# Loss Aversion and Reference-Dependent Preferences in Multi-Attribute Negotiations

## Abstract

Negotiation analysis and game theoretic bargaining models usually assume parties to have exogenous preferences from the beginning of a negotiation on and independent of the history of offers made. On the contrary, this paper argues that preferences might be based on attribute-wise reference points changing during the negotiation process. Aversion against losses relative to the reference point determines negotiators’ decisions in the negotiation and after its termination. The emergence and implications of reference points in a negotiation context are motivated, exemplified, and modeled formally. Furthermore, data from an internet experiment on endogenous preferences in bilateral multi-attribute negotiations is presented. The data supports the behavioral model.

## Key words

behavioral biases experimental economics loss aversion negotiation analysis prospect theory quasi-endowment effect## Preview

Unable to display preview. Download preview PDF.

## References

- Bazerman M. H., Curhan J. R., Moore D. A., Valley K. L. (2000). Negotiation. Annual Review of Psychology 51:279–314CrossRefGoogle Scholar
- Bazerman, M. H. and M. A. Neale. (1992).
*Negotiating Rationally*. The Free Press.Google Scholar - Bellemare, C., S. Kröger, and A. van Soest (2005). “Actions and beliefs: Estimating distribution-based preferences using a large scale experiment with probability questions on expectations.” Working Paper.Google Scholar
- Block, C., G. Kersten, H. Gimpel, and C. Weinhardt. (2006). “Reasons for rejecting pareto-improvements in negotitations.”
*Group Decision and Negotiation*2006 (GDN 2006).Google Scholar - Compte, O. and P. Jehiel. (2003). “Bargaining with reference dependent preferences.” Working Paper.Google Scholar
- Curhan J. R., Neale M. A., Ross L. D. (2004). Dynamic valuation: Preference changes in the context of face-to-face negotiation. Journal of Experimental Social Psychology 40:142–151CrossRefGoogle Scholar
- Faratin P., Sierra C., Jennings N. R. (2002). Using similarity ciretria to make issue trade-offs in automated negotiations. Artificial Intelligence 142:205–237CrossRefGoogle Scholar
- Good, P. I. (2000).
*Permutation tests: A practical guide to resampling methods for testing hypotheses*. Springer series in statistics. SpringerGoogle Scholar - Harrison G. W., List J. A. (2004). Field experiments. Journal of Economic Literature 42(4):1009–1055CrossRefGoogle Scholar
- Heyman J. E., Orhun Y., Ariely D. (2004). Auction fever: The effect of opponents and quasi-endowment on product valuations. Journal of Interactive Marketing 18(4):7–21CrossRefGoogle Scholar
- Hyndman, K. (2005). “Repeated bargaining with reference dependent preferences.” Working Paper.Google Scholar
- Kahneman D., Knetsch J. L., Thaler R. H. (1990). Experimental tests of the endowment effect and the coase theorem. Journal of Political Economy 98(6):1325–1348CrossRefGoogle Scholar
- Kreps, D. M. (1990).
*A Course in Microeconomic Theory*. Pearson Education Limited.Google Scholar - Kristensen H., Gärling T. (2000). Anchor points, reference points, and couteroffers in negotiations. Group Decision and Negotiation 9:453–505CrossRefGoogle Scholar
- Köszegi, B. and M. Rabin (2006). “A model of reference-dependent preferences.”
*Quarterly Journal of Economics*.Google Scholar - Li, D. (2004). “Bargaining with history-dependent preferences.” Working PaperGoogle Scholar
- List J. A. (2003). Does market experience eliminate market anomalies. The Quarterly Journal of Economics 118(1):41–71CrossRefGoogle Scholar
- Pruitt, D. G. (1981).
*Negotiating Behavior*. Academic Press.Google Scholar - Raiffa, H. (1982).
*The Art and Science of Negotiation*. Harvard University Press.Google Scholar - Shalev J. (2002). Loss aversion and bargaining. Theory and Decision 52:201–232CrossRefGoogle Scholar
- Sheskin, D. J. (2004).
*Handbook of parametric and nonparametric statistical procedures*(3rd ed.). Chapman & Hall/CRC.Google Scholar - Strahilevitz M. A., Loewenstein G. (1998). The effect of ownership history on the valuation of objects. Journal of Consumer Research 25:276–289CrossRefGoogle Scholar
- Tajima M., Fraser N. M. (2001). Logrolling procedure for multi-issue negotiation. Group Decision and Negotiation 10:217–235CrossRefGoogle Scholar
- Tversky A., Kahneman D. (1991). Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics 106:1039–1061CrossRefGoogle Scholar
- Vetschera, R. (2004). “Preference structures and behavioral consistency in negotiations.” Working Paper.Google Scholar