Aspirations as Reference Points *

We develop a model of individual effort choice towards the achievement of an outcome, where realised outcomes are compared to an aspiration reference point. We provide sufficient conditions for the dual role of aspirations: moderate aspirations can motivate, but high aspirations can discourage; and for the possibility that aspirations are exactly fulfilled. We then study how this relationship between aspirations and effort interact in a dynamic environment when aspirations are endogenous to one's realised outcomes in the past. We show how traits such as aversion to failure, grit, and ambition can crucially affect the fulfilment of aspirations in the long run, providing a more nuanced and novel perspective on the dual role of aspirations: holding ambitious aspirations can be frustrating, but can also lead to generating strictly better outcomes when individuals particularly dislike failure and have grit in the pursuit of their goals. Finally, we use our framework to explore the welfare implications of aspirations.