Reference Points and Loss Aversion in Intertemporal Choice

31 Pages Posted: 7 Jan 2005

See all articles by Qin Tu

Qin Tu

Institute of World Economics and Politics, Chinese Academy of Social Sciences; Wageningen University

Date Written: December 21, 2004

Abstract

Based on the insights of Loewenstein's (1988) reference point model, we specify structural model for intertemporal choice that incorporates loss aversion and reference points. We consider four scenarios: Delay of gains, delay of losses, speed-up of gains, and speed-up of losses, using six years of panel data from a Dutch representative household survey. These data contain rich information on individual time preferences and other characteristics, and employ a non-linear random coefficients model with panel data to estimate reference points of delay and speedup, the coefficient of loss aversion and the discount rate. We find that on average the reference point of delay is larger than speedup, consistent with the hypothesis of Loewenstein; the mean coefficient of loss aversion is around two, females are more loss averse than males, and high education and age make people less loss-averse; high educated and older people are also more patient. The observed relationships of these parameters can be used to better predict and understand the behavior of households for policy purposes.

Keywords: reference point, loss aversion, discount rate

JEL Classification: D00, C33

Suggested Citation

Tu, Qin, Reference Points and Loss Aversion in Intertemporal Choice (December 21, 2004). Available at SSRN: https://ssrn.com/abstract=644142 or http://dx.doi.org/10.2139/ssrn.644142

Qin Tu (Contact Author)

Institute of World Economics and Politics, Chinese Academy of Social Sciences ( email )

Beijing
China

Wageningen University ( email )

Hollandseweg 1
WAGENINGEN, 6706 KN
Netherlands

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