Reference Point Heterogeneity

Ayse Terzi, Kees Koedijk, Charles N. Noussair*, Rachel Pownall

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

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Abstract

It is well-established that, when confronted with a decision to be taken under risk, individuals use reference payoff levels as important inputs. The purpose of this paper is to study which reference points characterize decisions in a setting in which there are several plausible reference levels of payoff. We report an experiment, in which we investigate which of four potential reference points: (1) a population average payoff level, (2) the announced expected payoff of peers in a similar decision situation, (3) a historical average level of earnings that others have received in the same task, and (4) an announced anticipated individual payoff level, best describes decisions in a decontextualized risky decision making task. We find heterogeneity among individuals in the reference points they employ. The population average payoff level is the modal reference point, followed by experimenter's stated expectation of a participant's individual earnings, followed in turn by the average earnings of other participants in previous sessions of the same experiment. A sizeable share of individuals show multiple reference points simultaneously. The reference point that best fits the choices of the individual is not affected by a shock to her income.
Original languageEnglish
Article number1347
JournalFrontiers in Psychology
Volume7
DOIs
Publication statusPublished - 12 Sept 2016

Keywords

  • reference point
  • experiment
  • decision making
  • risk

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