Collin Raymond, University of Oxford

"A Behavioral Analysis of Stochastic Reference Dependence"

Abstract

We examine the reference-dependent risk preferences of Koszegi and Rabin (2007), focusing on their choice-acclimating personal equilibria concept. We relate their model to other existing generalizations of expected utility. We demonstrate that linear gain-loss choice-acclimating personal equilibria is equivalent to the intersection of quadratic utility and pessimistic rank-dependent utility.

However, it has only a trivial intersection (i.e. expected utility) with other referencedependent preferences. We use these relationships to extend our understanding of Koszegi and Rabin's model: linking their functional form to behavior; demonstrating new applications; and deriving new tests and looking for support in existing experimental data.

Contact person: Peter Norman Sørensen