Working Paper: CEPR ID: DP9183
Authors: Heiko Karle; Georg Kirchsteiger; Martin Peitz
Abstract: In this paper we analyze a consumer choice model with price uncertainty, loss aversion, and expectation-based reference points. The implications of this model are tested in an experiment in which participants have to make a consumption choice between two sandwiches. We make use of the fact that participants diff er in their reported taste difference between the two sandwiches and the degree of loss aversion which we measure separately. We find that more loss-averse participants are more likely to opt for the cheaper sandwich provided that their reported taste difference is below some threshold, confirming the model?s predictions.
Keywords: Contextual Reference Points; Loss Aversion; Reference Dependent Utility
JEL Codes: C91; D01; D11; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher degree of loss aversion (G41) | higher likelihood of choosing cheaper sandwich (D91) |
| smaller taste difference (L15) | higher likelihood of choosing cheaper sandwich when loss aversion is high (D91) |
| significant taste preference for expensive sandwich (D11) | higher likelihood of choosing expensive sandwich (D91) |
| minimal taste preference (D11) | higher likelihood of choosing cheaper sandwich (D91) |