A theory of reference-dependent behavior

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

Non-Deteriorating Choice without Full Transitivity

Although the theory of greatest-element rationalizability and maximal-element rationalizability under general domains and without full transitivity of rationalizing relations is well-developed in the literature, these standard notions of rational choice are often considered to be too demanding. An alternative definition of rationality of choice is that of non-deteriorating choice, which requires that the chosen alternatives must be judged at least as good as a reference alternative. In game theory, this definition is well-known under the name of individual rationality when the reference alternative is construed to be the status quo. This alternative form of rationality of individual and social choice is characterized in this paper on general domains and without full transitivity of rationalizing relations.

Salience and consumer choice

We present a theory of context-dependent choice in which a consumer's attention is drawnto salient attributes of goods, such as quality or price. An attribute is salient for a good when itstands out among the good's attributes, relative to that attribute's average level in the choice set (orgenerally, the evoked set). Consumers attach disproportionately high weight to salient attributesand their choices are tilted toward goods with higher quality/price ratios. The model accounts fora variety of disparate evidence, including decoy effects, context-dependent willingness to pay, andlarge shifts in demand in response to price shocks.

Does uncertainty cause inertia in decision making? An experimental study of the role of regret aversion and indecisiveness

Previous research has shown that often there is clear inertia in individual decision making---that is, a tendency for decision makers to choose a status quo option. I conduct a laboratory experiment to investigate two potential determinants of inertia in uncertain environments: (i) regret aversion and (ii) ambiguity-driven indecisiveness. I use a between-subjects design with varying conditions to identify the effects of these two mechanisms on choice behavior. In each condition, participants choose between two simple real gambles, one of which is the status quo option. I find that inertia is quite large and that both mechanisms are equally important.

Risk, ambiguity, and diversification

Attitudes toward risk influence the decision to diversify among uncertain options. Yet, because in most situations the options are ambiguous, attitudes toward ambiguity may also play an important role. I conduct a laboratory experiment to investigate the effect of ambiguity on the decision to diversify. I find that diversification is more prevalent and more persistent under ambiguity than under risk. Moreover, excess diversification under ambiguity is driven by participants who stick with a status quo gamble when diversification among gambles is not feasible. This behavioral pattern cannot be accommodated by major theories of choice under ambiguity.

Study of the Influence of Reference System in Surface Finishing Parameters Evaluation.

In the present paper the influence of the reference system with regard to the characterization of the surface finishing is analyzed. The effect of the reference system’s choice on the most representative surface finishing parameters (e.g. roughness average Ra and root mean square values Rq) is studied. The study can also be applied to their equivalent parameters in waviness and primary profiles. Based on ISO and ASME standards, three different types of regression lines (central, mean and orthogonal) are theoretically and experimentally analyzed, identifying the validity and applicability fields of each one depending on profile’s geometry. El presente trabajo realiza un estudio de la influencia que supone la elección del sistema de referencia en la determinación los valores de los parámetros más relevantes empleados en la caracterización del acabado superficial tales como la rugosidad media aritmética Ra o la rugosidad media cuadrática Rq y sus equivalentes en los perfiles de ondulación y completo. Partiendo de la definición establecida por las normas ISO y ASME, se analizan tres tipos de líneas de regresión cuadrática (línea central, línea media y línea ortogonal), delimitando los campos de validez y de aplicación de cada una de ellas en función de la geometría del perfil. Para ello se plantean diversos tipos de perfiles y se desarrolla un estudio teórico y experimental de los mismos.

Effect of the Reference Line on Main Roughness Parameters

In the present paper the influence of the reference system with regard to the characterization of the surface finishing is analyzed. The effect of the reference system’s choice on the most representative surface finishing parameters (e.g. roughness average Ra and root mean square values Rq) is studied. The study can also be applied to their equivalent parameters in waviness and primary profiles. Based on ISO and ASME standards, three different types of regression lines (center, mean and orthogonal) are theoretically and experimentally analyzed, identifying the validity and applicability fields of each one depending on profile’s geometry.

Testing reference dependence, loss aversion and diminishing sensitivity in Spanish tourism

Based on Tversky and Kahneman’s Prospect Theory, we test the existence of reference dependence, loss aversion and diminishing sensitivity in Spanish tourism. To do this, we incorporate the reference-dependent model into a Multinomial Logit Model with Random Parameters -which controls for heterogeneity- and apply it to a sample of vacation choices made by Spaniards. We find that the difference between reference price and actual price is considered to make decisions, confirming that reference dependence exists; that people react more strongly to price increases than to price decreases relative to their reference price, which represents evidence in favor of the loss aversion phenomenon; and that there is diminishing sensitivity for losses only, showing convexity for these negative values.

Perceiving Prospects Properly

When an agent chooses between prospects, noise in information processing generates an effect akin to the winner’s curse. Statistically unbiased perception systematically overvalues the chosen action because it fails to account for the possibility that noise is responsible for making the preferred action appear to be optimal. The optimal perception patterns share key features with prospect theory, namely, overweighting of small probability events (and corresponding underweighting of high probability events), status quo bias, and reference-dependent S-shaped valuations. These biases arise to correct for the winner’s curse effect.

A Theory of Wage Setting Behavior

Concerns for fairness, workers' morale and reciprocity infuence firms' wage setting policy. In this paper we formalize a theory of wage setting behavior in a simple and tractable model that explicitly considers these behavioral aspects. A worker is assumed to have reference-dependent preferences and displays loss aversion when evaluating the fairness of a wage contract. The theory establishes a wage-effort relationship that captures the worker's reference-dependent reciprocity, which in turn in uences the firm's optimal wage policy. The paper makes two key contributions: it identifies loss aversion as an explanation for a worker's asymmetric reciprocity; and it provides realistic and generalized microfoundation for downward wage rigidity. We further illustrate the implications of our theory for both wage setting and hiring behavior. Downward wage rigidity generates several implications for the outcome of the initial employment contract. The worker's reference wage, his extent of negative reciprocity and the firms expectations are key drivers of the propositions derived.

Catastrophic medical expenditure risk

Medical expenditure risk can pose a major threat to living standards. We derive decomposable measures of catastrophic medical expenditure risk from reference-dependent utility with loss aversion. We propose a quantile regression based method of estimating risk exposure from cross-section data containing information on the means of financing health payments. We estimate medical expenditure risk in seven Asian countries and find it is highest in Laos and China, and is lowest in Malaysia. Exposure to risk is generally higher for households that have less recourse to self-insurance, lower incomes, wealth and education, and suffer from chronic illness.

On optimal learning schedules and the marginal value of cumulative cultural evolution.

The age-dependent choice between expressing individual learning (IL) or social learning (SL) affects cumulative cultural evolution. A learning schedule in which SL precedes IL is supportive of cumulative culture because the amount of nongenetically encoded adaptive information acquired by previous generations can be absorbed by an individual and augmented. Devoting time and energy to learning, however, reduces the resources available for other life-history components. Learning schedules and life history thus coevolve. Here, we analyze a model where individuals may have up to three distinct life stages: "infants" using IL or oblique SL, "juveniles" implementing IL or horizontal SL, and adults obtaining material resources with learned information. We study the dynamic allocation of IL and SL within life stages and how this coevolves with the length of the learning stages. Although no learning may be evolutionary stable, we find conditions where cumulative cultural evolution can be selected for. In that case, the evolutionary stable learning schedule causes individuals to use oblique SL during infancy and a mixture between IL and horizontal SL when juvenile. We also find that the selected pattern of oblique SL increases the amount of information in the population, but horizontal SL does not do so.

Monitoring natural hazards

Few subjects have caught the attention of the entire world as much as those dealing with natural hazards. The first decade of this new millennium provides a litany of tragic examples of various hazards that turned into disasters affecting millions of individuals around the globe. The human losses (some 225,000 people) associated with the 2004 Indian Ocean earthquake and tsunami, the economic costs (approximately 200 billion USD) of the 2011 Tohoku Japan earthquake, tsunami and reactor event, and the collective social impacts of human tragedies experienced during Hurricane Katrina in 2005 all provide repetitive reminders that we humans are temporary guests occupying a very active and angry planet. Any examples may have been cited here to stress the point that natural events on Earth may, and often do, lead to disasters and catastrophes when humans place themselves into situations of high risk. Few subjects share the true interdisciplinary dependency that characterizes the field of natural hazards. From geology and geophysics to engineering and emergency response to social psychology and economics, the study of natural hazards draws input from an impressive suite of unique and previously independent specializations. Natural hazards provide a common platform to reduce disciplinary boundaries and facilitate a beneficial synergy in the provision of timely and useful information and action on this critical subject matter. As social norms change regarding the concept of acceptable risk and human migration leads to an explosion in the number of megacities, coastal over-crowding and unmanaged habitation in precarious environments such as mountainous slopes, the vulnerability of people and their susceptibility to natural hazards increases dramatically. Coupled with the concerns of changing climates, escalating recovery costs, a growing divergence between more developed and less developed countries, the subject of natural hazards remains on the forefront of issues that affect all people, nations, and environments all the time.This treatise provides a compendium of critical, timely and very detailed information and essential facts regarding the basic attributes of natural hazards and concomitant disasters. The Encyclopedia of Natural Hazards effectively captures and integrates contributions from an international portfolio of almost 300 specialists whose range of expertise addresses over 330 topics pertinent to the field of natural hazards. Disciplinary barriers are overcome in this comprehensive treatment of the subject matter. Clear illustrations and numerous color images enhance the primary aim to communicate and educate. The inclusion of a series of unique ?classic case study? events interspersed throughout the volume provides tangible examples linking concepts, issues, outcomes and solutions. These case studies illustrate different but notable recent, historic and prehistoric events that have shaped the world as we now know it. They provide excellent focal points linking the remaining terms in the volume to the primary field of study. This Encyclopedia of Natural Hazards will remain a standard reference of choice for many years.

A Behavioral Account of the Labor Market: The Role of Fairness Concerns

In this paper, we argue that important labor market phenomena can be better understood if one takes (a) the inherent incompleteness and relational nature of most employment contracts and (b) the existence of reference-dependent fairness concerns among a substantial share of the population into account. Theory shows and experiments confirm that, even if fairness concerns were to exert only weak effects in one-shot interactions, repeated interactions greatly magnify the relevance of such concerns on economic outcomes. We also review evidence from laboratory and field experiments examining the role of wages and fairness on effort, derive predictions from our approach for entry-level wages and incumbent workers' wages, confront these predictions with the evidence, and show that reference-dependent fairness concerns may have important consequences for the effects of economic policies such as minimum wage laws.

Detecting Heterogeneous Risk Attitudes with Mixed Gambles

We propose a task for eliciting attitudes toward risk that is close to real-world risky decisions which typically involve gains and losses. The task consists of accepting or rejecting gambles that provide a gain with probability p and a loss with probability 1−p . We employ finite mixture models to uncover heterogeneity in risk preferences and find that (i) behavior is heterogeneous, with one half of the subjects behaving as expected utility maximizers, (ii) for the others, reference-dependent models perform better than those where subjects derive utility from final outcomes, (iii) models with sign-dependent decision weights perform better than those without, and (iv) there is no evidence for loss aversion. The procedure is sufficiently simple so that it can be easily used in field or lab experiments where risk elicitation is not the main experiment.