No abstract

This paper characterizes a model of reference dependence, where a state-contingent contract (act) is evaluated by its expected value and its expected gain-loss utility. The expected utility of an act serves as the reference point; hence, gains (resp., losses) occur when the act provides an outcome that is better (worse) than expected. The utility representation is characterized by a belief regarding the state space and a degree of reference dependence; both are uniquely identified from behavior. We establish a link between this type of reference dependence and attitudes toward uncertainty. We show that loss aversion and reference dependence are equivalent to max-min and concave expected utility.