Poverty,educational attainment,and loss aversion: An analysis with prospect theory focusing on loss aversion and forming reference point

Abstract

The impact of financial assets on university enrollment has typically been examined in terms of the ability to finance education. However, the role of assets in shaping decision-making processes remains underexplored. This study develops a formal model based on prospect theory, incorporating endogenous reference point formation and asset-dependent loss aversion, to analyze the decision to enter university. The results show that individuals with low asset levels are more likely to opt out of higher education. Moreover, we identify conditions under which reducing pre-enrollment costs is more effective than reducing post-enrollment costs in lowering the enrollment threshold. These findings provide new insights into the behavioral mechanisms underlying educational inequality.