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Reference dependence and loss aversion in choice set formation and brand selection

Authors Han, Sangman
Vanhonacker, Wilfried R.
Issue Date 1996-01
Summary The existence of multi-attribute reference points and loss aversion in brand selection has been discussed and demonstrated in Hardie, Johnson, and Fader (1993). But with recent developments and emphasis on two-stage choice models where brand selection is preceded by choice set formation, three questions arise. First, are choice set formation evaluations, as brand selection evaluations, made relative to reference points? Second, if choice set formation evaluations are relative, do they exhibit loss aversion? And third, as reference dependence in single-stage choice models could endogenously capture choice set membership, does reference dependence disappear when choice set formation is modeled explicitly as a stage preceding brand selection? To address these questions, this paper develops a reference-dependent threshold model of choice set formation in price/quality tiers which is combined with a brand selection model that recognizes multi-attribute reference dependence in the brands' utilities. Using data collected in a computer-assisted choice task, the empirical results demonstrate that reference dependence and loss aversion are present in both stages of the brand choice process but are significantly more prevalent in choice set formation than in brand selection. Accordingly, the results suggest that observed loss aversion behavior in single-stage brand choice models may merely capture endogenous choice set membership effects. Some implications of these findings are put forward and discussed.
Language English
Format Working paper
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