Attitudes Towards Success and Failure

• Authors: Antonio Penta and Larbi Alaoui.
• BSE Working Paper: 1336 | March 22
• Keywords: Risk Aversion , aspirations , reference-dependence , expected utility , loss aversion
• JEL codes: D01, D81
• Risk Aversion
• aspirations
• reference-dependence
• expected utility
• loss aversion

Individuals often attach a special meaning to attaining a certain goal, that marks the difference between what they consider a success or a failure. Within a standard von Neumann-Morgenstern Expected Utility setting, with an exogenous reference point that separates success from failure, we define attitudes towards success and failure as features of preferences over lotteries. The distinctive feature of our definitions is that they all concern a local reversal of risk attitude, between risk-aversion and risk-lovingness, for lotteries that go across the reference point. Our findings provide a unified view of several models of reference-dependent preferences, as well as novel representations. We order the intensity of each attitude,and characterize these orderings in terms of properties of the utility representations, with indices analogous to the Arrow-Pratt index of risk aversion.