Heterogeneity of Loss Aversion and Expectations-Based Reference Points

Abstract

This project examines the role of heterogeneity in loss aversion for identifying models of expectations-based reference dependence (Kőszegi and Rabin, 2006, 2007) (KR). Different levels of loss aversion lead to different signs for comparative statics previously used to test the KR model. In an experiment with 607 subjects, we show heterogeneous treatment effects over loss aversion types. Recognizing heterogeneity in loss aversion allows us to reliably recover the KR model’s central element of expectations-based reference points. Additional effects are discussed related to the subjective perception of exchange experiences.

Keywords: Reference-Dependent Preferences, Rational Expectations, Personal Equilibrium, Endowment Effect, Expectations-Based Reference Points

JEL Classification: D81, D84, D12, D03