Are Reference Points Merely Lagged Beliefs Over Probabilities?

40 Pages Posted: 24 May 2018 Last revised: 1 Jun 2018

See all articles by Ori Heffetz

Ori Heffetz

Cornell University - S.C. Johnson Graduate School of Management; The Hebrew University of Jerusalem - Department of Economics and Center for Rationality; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2018

Abstract

What explains the mixed evidence from laboratory tests of Kőszegi and Rabin’s (2006 and later) model of expectations-based reference-dependent preferences? We investigate one hypothesis: to become (behavior-affecting) reference points, probability beliefs have to sink in—being merely lagged, as the theory requires, is not sufficient. Past experiments with conflicting findings exogenously endowed subjects with beliefs that were equally lagged, but possibly unequally sunk-in. In four experiments, whose designs replicate past KR-nonsupporting experiments, we add new sink-in manipulations that endow individuals with additional, visual/physical probability impressions. Our findings are more KR-supporting in an endowment-effect setting but not in an effort-provision setting.

Keywords: expectations, beliefs, reference-dependent preferences, sink-in, endow- ment effect, effort provision, prospect theory, experiments

JEL Classification: D12, D84, D91, J22

Suggested Citation

Heffetz, Ori, Are Reference Points Merely Lagged Beliefs Over Probabilities? (May 27, 2018). Available at SSRN: https://ssrn.com/abstract=3051829 or http://dx.doi.org/10.2139/ssrn.3051829

Ori Heffetz (Contact Author)

Cornell University - S.C. Johnson Graduate School of Management ( email )

324 Sage Hall
Ithaca, NY 14853
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The Hebrew University of Jerusalem - Department of Economics and Center for Rationality

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/~heffetz

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