Managing anticipation and reference-dependent choice

Abstract

Extensive field and experimental evidence shows that reference points shape behavior. But, what shapes the reference point? Candidates put forward in the literature range from the status quo, to rational expectations and the narrow focus of dreaming or worrying about a single possible outcome. This paper develops a model that includes all of these candidate sources. It does so, by allowing the reference point to be any convex combination of the outcomes possible under a consumption lottery. We introduce new solution concepts for reference-dependent choices, characterize these solution concepts on the level of choice data and identify the model’s parameters.