A theory of reference point formation

Kıbrıs, Özgür and Masatlioglu, Yusufcan and Suleymanov, Elchin (2023) A theory of reference point formation. Economic Theory, 75 (1). pp. 137-166. ISSN 0938-2259 (Print) 1432-0479 (Online)

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We introduce a model of reference-dependent choice where the reference point is endogenously determined through maximization of a conspicuity ranking. This subjective ranking captures how prominent or eye-catching the alternatives are relative to one another. The most conspicuous alternative in a choice set serves as the reference point and in turn determines the reference-dependent utility function the decision maker maximizes to make a choice. We show that this conspicuity based endogenous reference model (CER) is characterized by an intuitive and simple behavioral postulate, called the Single Reversal, and we discuss how choice data can be used to reveal information about CER’s parameters. We additionally analyze special cases where a reference-free utility function, combined with psychological constraints, is used to make reference-dependent choices.
Item Type: Article
Uncontrolled Keywords: Choice reversal; Conspicuity; Psychological constraints; Reference point formation; Reference-Dependence; Revealed preference
Divisions: Faculty of Arts and Social Sciences
Depositing User: Özgür Kıbrıs
Date Deposited: 05 Sep 2023 16:15
Last Modified: 05 Sep 2023 16:15
URI: https://research.sabanciuniv.edu/id/eprint/47759

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