KoszegiRabin-ho

KoszegiRabin-ho - Motivation & Introduction...

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Unformatted text preview: Motivation & Introduction Model Risk Attitudes Reference-Dependent Preferences with Expectations as the Reference Point January 11, 2011 Motivation & Introduction Model Risk Attitudes Today The K oszegi/Rabin model of reference-dependent preferences... Featuring: Personal Equilibrium (PE) Preferred Personal Equilibrium (PPE) ...and many more (UPE,CPE) Ultimate goal: more complete understanding of the insights to be gained from modeling RD prefs, how we can apply them to standard economic situations. Motivation & Introduction Model Risk Attitudes What is the (reference) point? TK(1991): A treatment of reference-dependent choice raises two questions: what is the reference state, and how does it affect preferences? The present analysis focuses on the second question. We assume that the decision maker has a definite reference state X, and we investigate its impact on the choice between options. The question of the origin and the determinants of the reference state lies beyond the scope of the present article. Although the reference state usually corresponds to the decision makers current position, it can also be influenced by aspirations, expectations, norms, and social comparisons. Motivation & Introduction Model Risk Attitudes What is the (reference) point? Candidates: 1. Aspirations/goals 2. Your neighbors 3. Recent 4. Status quo r t = (1- ) r t- 1 + c t- 1 (most common, convenient) r t = max < t c ; t- 1 j =1 1 j c j t- 1 j =1 1 j ; t- 1 j =1 1 j c t- j t- 1 j =1 1 j ; j =1 j c t- j 5. Expectations K oszegi & Rabin argue that (5) is often most appropriate. Motivation & Introduction Model Risk Attitudes Expectations as the Reference Point: Why? KR: reference point = probabilistic beliefs held in recent past about outcomes In most cases where evidence is interpreted w/ status quo as r , people plausibly expect to maintain status quo. When expectations 6 = status quo, expectations generally makes better predictions: Endowment effect in mug experiments: people expect to keep mug, no predisposition to trade No endowment effect among card traders: Buyers & sellers in real-world markets who...
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KoszegiRabin-ho - Motivation & Introduction...

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