Antonio Penta: Attitudes towards success and failure

We consider a standard expected utility setting, with an exogenous reference point that separates outcomes the decision maker regards as failures from successes. We introduce various attitudes towards success and failure, defined as features of the decision maker’s preferences over lotteries, and characterize their implications for the shape of the Bernoulli utility functions. The distinctive feature of our behavioral definitions is to consider attitudes that determine, locally, a reversal of the decision maker’s risk-attitude (between risk-aversion and risk-lovingness) over binary lotteries that go across the reference point. The various attitudes that we consider differ for the ‘source’ and the ‘direction’ of such reversals. Our findings provide a unified view of several known models of reference-dependent preferences in economics, finance and psychology. These include both novel representations, as well as highly influential models of loss-aversion, aspirations, and others, for which a standard preference-based characterization was lacking. We also introduce orderings over the primitive space of preferences to define different intensities with which each of these attitudes can be displayed, and we characterize them in terms of the Bernoulli representation, with indices analogous to the well-known Arrow-Pratt index for risk-aversion. Our findings shed new light on seemingly intuitive notions of comparative statics for frequently used notions of reference-dependent preferences. Finally, we argue that our framework may prove useful to incorporate, within a standard economic model, behavioral manifestations of personality traits familiar from the psychology literature (such as grit, tenacity, conscientiousness and neuroticism) that have received increasing attention within the empirical economics literature.