Attitudes Towards Success and Failure

Seminario Theory-Experimental

Antonio Penta

UPF and BSE

30-May-2022

seminar – 14:30

Individuals often attach a special meaning to obtaining a certain goal, and getting past a threshold marks the difference between what they consider a success or a failure. In this paper we take a standard von Neumann-Morgenstern Expected Utility setting with an exogenous reference point that separates success from failure, and define attitudes towards success and failure as features of preferences over lotteries. The distinctive feature of our definitions is that they all concern a local reversal of the decision maker’s risk attitude between riskaversion and risk-lovingness across the reference point. Our findings provide a unified view of several well-known models of reference-dependent preferences in economics, finance and psychology, and also include novel representations. Moreover, we introduce orderings over the primitive space of preferences to define different attitudes with which each attitudes can be displayed, and characterize them in terms of the representation, with indices analogous to the well-known Arrow-Pratt index of risk aversion. Our findings shed new light on frequently used notions of reference-dependent preferences, and suggest that new comparative statics analyses be conducted in these settings. Finally, we argue that our framework may prove useful to incorporate, within a standard economic model, behavioral manifestations of personality traits that have received increasing attention within the empirical economics literature.