Paper #1056

Title:

A theory of reference-dependent behavior

Authors:

Jose Apesteguia and Miguel A. Ballester

Date:

October 2007

Abstract:

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

Keywords:

Individual rationality, reference-dependence, rationalization, path independence, status-quo bias, addiction, habit formation, LeeX

JEL codes:

A12, B41, D11

Area of Research:

Behavioral and Experimental Economics / Microeconomics

Published in:

Economic Theory, 40: 427-455, 2009

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