"Searching for the Reference Point"

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Date and Time: 
Thursday, December 13, 2018
12:00 pm – 1:30 pm
Han Bleichrodt
Erasmus University Rotterdam

Although reference dependence plays a central role in explaining behavior, little is known about the way they are selected. This paper identifies empirically which reference point people use in decision under risk. We assume a comprehensive reference-dependent model that nests the main reference-dependent theories, including prospect theory, and that allows isolating the reference point rule from other behavioral parameters. Our experiment involved high stakes with payoffs up to a week’s salary. We used an optimal design to select the choices in the experiment and Bayesian hierarchical modeling for estimation. The most common reference points were the status quo and a security level (the maximum of the minimal outcomes of the prospects in a choice). We found little support for the use of expectations-based reference points.