Anchored Preference Relations

Posted: 15 Sep 2005

See all articles by Jacob S. Sagi

Jacob S. Sagi

University of North Carolina (UNC) at Chapel Hill - Finance Area

Abstract

This note explores the implications of a simple and intuitive restriction on reference-dependent preferences assuming the status quo serves as the reference point. The condition imposed potentially rules out situations in which a decision maker has a choice between two prospects, selects one which subsequently becomes the new reference point, and then regrets her initial choice. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non satiation in which all reference-dependent indifference surfaces are smooth. It is also shown that the condition does admit a class of non-trivial reference-dependent preferences.

Keywords: Non-expected utility, Reference dependence, Cumulative prospect theory, Decision theory, Utility

JEL Classification: D11, D81

Suggested Citation

Sagi, Jacob, Anchored Preference Relations. Journal of Economic Theory, Forthcoming, Available at SSRN: https://ssrn.com/abstract=799825

Jacob Sagi (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
735
PlumX Metrics