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TESTING REFERENCE DEPENDENCE, LOSS AVERSION AND DIMINISHING SENSITIVITY IN SPANISH TOURISM

By Juan Luis Nicolau

Abstract

Based on Tversky and Kahneman’s Prospect Theory, we test the existence of reference dependence, loss aversion and diminishing sensitivity in Spanish tourism. To do this, we incorporate the reference-dependent model into a Multinomial Logit Model with Random Parameters-which controls for heterogeneity-and apply it to a sample of vacation choices made by Spaniards. We find that the di�erence between reference price and actual price is considered to make decisions, confirming that reference dependence exists; that people react more strongly to price increases than to price decreases relative to their reference price, which represents evidence in favor of the loss aversion phenomenon; and that there is diminishing sensitivity for losses only, showing convexity for these negative values

Topics: Prospect theory, tourism prices. (JEL D12, L83
Year: 2013
OAI identifier: oai:CiteSeerX.psu:10.1.1.320.3065
Provided by: CiteSeerX
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