“Caution and Reference Effects,” Pietro Ortoleva, Princeton University
BEHAVIORAL SCIENCES WORKSHOP
Abstract: We establish a theoretical link between three phenomena at the core of behavioral economics: the Endowment Effect, Loss Aversion, and violations of Expected Utility as in the Certainty Effect. In our model, all jointly stem from one single force: uncertainty about the right utility function and caution. We show that our model is derived from positing a form of the certainty effect that implies both Loss Aversion and the Endowment Effect. We analyze further implications of our model and demonstrate how it can organize existing empirical evidence of the Endowment Effect, and how it is conceptually and behaviorally distinct from other popular approaches (e.g., Cumulative Prospect Theory). This is joint work with Simone Cerreia-Vioglio and David Dillenberger.
Pietro Ortoleva is a Professor of Economics and Public Affairs at Princeton University. He studied at the Università di Torino and at New York University. Prior to Princeton, he taught at Caltech and Columbia. He is currently a co-editor of the American Economic Review. Professor Ortoleva’s research focuses on economic theory, behavioral and experimental economics, and political economy. His recent work studies the relation between time and risk preferences; preferences for randomization; misspecified models in complex environments; models of reference-dependence; mechanism design; and large-scale incentivized surveys with a focus on the correlation between behavioral aspects.
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Cosponsored by the Center for the Study of American Politics (CSAP) and the School of Management’s International Center for Finance and the Lynne & Andrew Redleaf Foundation.