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American Economic Review Vol. 106 No. 9 2016

A Behavioral Analysis of Stochastic Reference Dependence

Yusufcan Masatlioglu1; Collin Raymond2

1 Department of Economics, University of Maryland, 3114 Tydings Hall, College Park, MD 20742 (e-mail: ) · 2 Department of Economics, Amherst College, 100 Boltwood Avenue, Amherst, MA 01002 (e-mail: )

Abstract

We examine the reference-dependent risk preferences of Kőszegi and Rabin (2007), focusing on their choice-acclimating personal equilibria. Although their model has only a trivial intersection (expected utility) with other reference-dependent models, it has very strong connections with models that rely on different psychological intuitions. We prove that the intersection of rank-dependent utility and quadratic utility, two well-known generalizations of expected utility, is exactly monotone linear gain-loss choice-acclimating personal equilibria. We use these relationships to identify parameters of the model, discuss loss and risk aversion, and demonstrate new applications.

DOI
10.1257/aer.20140973
Volume
106
Issue
9
Pages
2760-2782
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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