ECON 310 Study Guide - Midterm Guide: Loss Aversion, Prospect Theory, Risk Aversion
Document Summary
Reference-dependent utility looks at the extent and nature of such relative evaluations in utility. The evaluation of economic outcomes depend (partly) on comparisons to. When utility from an outcome depends on comparisons to relevant some relevant reference point (cid:498)reference levels(cid:499) or (cid:498)reference points(cid:499) We can conceptualize the endowment effect as a combination of reference dependence and loss aversion. Loss aversion, people dislike losses relative to the reference point more than they like same-sized gains. People dislike losses more strongly than they like same-sized gains. Endowment effect, endowing someone with a good almost instantaneously makes here value it more highly. Combination of reference dependence and loss aversion. Weighting the utility of each outcome by the probability of that outcome and then. And the sum is called the expected utility. People are most sensitive to losses than they are to same-sized gains, the sellers (cid:498)value(cid:499) the mug more: avoiding the loss of a mug is more important.
