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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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“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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Richards, T. J., Liaukonyte, J., & Streletskaya, N. A. (2016) · International Journal of Industrial Organization · doi:10.1016/j.ijindorg.2015.11.004 · Cited by 99
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“In fact, many pieces of empirical evidence show that people possess a series of characteristics paradigms, i.e., loss aversion, diminishing sensitivity, and reference dependence [22] in decision making.”
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“Moreover, some researchers have extended the idea of a reference point to product quality (Hardie et al, 1993; Kopalle and Winer, 1996; Gavious and Lowengart, 2012).”
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Exploring the Nature of Loss AversionPreprint
Johnson, E. J., Gächter, S., & Herrmann, A. P. (2006) · SSRN Electronic Journal · doi:10.2139/ssrn.892336 · Cited by 81
“A typical estimate of λ is 2.25, indicating that losses are approximately twice as painful and gains are pleasurable (p. 294).””
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“9Although our main results are neutral to in which dimension consumers have more severe loss aversion, some empirical research (Hardie et al. (1993), for instance) suggests that loss aversion is more severe in the product dimension than in the price dimension. return to the standard Hotelling model.”
The Economic Theory of WTP and WTA
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Ren, H., & Huang, T. (2017) · Computers & Operations Research · doi:10.1016/j.cor.2017.11.002 · Cited by 83
“metric price elasticities [66, 67], and insensitivity to bad income news [68, 69].”
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Neumann, N., & Böckenholt, U. (2014) · Journal of Retailing · doi:10.1016/j.jretai.2014.02.002 · Cited by 83
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Tereyağoğlu, N., Fader, P. S., & Veeraraghavan, S. K. (2017) · Management Science · doi:10.1287/mnsc.2016.2605 · Cited by 74
“Hardie et al. (1993) consider formation of multi-attribute reference levels on price and quality of orange juice product.”
BackgroundInfluentialSelf-citationHeuristics and Biases in Timing the Replacement of Durable Products
Cripps, J. D., & Meyer, R. J. (1994) · Journal of Consumer Research · doi:10.1086/209399 · Cited by 79
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BackgroundThe Effect of Local Consideration Sets on Global Choice Between Lower Price and Higher Quality
Simonson, I., Nowlis, S. M., & Lemon, K. N. (1993) · Marketing Science · doi:10.1287/mksc.12.4.357 · Cited by 76
Another look at loss aversion in brand choice data: Can we characterize the loss averse consumer?
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Fairness Ideals in Distribution Channels
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A conflict of choice: How consumers choose where to go for dinner
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Coping with Unfavorable Attribute Values in Choice
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Zhuge, C., Shao, C., Gao, J., Dong, C., & Zhang, H. (2016) · Computers Environment and Urban Systems · doi:10.1016/j.compenvurbsys.2016.02.001 · Cited by 78
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“While Putler (1992) and Hardie, Johnson and Fader (1993) find, consistent with prospect theory, that the effect of a loss is larger than that of an equal gain, Greenleaf (1995) finds the opposite.”
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“Similarly, Hardie et al. (1993) find”
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“…(and, by symmetry 0.9), where the values of uð/ À1 ½F Þ are ð2pÞ À1=2 and ð2pÞ À1=2 exp½Àð1:282Þ 2 =2, or 0.399 and 0.175, respectively. tion, and is similar in this way to that of Hardie et al. (1993); however, it would be premature to claim support for any specific theory on this basis alone.”
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“The small number of studies that have used relative satisfaction in the scientific literature (e.g. Bolton et al., 2000; Bowman and Narayandas, 2004; Hardie et al., 1993; Wind, 1970) point to the superiority of relative metrics in linking to customer behavior.”
BackgroundA model of price discrimination under loss aversion and state-contingent reference points
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“Furthermore, one member of the category is viewed as the standard, and other members of the category are evaluated against this reference product when consumers make their purchase decision (e.g., Hardie, Johnson, and Fader, 1993).”
BackgroundPricing policies in dual distribution channels: The reference effect of official prices
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“Previous research has investigated the relative use of IRP and ERP in various product categories (e.g., Briesch et al. 1997; Hardie, Johnson, and Fader 1993).”
BackgroundMethodSpecifying Price Judgments with Range–Frequency Theory in Models of Brand Choice
Niedrich, R. W., Weathers, D., Hill, R. C., & Bell, D. R. (2009) · Journal of Marketing Research · doi:10.1509/jmkr.46.5.693 · Cited by 55
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Metadata
- 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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