Title: Choosing with the worst in mind: A reference-dependent model
Abstract: This paper focuses on choices from menus of two-attribute alternatives and develops a reference-dependent model with endogenous reference points. The reference point for a given menu is a vector that consists of the minimum of each dimension of the menu. The model is characterized by a novel weakening of the Weak Axiom of Revealed Preference in addition to separability axioms. We show an equivalence between the attraction and compromise effects, two well-known choice reversals, and diminishing sensitivity, a widely-used behavioral property. We provide bounds on choice reversals, theoretically justify using minimums as references, and apply the model to intertemporal choice.