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Contribution Details
| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | Loss Aversion with a State-Dependent Reference Point |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Management Science |
| Publisher | Institute for Operations Research and the Management Science |
| Geographical Reach | international |
| ISSN | 0025-1909 |
| Volume | 57 |
| Number | 6 |
| Page Range | 1094 - 1110 |
| Date | 2011 |
| Abstract Text | This study investigates reference-dependent choice with a stochastic, state-dependent reference point. The optimal reference-dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is widespread, we conclude that the reference point generally includes an important exogenously fixed component. We develop a choice model in which adjustment costs can cause stickiness relative to an initial, exogenous reference point. Using historical U.S. investment benchmark data, we show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons, despite the historically high-risk premium of stocks compared to bonds. |
| Digital Object Identifier | 10.1287/mnsc.1110.1338 |
| Other Identification Number | merlin-id:5909 |
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