Existence of the phenomena of reference dependence and loss aversion has been established and documented. Reference dependence is the assumption that an individual's utility from an outcome depends also on its comparison to a reference point. Loss aversion is the assumption that losses (relative to the reference point) loom larger than gains. I wish to investigate these phenomena in repeated interactive situations. Since the outcome from many decisions may also depend on the decisions of other decision makers. and since many interactions are repeated a number of times, these situations are relevant and interesting The basic model of repeated games (interactions) can serve as an approximation for many actual situations, in both micro- and macro-economics and also in politics. Solving such games,by finding equilibria that are consistent with reference dependent evaluation of outcomes characterized by loss aversion may give us valuable insights in such situations. Examining a number of examples shows that the set of equilibria can differ substantially from that obtained in a similar model without loss aversion.
The objective of the project is to reach a better understanding of how economic and political processes evolve over time. This could enable improved analysis and forecasts of such processes.