Anchored preference relations

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 s...

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Bibliographic Details
Published in:Journal of economic theory 2006-09, Vol.130 (1), p.283-295
Main Author: Sagi, Jacob S.
Format: Article
Language:English
Subjects:
Anchoring
Cumulative prospect theory
Decision theory
Economic theory
Endowment effect
Non-expected utility
Preferences
Reference dependence
Status quo bias
Studies
Utility functions
Utility representation
Utility theory
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Summary: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.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2005.01.009