Caution and Reference Effects
Simone Cerreia-Vioglio, David Dillenberger, Pietro Ortoleva
Econometrica · 2024 · Volume 92 · Issue 6
Abstract
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.
Keywords
Cautious Utility, endowment effect, loss aversion, certainty effect, Non-Expected Utility, cumulative prospect theory
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