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Greg Kubitz is a Senior Lecturer in the School of Economics and Finance at the Queensland University of Technology in Brisbane, Australia.
TOPIC: If You Can, You Must. Information, Utility and Loss Aversion.
Abstract: We consider utility as a reward system shaped by evolution to motivate us to make the best decisions possible. An optimal system consists of a reference dependent utility function that adapts to expectations. We show that anticipatory utility and loss aversion emerge as features of this optimal system that encourage the agent to set the reference point to the level of his expected potential. Anticipatory utility that is increasing in aspiration level encourages the agent to set a higher reference point. Loss aversion increases the cost of over-optimism and reduces the benefit of over-pessimism.