Econometrica Vol. 92 No. 6 2024

Caution and Reference Effects

Simone Cerreia-Vioglio¹; David Dillenberger²; Pietro Ortoleva³

¹ Department of Decision Sciences, IGIER, Bocconi University · ² Department of Economics, University of Pennsylvania · ³ Department of Economics, SPIA, Princeton University

Abstract

We introduce Cautious Utility, a new model based on the idea that individuals are unsure of trade‐offs between goods and apply caution. The model yields an endowment effect, even when gains and losses are treated symmetrically. Moreover, it implies either loss aversion or loss neutrality for risk, but in a way unrelated to the endowment effect, and it captures the certainty effect, providing a novel unified explanation of all three phenomena. Cautious Utility can help organize empirical evidence, including some that directly contradicts leading alternatives.

DOI

10.3982/ecta21748

Volume

92

Issue

6

Pages

2069-2103

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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