Referencedependent

Reference-dependent preferences are a concept in behavioral economics in which the perceived value of an outcome depends on a reference point rather than its absolute level. In these models, outcomes are judged as gains or losses relative to this reference point, and the psychological impact of losses is often stronger than that of gains (loss aversion). The framework extends traditional utility by incorporating how the chosen benchmark shapes satisfaction, choices, and welfare.

The idea has formal roots in prospect theory and has been developed into explicit models, notably by Koszegi and Rabin. In reference-dependent models, utility depends on the difference between actual outcomes and a reference point, with gains and losses affecting utility asymmetrically. The reference point can be exogenous or endogenous, and may shift with expectations, past experiences, or social comparisons. Adaptation to new circumstances can occur gradually, altering future references and responses to similar outcomes.

Reference-dependent preferences have wide implications for behavior and policy. They help explain status quo bias, why price changes elicit asymmetric demand, and why individuals buy insurance or participate in experimentation differently than traditional models would predict. They also influence labor supply, savings, and political or welfare choices when expectations or social norms define reference points.

Empirically, researchers rely on experiments and field data to identify reference points and measure loss aversion and adaptation. Critiques focus on identifying stable reference points, endogeneity of benchmarks, and the variability of effects across individuals and contexts. Despite challenges, the concept remains influential in understanding how expectations, comparisons, and benchmarks shape decision making.