This study investigates reference-dependent choice with a stochastic, state-dependent reference point. The optimal reference-dependent solution equals the optimal consumption solution (no loss aversion) if the reference point is selected fully endogenously. Given that loss aversion is...

This paper considers a model of reference-dependent utility in which the individual makes a conscious choice of her reference point for future consumption. The model incorporates the combination of loss aversion and anticipatory utility as competing forces in the determination of the optimal...

In this thesis we explore two recent topics in behavioral finance, namely portfolio optimization by non-expected utility insiders and existence of equilibria in financial markets populated by heterogeneous agents. Firstly, we review a number of theories which have been used to model behavioral...

In 1996 Alan Greenspan warned that stock prices were "unduly escalated" and reflected "irrational exuberance". In this paper we describe an economy that can support a prolonged surge of asset prices, accompanied by a sharp increase of volatility. We study an equilibrium model where some agents...

In 1996 Alan Greenspan warned that stock prices were "unduly escalated" and reflected "irrational exuberance". In this paper we describe an economy that can support a prolonged surge of asset prices, accompanied by a sharp increase of volatility. We study an equilibrium model where some agents...

This paper tests whether utility is the same for risk and for uncertainty. This test is critical for models that capture ambiguity aversion through a difference in event weighting between risk and uncertainty, like the multiple priors models and prospect theory. We present a new method to...

This paper reports on the results of an experimental elicitation at the individual level of all prospect theory components (i.e., utility, loss aversion, and weighting functions) in two decision contexts: situations where alternatives are described as probability distributions and situations...

Previous endowment effect experiments have examined circumstances in which people encounter a single unit of a good (e.g., one chocolate). We contrast single-unit treatments with multiple-unit treatments in which participants encounter several units of a good (e.g., five chocolates). We observe...

This research note examines the conditions which will induce a prospect theory type investor, whose reference level is set by ‘playing it safe’, to invest in a risky asset. The conditions indicate that this type of investor requires a large equity premium to invest in risky assets. However,...

The standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximize expected utility. However, prospect theory has now been established as an alternative model of individual behaviour, with empirical support. This paper explores the...