Yesterday's Expectation of Tomorrow Determines What You Do Today: The Role of Reference-Dependent Utility from Expectations

33 Pages Posted: 3 Aug 2006 Last revised: 2 Mar 2008

See all articles by Astrid Matthey

Astrid Matthey

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

Date Written: January 15, 2008

Abstract

The paper introduces the concept of adjustment utility, that is, reference-dependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unexpectedly costly; people's aversion towards positive but false information, which cannot be explained with previous models; and the increasing acceptance of risks when people get used to them.

Keywords: utility, expectations, reference-dependent preferences, anticipation, prospect theory, experiments

JEL Classification: D11, D81, D84, C99

Suggested Citation

Matthey, Astrid, Yesterday's Expectation of Tomorrow Determines What You Do Today: The Role of Reference-Dependent Utility from Expectations (January 15, 2008). Jena Economic Research Paper No. 2008-003. Available at SSRN: https://ssrn.com/abstract=920997 or http://dx.doi.org/10.2139/ssrn.920997

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

Register to save articles to
your library

Register

Paper statistics

Downloads
190
Abstract Views
1,242
rank
159,280
PlumX Metrics