Topic
Preference (economics)
About: Preference (economics) is a research topic. Over the lifetime, 3381 publications have been published within this topic receiving 104599 citations.
Papers published on a yearly basis
Papers
More filters
TL;DR: In this article, the authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point, in which losses and disadvantages have greater impact on preferences than gains and advantages.
Abstract: Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. We present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. The standard models of decision making assume that preferences do not depend on current assets. This assumption greatly simplifies the analysis of individual choice and the prediction of trades: indifference curves are drawn without reference to current holdings, and the Coase theorem asserts that, except for transaction costs, initial entitlements do not affect final allocations. The facts of the matter are more complex. There is substantial evidence that initial entitlements do matter and that the rate of exchange between goods can be quite different depending on which is acquired and which is given up, even in the absence of transaction costs or income effects. In accord with a psychological analysis of value, reference levels play a large role in determining preferences. In the present paper we review the evidence for this proposition and offer a theory that generalizes the standard model by introducing a reference state. The present analysis of riskless choice extends our treatment of choice under uncertainty [Kahneman and Tversky, 1979, 1984; Tversky and Kahneman, 1991], in which the outcomes of risky prospects are evaluated by a value function that has three essential characteristics. Reference dependence: the carriers of value are gains and losses defined relative to a reference point. Loss aversion: the function is steeper in the negative than in the positive domain; losses loom larger than corresponding gains. Diminishing sensitivity: the marginal value of both gains and losses decreases with their
5,864 citations
TL;DR: In this paper, the authors characterize preference relations over acts which have a numerical representation by the functional J(f) = min > {∫ uo f dP / P∈C } where f is an act, u is a von Neumann-Morgenstern utility over outcomes, and C is a closed and convex set of finitely additive probability measures on the states of nature.
2,719 citations
TL;DR: In this article, the authors propose a formal normative theory of the total experienced utility of temporally extended outcomes, which can be reported in real time (instant utility), or in retrospective evaluations of past episodes (remembered utility).
Abstract: textTwo core meanings of “utility” are distinguished. “Decision utility” is the weight of an outcome in a decision. “Experienced utility” is hedonic quality, as in Bentham’s usage. Experienced utility can be reported in real time (instant utility), or in retrospective evaluations of past episodes (remembered utility). Psychological
research has documented systematic errors in retrospective evaluations, which can induce a preference for dominated options. We propose a formal normative theory of the total experienced utility of temporally extended outcomes. Measuring
the experienced utility of outcomes permits tests of utility maximization and opens other lines of empirical research.
1,972 citations
TL;DR: In this article, the authors apply the axioms of revealed preference to the altruistic actions of subjects and find that over 98% of the subjects made choices that are consistent with utility maximization.
Abstract: Subjects in economic laboratory experiments have clearly expressed an interest in behaving unselfishly. They cooperate in prisoners’ dilemma games, they give to public goods, and they leave money on the table when bargaining. While some are tempted to call this behavior irrational, economists should ask if this unselfish and altruistic behavior is indeed self-interested. That is, can subjects’ concerns for altruism or fairness be expressed in the economists’ language of a well-behaved preference ordering? If so, then behavior is consistent and meets our definition of rationality. This paper explores this question by applying the axioms of revealed preference to the altruistic actions of subjects. If subjects adhere to these axioms, such as GARP, then we can infer that a continuous, convex, and monotonic utility function could have generated their choices. This means that an economic model is sufficient to understand the data and that, in fact, altruism is rational. We do this by offering subjects several opportunities to share a surplus with another anonymous subject. However, the costs of sharing and the surplus available vary across decisions. This price and income variation creates budgets for altruistic activity that allow us to test for an underlying preference ordering. We found that subjects exhibit a significant degree of rationally altruistic behavior. Over 98% of our subjects made choices that are consistent with utility maximization. Only a quarter of subjects are selfish money-maximizers, and the rest show varying degrees of altruism. Perhaps most strikingly, almost half of the subjects exhibited behavior that is exactly consistent with one of three standard CES utility functions: perfectly selfish, perfect substitutes, or Leontief. Those with Leontief preferences are always dividing the surplus equally, while those with perfect substitutes preferences give everything away when the price of giving is less than one, but keep everything when the price of giving is greater than one. Using the data on choices, we estimated a population of utility functions and applied these to predict the results of other studies. We found that our results could successfully characterize the outcomes of other studies, indicating still further that altruism can be captured in an economic model.
1,742 citations
TL;DR: In this article, the Black-Scholes equation for options on aggregate consumption has been used to derive the prices of primitive securities from the price of call options on aggregated consumption.
Abstract: The time-state preference approach to general equilibrium in an economy as developed by Arrow (1964) and Debreu (1959) is one of the most general frameworks available for the theory of finance under uncertainty. Given the prices of primitive securities (a security that pays $1.00 contingent upon a given state of the world at a given date, and zero otherwise, is a primitive This paper implements the time-state preference model in a multiperiod economy, deriving the prices of primitive securities from the prices of call options on aggregate consumption. These prices permit an equilibrium valuation of assets with uncertain payoffs at many future dates. Furthermore, for any given portfolio, the price of a $1.00 claim received at a future date, if the portfolio's value is between two given levels at that time, is derived explicitly from a second partial derivative of its calloption pricing function. An intertemporal capital asset pricing model is derived for payoffs that are jointly lognormally distributed with aggregate consumption. It is shown that using the Black-Scholes equation for options on aggregate consumption implies that individuals' preferences aggregate to isoelastic utility.
1,630 citations