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I have become interested in the new micro-economic foundations of Macro - Rational Expectations Economics (in the context of irrational macro-policy design, particularly visible in the EuroZone); here are two interesting papers from one seminar at Warwick, link below abstracts ..
A MODEL OF REFERENCE-DEPENDENT PREFERENCES
*BOTOND KO˝SZEGI AND MATTHEW RABIN
ABSTRACT: We develop a model of reference-dependent preferences and loss aversionwhere “gain–loss utility” is derived from standard “consumption utility” and thereference point is determined endogenously by the economic environment. Weassume that a person’s reference point is her rational expectations held in therecent past about outcomes, which are determined in a personal equilibrium bythe requirement that they must be consistent with optimal behavior given expectations. In deterministic environments, choices maximize consumption utility, butgain–loss utility inﬂuences behavior when there is uncertainty. Applying themodel to consumer behavior, we show that willingness to pay for a good isincreasing in the expected probability of purchase and in the expected pricesconditional on purchase. In within-day labor-supply decisions, a worker is lesslikely to continue work if income earned thus far is unexpectedly high, but morelikely to show up as well as continue work if expected income is high.
Expectations as Endowments:Evidence on Reference-Dependent Preferences fromExchange and Valuation Experiments
Keith M. Marzilli Ericson and Andreas Fustery
May 19, 2010
Abstract Evidence on loss aversion and the endowment eect suggests that people evaluateoutcomes with respect to a reference point. Yet little is known about what determinesreference points. We conduct two experiments that show that reference points aredetermined by expectations. In the rst experiment, we endow subjects with an itemand randomize the probability they will be allowed to trade it for an alternative.Subjects that are less likely to be able to trade are more likely to choose to keep theiritem, as predicted when reference points are expectation-based, but not when referencepoints are determined by the status quo or when preferences are reference-independent.In the second experiment, we randomly assign subjects a high or low probability ofobtaining an item for free and elicit their willingness-to-accept for it. Being in the highprobability treatment increases valuation of the item by 20-30%.