Working Paper

Endogenizing Prospect Theory's Reference Point


  • Schmidt
  • U.
  • Zank
  • H.
Publication Date

In previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where reference-dependence is derived from preference conditions and a unique reference point arises endogenously.

Kiel Institute Expert


JEL Classification

Key Words

  • diminishing sensitivity
  • loss aversion
  • prospect theory
  • reference point