DP10823 Reference Point Formation

Author(s): Kees Koedijk, Charles Noussair, Rachel A J Pownall, Ayse Terzi
Publication Date: September 2015
Keyword(s): experiment, reference point
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10823

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.