Abstract: Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Bruce G.S. Hardie
Eric J. Johnson
Peter S. Fader

Marketing Science
Volume 12, Number 4
Fall 1993

Abstract

Based upon a recently developed multiattribute generalization of prospect theory's value function, it is argued that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains. Implications of this model are sketched for understanding brand choice. A multinomial logit formulation of a reference-dependent choice model is developed, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. The implications of a reference-dependent view of consumer choice are discussed for modeling brand choice, and it is demonstrated that loss aversion can account for asymmetric responses to changes in product characteristics. Additional implications for competitive strategy are examined.