We develop a model that fleshes out, extends, and modifies existing models of referencedependent preferences and loss aversion while accomodating most of the evidence motivating these models. Our approach makes reference-dependent theory more broadly applicable by avoiding some of the ways that prevailing models—if applied literally and without ancillary assumptions—make variously weak and incorrect predictions. Our model combines the reference-dependent gain-loss utility with standard economic “consumption utility ” and clarifies the relationship between the two. Most importantly, we posit that a person’s reference point is her recent expectations about outcomes (rather than the status quo), and assume that behavior accords to a personal equilibrium: The person maximizes utility given her rational expectations about outcomes, where these expectations depend on her own anticipated behavior. We apply our theory to consumer behavior, and emphasize that a consumer’s willingness to pay for a good is endogenously determined by the market distribution of prices and how she expects to respond to these prices. Because a buyer’s willingness to buy depends on whether she anticipates buying the good, for a range of market prices there are multiple personal equilibria. This multiplicity disappears when the consumer is sufficiently uncertain about the price she will face. Because paying more than she anticipated induces a sense of loss in the buyer, the lower the prices at which she expects to buy the lower will be her willingness to pay. In some situations, a known stochastic decrease in prices can even lower the quantity demanded.

The canonical model of life-cycle labor supply predicts a positive response of labor supplied to transitory wage changes. We tested this prediction by conducting a randomized field experiment with bicycle messengers. In contrast to previous studies we can observe in which way working hours as well as effort respond to a wage increase and we have full control regarding the workers' anticipation of the wage increase.

Abstract: This paper reconsiders whether cabdrivers ’ labor supply decisions reflect reference-dependent preferences. Following Botond Kıszegi and Matthew Rabin (2006), we construct a model with targets for hours as well as income, both determined by rational expectations. Estimating using Henry S. Farber’s (2005, 2008) data, we show that the reference-dependent model can reconcile his 2005 finding that drivers ’ stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by Colin Camerer et al. (1997) and Farber (2005, 2008). The model yields sensible estimates that avoid Farber’s (2008) criticism that drivers ’ income targets are too unstable to allow a useful reference-dependent model of labor supply.

The publication of “Advances in Behavioral Economics ” is a testament to the success of behavioral economics. The book contains important second-generation contributions to behavioral economics that build on the seminal work by Kahnemann, Tversky, Thaler, Strotz and others.

A key open question for theories of reference-dependent preferences is what determines the reference point. One candidate is expectations: what people expect could affect how they feel about what actually occurs. In a real-effort experiment, we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision. We find that effort provision is significantly different between treatments in the way predicted by models of expectation-based reference-dependent preferences: if expectations are high, subjects work longer and earn more money than if expectations are low.

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The focus for the Centre is research into individual and strategic decision-making using a combination of theoretical and experimental methods. On the theory side, members of the Centre investigate individual choice under uncertainty, cooperative and non-cooperative game theory, as well as theories of psychology, bounded rationality and evolutionary game theory. Members of the Centre have applied experimental methods in the fields of Public Economics, Individual Choice under Risk and Uncertainty, Strategic Interaction, and the performance of auctions, Markets and other economic institutions. Much of the Centre's research involves collaborative projects with researchers from other departments in the UK and overseas.

In many applications of game theory, there are ample opportunities for learning from experience in previous play of analogous games. In such settings, the cognitive requirements for learning to converge to equilibrium are mild, and experiments suggest that people do in

Although experimental studies have documented systematic decision errors, many leading scholars believe that experience, competition, and large stakes will reliably extinguish biases. We test for the presence of a fundamental bias, loss aversion, in a high-stakes context: professional golfers ’ performance on the PGA TOUR. Golf provides a natural setting to test for loss aversion because golfers are rewarded for the total number of strokes they take during a tournament, yet each individual hole has a salient reference point, par. We analyze over 1.6 million putts using precise laser measurements and find evidence that even the best golfers – including Tiger Woods – show evidence of loss aversion. On average, this bias costs the best golfers over $1.2 million in tournament winnings per year.

Abstract: This paper proposes a model of cabdrivers ’ labor supply, building on Henry S. Farber’s (2005, 2008) empirical analyses and Botond Kıszegi and Matthew Rabin’s (2006; henceforth “KR”) theory or reference-dependent preferences. Following KR, our model has targets for hours as well as income, both determined by rational expectations. Estimated with Farber’s data, our model reconciles his finding that stopping probabilities are significantly related to hours but not income with Colin Camerer et al.’s (1997) negative wage elasticity of hours; and avoids his criticism that estimates of drivers ’ income targets are too unstable to yield a useful model of labor supply.