reference price as gains. Employing such a definition, Kalyanaram and Little (1989…”
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“Also, losing quality is generally quite aversive to consumers (Hardie et al. 1993) and is more likely to occur at the higher end of the quality distribution than the lower end (Simonson and Tversky 1992).”
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BackgroundMethodReference-Point Formation and Updating
Baucells, M., Weber, M., & Welfens, F. (2011) · Management Science · doi:10.1287/mnsc.1100.1286 · Cited by 308 · see citing works
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A Nonparametric Approach to Modeling Choice with Limited Data
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“Our model of the customer is thus general.2”
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“Differential loss aversion suggests that consumers are more sensitive to utility losses than monetary losses (Hardie, Johnson, and Fader 1993; Tversky and Kahneman 1991).”
BackgroundInfluentialThe Impact of Reference Price Effects on the Profitability of Price Promotions
Greenleaf, E. A. (1995) · Marketing Science · doi:10.1287/mksc.14.1.82 · Cited by 308 · see citing works
The Loss of Loss Aversion: Will It Loom Larger Than Its Gain?
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InfluentialCustomer experience driven business model innovation
Keiningham, T. L., Aksoy, L., Bruce, H., Cadet, F. T., Clennell, N., Hodgkinson, I. R., & Kearney, T. (2019) · Journal of Business Research · doi:10.1016/j.jbusres.2019.08.003 · Cited by 342 · see citing works
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“They have also been defined as the price of the last brand purchased (Hardie, Johnson, and Fader 1993; Kalwani et al. 1990).”
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Gächter, S., Johnson, E. J., & Herrmann, A. P. (2021) · Theory and Decision · doi:10.1007/s11238-021-09839-8 · Cited by 509 · see citing works
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Assessing the Competitive Interaction between Private Labels and National Brands
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The Evolution of Brand Preferences and Choice Behaviors of Consumers New to a Market
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“For example, Hardie et al. (1993) found that consumers react more strongly to price increases (a loss) than to price decreases (a gain).”
BackgroundProspect theory, the disposition effect, and asset prices
Li, Y., & Yang, L. (2012) · Journal of Financial Economics · doi:10.1016/j.jfineco.2012.11.002 · Cited by 199 · see citing works
Consumer evaluations of sales promotion: the effect on brand choice
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“Other authors contend that it is difficult for the consumer to store information about old prices, and it is therefore more likely that the consumer forms reference prices at the sale point through the observation of certain brands' prices ( Hardie et al. , 1993”
BackgroundAsymmetric Promotion Effects and Brand Positioning
Bronnenberg, B. J., & Wathieu, L. (1996) · Marketing Science · doi:10.1287/mksc.15.4.379 · Cited by 189 · see citing works
The Shape of Utility Functions and Organizational Behavior
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“Recently, various researchers have demonstrated the role of loss aversion in decision-making behavior of consumers and investors (e.g., Hardie et al. 1993, Odean 1998).”
BackgroundProduct Complements and Substitutes in the Real World: The Relevance of “Other Products”
Shocker, A. D., Bayus, B. L., & Kim, N. (2003) · Journal of Marketing · doi:10.1509/jmkg.68.1.28.24032 · Cited by 187 · see citing works
An Investigation of Reference Price Segments
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BackgroundMethodInfluentialQuality Tier Competition: How Price Change Influences Brand Choice and Category Choice
Sivakumar, K., & Raj, S. P. (1997) · Journal of Marketing · doi:10.1177/002224299706100305 · Cited by 186 · see citing works
An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points
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BackgroundSearching for the Reference Point
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“There is a rich literature that studies reference dependence in other domains, such as time preference (Loewenstein and Prelec 1992), consumer choice (Tversky and Kahneman 1991), and marketing (Winer 1986, Hardie et al. 1993, Kopalle and Winer 1996).”
Asymmetric and Neighborhood Cross-Price Effects: Some Empirical Generalizations
Sethuraman, R., Srinivasan, V., & Kim, D. (1999) · Marketing Science · doi:10.1287/mksc.18.1.23 · Cited by 174 · see citing works
“This phenomenon, known as the asymmetric price effect, was documented by Blattberg and Wisniewski (1989) and has been extensively studied in the literature (e.g., Allenby and Rossi 1991; Bronnenberg and Wathieu 1996; Hardie et al. 1993; Sethuraman 1995; Sivakumar 1997; Sivakumar and Raj 1997).”
BackgroundThe American Economic Association
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“Assuming that price increases (losses) had a greater influence than corresponding price decreases (gains, cf. Hardie et al., 1993) and that unusually large changes had a disproportionate impact on consumers’ reactions, these more salient price changes may have boosted perceived inflation.”
BackgroundContract Preferences and Performance for the Loss-Averse Supplier: Buyback vs. Revenue Sharing
Zhang, Y., Donohue, K. L., & Cui, T. H. (2015) · Management Science · doi:10.1287/mnsc.2015.2182 · Cited by 157 · see citing works
Random utility models in marketing research: a survey
Baltas, G., & Doyle, P. J. (2001) · Journal of Business Research · doi:10.1016/s0148-2963(99)00058-2 · Cited by 168 · see citing works
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BackgroundMethodInfluentialStrategic pricing with reference effects in a competitive supply chain
Zhang, J., Chiang, W. K., & Liang, L. (2013) · Omega · doi:10.1016/j.omega.2013.07.002 · Cited by 165 · see citing works
Prospect theory: A literature review
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“…selling tasks.” opt-in policy (Johnson and Goldstein, 2003), the tendency of consumer demand to be more sensitive to price increases than decreases (Hardie et al., 1993), and the tendency for taxi drivers to quit after they have met their daily income targets, even on busy days during which…”
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“Hardie et al. (1993) developed the notion of reference quality and empirically demonstrated that differences between observed and reference quality can significantly affect purchase probabilities.”
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Willingness to pay and attitudinal preferences of Indian consumers for electric vehicles
Bansal, P., Kumar, R. R., Raj, A., Dubey, S., & Graham, D. J. (2021) · Energy Economics · doi:10.1016/j.eneco.2021.105340 · Cited by 157 · see citing works
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“…research in marketing suggests that consumers are loss-averse in their evaluation of market prices (Erickson and Johansson 1985, Winer 1986, Kalwani and Yim 1992, Hardie et al. 1993), with their “reference price” determined at least partly by expectations (Jacobson and Obermiller 1990).”
Price Promotion for Emotional Impact
Aydinli, A., Bertini, M., & Lambrecht, A. (2014) · Journal of Marketing · doi:10.1509/jm.12.0338 · Cited by 159 · see citing works
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“The current reference price, RPijt, is a weighted average of the reference price and price from the last purchase occasion: and We use item-specific IRPs rather than the category-level ERPs suggested by Hardie, Johnson, and Fader (1993).”
MethodAmos Tversky and the Ascent of Behavioral Economics
Laibson, D., & Zeckhauser, R. (1998) · Journal of Risk and Uncertainty · doi:10.1023/a:1007717224343 · Cited by 132 · see citing works
“Hardie, Johnson, and Fader (1993) test the multiattribute generalization of prospect theory (Tversky and Kahneman 1991), using supermarket scanner data.”
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Suzuki, Y. (2000) · Transportation Research Part E Logistics and Transportation Review · doi:10.1016/s1366-5545(99)00026-5 · Cited by 132 · see citing works
“For example, a recent empirical study by Hardie et al. (1993) utilized the concept of loss aversion in their multinomial logit model of consumer brand choice, and showed that the model performance can be improved signi®cantly by incorporating the loss aversion e ect.”
Weathering Tight Economic Times: The Sales Evolution of Consumer Durables Over the Business Cycle
Deleersnyder, B., Dekimpe, M. G., Sárváry, M., & Parker, P. M. (2004) · Quantitative Marketing and Economics · doi:10.1007/s11129-004-0137-x · Cited by 129 · see citing works
“However, other manifestations of asymmetric consumer response include their reaction to product quality changes (Hardie, Johnson, and Fader, 1993), and both expected wage changes (Shea, 1995) and changes in their income level (Bowman, Minehart, and Rabin, 1999).”
BackgroundThe effects of loss aversion on trade policy: Theory and evidence
Tovar, P. (2009) · Journal of International Economics · doi:10.1016/j.jinteco.2009.01.012 · Cited by 121 · see citing works
Pre‐Orders for New To‐be‐Released Products Considering Consumer Loss Aversion
Zhao, X., & Stecke, K. E. (2009) · Production and Operations Management · doi:10.1111/j.1937-5956.2009.01092.x · Cited by 129 · see citing works
“Hardie, Johnson, and Fader (1993) show that people being loss averse explains asymmetries in demand elasticities after price increases and decreases.”
BackgroundDynamic pricing in the presence of reference price effect and consumer strategic behaviour
Chen, K., Zha, Y., Alwan, L. C., et al. (2019) · International Journal of Production Research · doi:10.1080/00207543.2019.1598592 · Cited by 127 · see citing works
“Consumer perception of savings and loss aversion have been examined in relation to retail advertisements and brand choice (Hardie, Johnson, and Fader 1993).”
BackgroundMrkva, K., Johnson, E. J., Gächter, S., & Herrmann, A. P. (2019) · Journal of Consumer Psychology · doi:10.1002/jcpy.1156 · Cited by 120 · see citing works
Self-citationLong-term changes in consumers' shopping behavior post-pandemic: an exploratory study
Gupta, A., & Mukherjee, J. (2022) · International Journal of Retail & Distribution Management · doi:10.1108/ijrdm-04-2022-0111 · Cited by 101 · see citing works
Dynamic Stochastic Inventory Management with Reference Price Effects
Chen, X., Hu, P., Shum, S., & Zhang, Y. (2016) · Operations Research · doi:10.1287/opre.2016.1524 · Cited by 115 · see citing works
“Such assumption is consistent with the results from many empirical studies, e.g., Hardie et al. (1993).”
ResultThe Role of Internal Reference Points in the Category Purchase Decision
Bell, D., & Bucklin, R. E. (1999) · Journal of Consumer Research · doi:10.1086/209555 · Cited by 120 · see citing works
“In that literature, the information from the shopper’s most recent purchase has been shown to provide a sound basis for both internal and external reference points (e.g., Briesch et al. 1997; Hardie et al. 1993; Krishnamurthi et al. 1992; Lattin and Bucklin 1989).”
BackgroundMethodInfluentialOptimal Product Line Design When Consumers Exhibit Choice Set-Dependent Preferences
Orhun, A. Y. (2009) · Marketing Science · doi:10.1287/mksc.1080.0449 · Cited by 115 · see citing works
“Hardie et al. (1993) otherwise because of costs of product introduction.”
Consumer dynamics: theories, methods, and emerging directions
Zhang, J. Z., & Chang, C.-W. (2020) · Journal of the Academy of Marketing Science · doi:10.1007/s11747-020-00720-8 · Cited by 137 · see citing works
Viglia, G., Mauri, A., & Carricano, M. (2016) · International Journal of Hospitality Management · doi:10.1016/j.ijhm.2015.09.010 · Cited by 115 · see citing works
- Authors
- Hardie, B. G. S., Johnson, E. J., & Fader, P. S.
- Affiliations
- London Business School (GB)
- Columbia University (US)
- University of Pennsylvania (US)
- Venue
- Marketing Science
- Published
- 1993-11
- Volume
- 12
- Issue
- 4
- Pages
- 378-394
- ISSN
- 0732-2399 (ISSN-L)
- 1526-548X
- OpenAlex
- W2074270109
- Cited by
- 903
- References
- 0
- Citations by year
- 2026: 22 · 2025: 25 · 2024: 29 · 2023: 23 · 2022: 41 · 2021: 35 · 2020: 31 · 2019: 38 · 2018: 28 · 2017: 35 · 2016: 41 · 2015: 50 · 2014: 37 · 2013: 44 · 2012: 32
- FWCI
- 38.60
- Type
- journal article
- Language
- en
- Open access
- green
- papers.ssrn.com
- Locations
- Marketing Science (publishedVersion)
- SSRN Electronic Journal (submittedVersion)
- Topics
- Social Sciences › Business, Management and Accounting › Marketing › Consumer Market Behavior and Pricing
- Social Sciences › Decision Sciences › General Decision Sciences › Decision-Making and Behavioral Economics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic and Environmental Valuation
- Keywords
- loss aversion, reference dependence, brand choice, prospect theory, multinomial logistic regression, scanner data, asymmetric price response, competitive strategy, consumer choice modeling
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