This was part of Decision Making under Uncertainty

Caution and Reference Effects

David Dillenberger, University of Pennsylvania

Wednesday, May 4, 2022

Abstract: We introduce the Cautious Utility model and show that it provides a novel approach to three phenomena at the core of behavioral economics: the endowment effect, loss aversion, and violations of Expected Utility due to the certainty effect. In our model, all three phenomena jointly stem from the same source: uncertainty about which utility to use and caution. We show how this model can help organize empirical evidence, some of which is incompatible with existing models, and is both conceptually and behaviorally distinct from other popular approaches.