Reference Point Adaptation: Tests in the Domain of Security Trading

Organizational Behavior and Human Decision Processes, Vol. 105, No. 1, pp. 67-81, January 2008

32 Pages Posted: 28 Jun 2006 Last revised: 19 Oct 2008

Hal R. Arkes

Ohio State University - Department of Psychology

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Danling Jiang

College of Business, SUNY at Stony Brook

Sonya S. Lim

DePaul University - Department of Finance

Date Written: January 1, 2008

Abstract

According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants' responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior.

Keywords: Prospect theory, Reference point, Asset pricing, Security trading

JEL Classification: C91, D81

Suggested Citation

Arkes, Hal R. and Hirshleifer, David A. and Jiang, Danling and Lim, Sonya S., Reference Point Adaptation: Tests in the Domain of Security Trading (January 1, 2008). Organizational Behavior and Human Decision Processes, Vol. 105, No. 1, pp. 67-81, January 2008. Available at SSRN: https://ssrn.com/abstract=911611

Hal R. Arkes (Contact Author)

Ohio State University - Department of Psychology ( email )

240N Lazenby Hall
1885 Neil Avenue
Columbus, OH 43210
United States
614-292-1592 (Phone)
614-688-3984 (Fax)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Danling Jiang

College of Business, SUNY at Stony Brook ( email )

306 Harriman Hall
Stony Brook, NY 11794
United States

HOME PAGE: http://sites.google.com/site/danlingjiang

Sonya S. Lim

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://sites.google.com/site/sonyalim/

Paper statistics

Downloads
294
Rank
83,182
Abstract Views
1,609