Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Marketing Science, Vol. 12, No. 4, pp. 378-394, 1993

18 Pages Posted: 28 Jun 2009

See all articles by Bruce Hardie

Bruce Hardie

London Business School

Eric J. Johnson

Columbia University - Columbia Business School, Marketing

Peter Fader

University of Pennsylvania - Marketing Department

Date Written: 1993

Abstract

Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice. We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.

Keywords: brand choice, buyer behavior, choice models, reference effects

Suggested Citation

Hardie, Bruce and Johnson, Eric J. and Fader, Peter, Modeling Loss Aversion and Reference Dependence Effects on Brand Choice (1993). Marketing Science, Vol. 12, No. 4, pp. 378-394, 1993, Available at SSRN: https://ssrn.com/abstract=1424038

Bruce Hardie (Contact Author)

London Business School ( email )

Regent's Park
London, NW1 4SA
United Kingdom

Eric J. Johnson

Columbia University - Columbia Business School, Marketing ( email )

New York, NY 10027
United States

Peter Fader

University of Pennsylvania - Marketing Department ( email )

700 Jon M. Huntsman Hall
3730 Walnut Street
Philadelphia, PA 19104-6340
United States

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