Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference poin...

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Bibliographic Details
Published in:Marketing science (Providence, R.I.) R.I.), 1993-10, Vol.12 (4), p.378-394
Main Authors: Hardie, Bruce G. S, Johnson, Eric J, Fader, Peter S
Format: Article
Language:English
Subjects:
brand choice
Brand loyalty
Brand preferences
Brands
buyer behavior
choice models
Consumer behavior
Consumer research
Consumers
Decision making models
Fruit juices
Loss aversion
Market prices
Marketing
Modeling
Orange juice
Parametric models
Prices
Product choice
reference effects
Restaurants
Retailing industry
Scanners
Value
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Summary:Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice. We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.
ISSN:0732-2399
1526-548X
DOI:10.1287/mksc.12.4.378