Caution and Reference Effects

doi:10.3982/ECTA21748

Caution and Reference Effects

2024-01-01

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AI

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Simone Cerreia‐Vioglio

DOI：10.3982/ECTA21748

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We introduce Cautious Utility, a new model based on the idea that individuals are unsure of trade-offs between goods and apply caution. The model yields an endowment effect, even when gains and losses are treated symmetrically. Moreover, it implies either loss aversion or loss neutrality for risk, but in a way unrelated to the endowment effect, and it captures the certainty effect, providing a novel unified explanation of all three phenomena. Cautious Utility can help organize empirical evidence, including some that directly contradicts leading alternatives.

Keyword:

Cautious Utility

endowment effect

loss aversion

certainty effect

Non-Expected Utility

cumulative prospect theory

Caution and Reference Effects

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