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Reference Point Adaptation: Tests in the Domain of Security TradingHal R. ArkesOhio State University - Department of Psychology David A. HirshleiferUniversity of California, Irvine - Paul Merage School of Business Danling JiangFlorida State University - The College of Business Sonya S. LimDePaul University - Department of Finance January 1, 2008 Organizational Behavior and Human Decision Processes, Vol. 105, No. 1, pp. 67-81, January 2008 Abstract: According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants' responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior.
Number of Pages in PDF File: 32 Keywords: Prospect theory, Reference point, Asset pricing, Security trading JEL Classification: C91, D81 Accepted Paper SeriesDate posted: June 28, 2006 ; Last revised: October 19, 2008Suggested CitationContact Information
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