Don't Aim Too High: The Potential Costs of High Aspirations

22 Pages Posted: 6 Dec 2007

See all articles by Astrid Matthey

Astrid Matthey

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance

Date Written: December 4, 2007

Abstract

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on the factor found to be crucial: the adjustment of reference states to changes in expectations. The results suggest that the costs of high aspirations can be significant, since reference states do not adjust quickly. We use a novel, indirect approach that allows us to infer the determinants of the reference state from observed behavior, rather than to rely on cheap talk.

Keywords: aspirations, reference state, expectations, individual utility, experiments

JEL Classification: D11, D84, C91

Suggested Citation

Matthey, Astrid and Dwenger, Nadja, Don't Aim Too High: The Potential Costs of High Aspirations (December 4, 2007). Jena Economic Research Paper No. 2007-097, Available at SSRN: https://ssrn.com/abstract=1053881 or http://dx.doi.org/10.2139/ssrn.1053881

Astrid Matthey (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

Nadja Dwenger

Max Planck Institute for Tax Law and Public Finance ( email )

10117
Germany

HOME PAGE: http://www.tax.mpg.de/en/pub/public_economics/public_economics_people/dwenger_nadja.cfm

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