When Do Reference Points Update? A Field Analysis of the Effect of Prior Gains and Losses on Risk-Taking over Time

University of Zurich, Institute of Business Administration, UZH Business Working Paper No. 369

40 Pages Posted: 6 Oct 2017

See all articles by Maximilian Rüdisser

Maximilian Rüdisser

University of Zurich - Department of Business Administration (IBW)

Raphael Flepp

University of Zurich - Department of Business Administration (IBW)

Egon P. Franck

University of Zurich - Department of Business Administration (IBW)

Date Written: October 4, 2017

Abstract

We study how temporal separations affect recurring decision-making under risk and thus ask when reference points update. Using both experimental and panel data from a casino, we analyze how individual risk-taking behavior during a casino visit depends on the outcomes of temporally separated prior visits. Our results show that small prior gains lead to more risk-averse behavior in the next visit, but small prior losses have no effect on subsequent risk-taking. These results suggest an asymmetric temporal effect of small prior gains and losses, whereby gains affect subsequent choices for longer than losses. Thus, the reference point — which determines subsequent risk-taking behavior — updates much faster after small losses than after small gains. Further, we find that risk-taking greatly depends on the size of prior outcomes. Whereas large prior losses also impact subsequent choices and strongly reduce risk-taking, large prior gains only have a marginal effect, if any.

Keywords: Decision-Making, Risk-Taking, Field Experiment, Longitudinal Data, Casino Gambling

JEL Classification: C23, C93, D81, D90

Suggested Citation

Rüdisser, Maximilian and Flepp, Raphael and Franck, Egon P., When Do Reference Points Update? A Field Analysis of the Effect of Prior Gains and Losses on Risk-Taking over Time (October 4, 2017). University of Zurich, Institute of Business Administration, UZH Business Working Paper No. 369. Available at SSRN: https://ssrn.com/abstract=3047800 or http://dx.doi.org/10.2139/ssrn.3047800

Maximilian Rüdisser (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Affolternstrasse 56
Zurich, Zurich 8050
Switzerland

Raphael Flepp

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

Egon P. Franck

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich 8032
Switzerland
+41 1 634 28 45 (Phone)

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