A Cross-Cultural Study of Reference Point Adaptation: Evidence from China, Korea, and the US

Abstract:     
We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects in all countries adapted their reference points more after a gain than after an equal-sized loss. When we introduced a forced sale intervention that highlighted a prior price change, Americans showed greater adaptation toward the new price, whereas Asians showed less adaptation. We offer possible explanations both for the cross-cultural similarities and the cross-cultural differences.

Keywords: Prospect theory, cross-cultural differences, reference point adaptation, mental accounting, security trading

JEL Classifications: C91, D81

Working Paper Series