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Estimating the reference frame: a smooth twice-differentiable utility function for non-compensatory loss-averse decision-making

Bahamonde Birke, Francisco Jose (2018) Estimating the reference frame: a smooth twice-differentiable utility function for non-compensatory loss-averse decision-making. Journal of Choice Modelling, 28, pp. 71-81. Elsevier. DOI: 10.1016/j.jocm.2018.03.002 ISSN 1755-5345

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Official URL: https://www.sciencedirect.com/science/article/pii/S1755534517301112

Abstract

Since the introduction of prospect theory, reference-dependence and loss-aversion have become widely acknowledged as important elements affecting decision-making. Nevertheless, establishing and determining reference frames are not extensively analyzed in the literature; rather, in most applications, it is simply assumed that the reference frames can be represented through the status quo. This assumption, however, may lead to biased results, as not only the status quo affects reference frames, but also previous experiences or expectations, among many others. Therefore, it would be more appropriate to estimate the reference frame directly as an unobserved latent variable. Unfortunately, current utility functions utilized to depict this kind of behavior are not useful for this purpose, as they are defined piecewise. This work proposes a smooth twice-differentiable utility function that indeed allows estimating reference frames. Further, this function satisfies all major properties of prospect theory. Finally, the approach is tested relying on three case studies. They show that in the context of semi-compensatory loss-averted decision-making reference frames may diverge from the status quo.

Item URL in elib:https://elib.dlr.de/121300/
Document Type:Article
Title:Estimating the reference frame: a smooth twice-differentiable utility function for non-compensatory loss-averse decision-making
Authors:
AuthorsInstitution or Email of AuthorsAuthors ORCID iD
Bahamonde Birke, Francisco JoseFrancisco.BahamondeBirke (at) dlr.deUNSPECIFIED
Date:2018
Journal or Publication Title:Journal of Choice Modelling
Refereed publication:Yes
Open Access:Yes
Gold Open Access:No
In SCOPUS:Yes
In ISI Web of Science:Yes
Volume:28
DOI :10.1016/j.jocm.2018.03.002
Page Range:pp. 71-81
Publisher:Elsevier
ISSN:1755-5345
Status:Published
Keywords:loss-aversion, utility function, discrete choice modeling, non-compensatory models
HGF - Research field:Aeronautics, Space and Transport
HGF - Program:Transport
HGF - Program Themes:Transport System
DLR - Research area:Transport
DLR - Program:V VS - Verkehrssystem
DLR - Research theme (Project):V - Verkehrsentwicklung und Umwelt II (old)
Location: Berlin-Adlershof
Institutes and Institutions:Institute of Transport Research > Mobility and Urban Development
Deposited By: Bahamonde Birke, Francisco Jose
Deposited On:07 Aug 2018 11:53
Last Modified:31 Jul 2019 20:19

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