Testing for Reference Dependence: An Application to the Art Market

39 Pages Posted: 5 Aug 2005

See all articles by Alan Beggs

Alan Beggs

University of Oxford

Kathryn Graddy

Brandeis University - Department of Economics

Date Written: April 2005

Abstract

This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on 'rule of thumb' learning from reference dependence based on 'rational' learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky's Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion.

Keywords: Loss aversion, reference dependence, art, prospect theory, auctions

JEL Classification: D44, D81, L82

Suggested Citation

Beggs, Alan and Graddy, Kathryn, Testing for Reference Dependence: An Application to the Art Market (April 2005). CEPR Discussion Paper No. 4982. Available at SSRN: https://ssrn.com/abstract=771968

Alan Beggs

University of Oxford ( email )

Oxford
United Kingdom
+44 1865 277 932 (Phone)
+44 1865 277 937 (Fax)

Kathryn Graddy (Contact Author)

Brandeis University - Department of Economics ( email )

415 South Street MS 021
Waltham, MA 02453-2728
United States
781-736-8616 (Phone)
781-736-2269 (Fax)

HOME PAGE: http://people.brandeis.edu/~kgraddy/

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