Reference Points and Loss Aversion in Intertemporal Choice (Preliminary)

Reference points and loss aversion are two essential and commonly used concepts in behavioral economics. In this paper, based on insight of Loewenstein’s (1988) reference point model, we construct a structural model for intertemporal choice with reference points and loss aversion by considering four scenarios: delay of gains, delay of losses, speed-up of gains, and speed-up of losses. We use panel data from a Dutch representative household survey 1997-2002, containing rich information on individual time preferences and other characteristics, and a nonlinear random coefficients model with panel data to estimate reference points of delay and speedup, the coefficient of loss aversion and discount rates. We find that on average the reference point of delay is larger than speedup, consistent with the hypothesis of Loewenstein; the mean of coefficient of loss aversion is around two, females are more loss averse than males, and high education and aging make people less loss averse; high educated or older people are also more patient. The observed relationships of these parameters can be used to better predict and understand the behavior of households for policy purposes. ∗The author thanks Bas Donkers, Bertrand Melenberg, and Arthur van Soest for their helpful suggestions. Financial support has been provided by the Netherlands Organization for Scientic Research (NWO).