Reference Point Formation

28 Pages Posted: 16 Sep 2015

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

Charles N. Noussair

Tilburg University

Rachel A.J. Pownall

Tilburg University - Department of Finance; Maastricht University - Department of Finance

Ayse Terzi

Tilburg University

Date Written: September 2015

Abstract

It is well-established that reference points are a feature of decision making under risk. In this paper we report an experiment, in which we investigate which of three potential reference points: (1) a status quo payoff level, (2) the average expected earnings of peers, and (3) a stated expectation of the experimenter, best describes behavior in a decontextualized risky decision making task. We find heterogeneity among individuals in the reference points they employ. The status quo level is the modal reference point, followed by the experimenter's stated expectation of participant earnings, and in turn by the average expected earnings of peers. A sizeable share of individuals show multiple reference points simultaneously. Reference points can be affected by a change in the income level.

Keywords: experiment, reference point

Suggested Citation

Koedijk, Kees G. and Noussair, Charles N. and Pownall, Rachel Ann Jane and Terzi, Ayse, Reference Point Formation (September 2015). CEPR Discussion Paper No. DP10823. Available at SSRN: https://ssrn.com/abstract=2661552

Kees G. Koedijk (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Charles N. Noussair

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Rachel Ann Jane Pownall

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Ayse Terzi

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

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