Reference dependence Flashcards
What is a reference point/level?
A standard of comparison when judging the size/magnitude of other objects/choices
What’s the equation for reference-dependent utility function?
U(x) = nu(x) + v(x-r) n is some parameter r is the reference point (wealth last year etc) v means value function x is outcome
Someone is loss averse if:
Losses are worse than gains are good
What is the endowment effect?
People value more highly goods that they have some ownership over
What is the “No loss in buying hypothesis”?
When people are deciding to buy a good, they deduct the amount from their current income, then decide to gain it back or keep the loss
What is acquisition utility?
Measures the net gain from buying something for less than it is valued
What is transaction utility?
Measures the net gain or less from buying something for more or less than expected
Separating purchase into different groups can lead to:
Narrow framing
What is narrow framing?
Where a choice is seen in isolation rather than being integrated with other purchases
What is mental accounting?
When people choose gains and losses for different types of purchases
What is the Prospect theory example?
The current level of wealth
What is the Expected utility example?
Zero wealth
What is the disappointment theory example?
Expected utility of the prospect
What influences how someone deals with a risk?
Whether or not the person expects to face the risk
What are three examples of existing risk?
- Money invested in the stock market
- Person might lose their job
- Person might’ve bought a lottery ticket
