Loss Aversion with a State‐Dependent Reference Point

Loss Aversion with a State‐Dependent Reference Point

0.00 Avg rating0 Votes
Article ID: iaor20116756
Volume: 57
Issue: 6
Start Page Number: 1094
End Page Number: 1110
Publication Date: Jun 2011
Journal: Management Science
Authors: ,
Abstract:

This study investigates reference‐dependent choice with a stochastic, state‐dependent reference point. The optimal reference‐dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is widespread, we conclude that the reference point generally includes an important exogenously fixed component. We develop a choice model in which adjustment costs can cause stickiness relative to an initial, exogenous reference point. Using historical U.S. investment benchmark data, we show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons, despite the historically high‐risk premium of stocks compared to bonds.

Reviews

Required fields are marked *. Your email address will not be published.