Prospect Theory with Reference Points in the Opportunity Set

Many empirical studies have shown that preferences are reference-dependent, implying loss aversion.\nBecause reference-dependence is a relatively new concept, there exists little theory on it. The theories that\nare available generally take the reference point as given and then impose the traditional assumptions such\nas completeness of preferences. Reference-dependence raises, however, new problems that do not occur in\nreference-independent theories. This paper argues that in the empirically realistic case