Preferred personal equilibrium and simple choices

This paper studies choices under the preferred personal equilibrium concept introduced by Koszegi and Rabin (2006) for modeling choice given expectations-based reference dependent preferences. The main result of this paper shows that when expectations are not observed and parametric assumptions on utility are not made, preferred personal equilibrium choice is a special case of the rational shortlist method of Manzini and Mariotti (2007). Building on this connection, the paper provides an axiomatization of preferred personal equilibrium choice behavior and discusses the implications of these results for how choices can be used to test and identify the model, and for the relationship between preferred personal equilibrium and other models of behavior. (C) 2017 Elsevier B.V. All rights reserved.