Attention to reference point formation: Examining how attention affects reference dependence

This paper provides field evidence on how reference points adjust, a degree of freedom in reference-dependence models. Examining this in the context of cabdrivers’ daily labor-supply behavior, we ask how the within-day timing of earnings affects decisions. Drivers work less in response to higher accumulated income, with a strong effect for recent earnings that gradually diminishes for earlier earnings. We estimate a structural model in which drivers work toward a reference point that adjusts to deviations from expected earnings with a lag. This dynamic view of reference dependence reconciles conflicting “neoclassical” and “behavioral” interpretations of evidence on daily labor-supply decisions. (JEL J22, J31, L94)

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Reference-Dependence Effects in Benefit Assessment: Beyond the WTA–WTP Dichotomy and WTA–WTP Ratios

Journal of Benefit-Cost Analysis ◽

10.1017/bca.2015.3 ◽

2015 ◽

Vol 6 (1) ◽

pp. 187-206 ◽

Cited By ~ 10

Author(s):

W. Kip Viscusi

Keyword(s):

Water Quality ◽

Labor Market ◽

Experimental Evidence ◽

Empirical Evidence ◽

Reference Point ◽

Willingness To Accept ◽

Reference Dependence ◽

Statistical Life ◽

The Cost

Willingness-to-pay (WTP) values and willingness-to-accept (WTA) values have received considerable attention, but the role of reference-dependence effects is more diverse. Policies involving cost and risk may have reference point effects with respect to both cost and risk, leading to four potential valuation measures. Experimental evidence for water quality policies suggests that the cost reference effects are particularly influential in that context. There is, however, no evidence of significant reference effects for labor market estimates of the value of a statistical life. Sound application of benefit values other than WTP measures requires pertinent empirical evidence and an assessment of the underlying rationality of the determinants of the reference-dependence effects.

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Relative reference prices and M&A misvaluations

Review of Behavioral Finance ◽

10.1108/rbf-04-2018-0036 ◽

2019 ◽

Vol 11 (1) ◽

pp. 70-97

Author(s):

Zhenlong Li ◽

Jie Guo ◽

Panagiotis Andrikopoulos

Keyword(s):

Reference Point ◽

Design Methodology ◽

Direct Evidence ◽

Investment Decisions ◽

Reference Dependence ◽

Content Type ◽

Long Run ◽

The Us ◽

Announcement Returns ◽

Prefer Stock

Purpose The purpose of this paper is to examine the misvaluation hypothesis using a relative reference point (RRP) in mergers and acquisitions (M&A) market. Design/methodology/approach The paper studies 1,878 M&A deals in the US market announced between January 1985 and December 2014. Findings The paper finds that bidders prefer stock payments when the RRP increases. The RRP is positively related to the offer premium and the target announcement returns. Although the RRP is negatively related to the bidder announcement returns, it is positively related to the long-run performance of bidders who time the market with overvalued stocks. The results are consistent with the predictions of the misvaluation hypothesis and reference point (RP) theory. Originality/value The authors construct a dynamic valuation framework to explain the misvaluation hypothesis by linking M&As’ misvaluation with RP theory. This paper provides direct evidence that the reference-dependence bias is prevalent for more experienced investors in major corporate investment decisions and offers fresh insights into the method of payment hypothesis.

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The Loss-Averse Newsvendor Problem with Random Yield and Reference Dependence

Mathematics ◽

10.3390/math8081231 ◽

2020 ◽

Vol 8 (8) ◽

pp. 1231

Author(s):

Wei Liu ◽

Shiji Song ◽

Ying Qiao ◽

Han Zhao ◽

Huachang Wang

Keyword(s):

Loss Aversion ◽

Reference Point ◽

Newsvendor Problem ◽

Optimal Order ◽

Reference Dependence ◽

Random Yield ◽

Order Quantity ◽

Ordering Policy ◽

Optimal Ordering Policy ◽

Optimal Ordering

This paper studies a loss-averse newsvendor problem with reference dependence, where both demand and yield rate are stochastic. We obtain the loss-averse newsvendor’s optimal ordering policy and analyze the effects of loss aversion, reference dependence, random demand and yield on it. It is shown that the loss-averse newsvendor’s optimal order quantity and expected utility decreases in loss aversion level and reference point. Then, that this order quantity may be larger than the risk-neutral one’s if the reference point is less than a negative threshold. In addition, although the effect of random yield leads to an increase in the order quantity, the loss-averse newsvendor may order more than, equal to or less than the classical one, which significantly depends on loss aversion level and reference point. Numerical experiments were conducted to demonstrate our theoretical results.

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Deciding When to Quit: Reference-Dependence over Slot Machine Outcomes

The American Economic Review ◽

10.1257/aer.p20151036 ◽

2015 ◽

Vol 105 (5) ◽

pp. 366-370 ◽

Cited By ~ 17

Author(s):

Jaimie W. Lien ◽

Jie Zheng

Keyword(s):

Loss Aversion ◽

Reference Point ◽

Slot Machine ◽

Status Quo ◽

Reference Points ◽

Reference Dependence ◽

Diminishing Sensitivity

We conduct tests for reference dependent loss aversion using slot machine gamblers' decisions on when to quit playing for a visit to a casino. Evidence for a lagged status-quo reference point is found in the aggregate, while endogenously determined reference points are found when conditioning on betting intensity choices. Significant deviations from the distributions implied by random quitting support the loss aversion and diminishing sensitivity hypotheses.

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Cognitive Reflection Effects on Time Discounting

Journal of Individual Differences ◽

10.1027/1614-0001/a000254 ◽

2018 ◽

Vol 39 (2) ◽

pp. 99-106 ◽

Cited By ~ 4

Author(s):

Michał Białek ◽

Przemysław Sawicki

Keyword(s):

Individual Differences ◽

Individual Difference ◽

Delay Discounting ◽

Reference Point ◽

Reference Points ◽

Cognitive Reflection Test ◽

Process Information ◽

Time Discounting ◽

Cognitive Reflection ◽

The Way

Abstract. In this work, we investigated individual differences in cognitive reflection effects on delay discounting – a preference for smaller sooner over larger later payoff. People are claimed to prefer more these alternatives they considered first – so-called reference point – over the alternatives they considered later. Cognitive reflection affects the way individuals process information, with less reflective individuals relying predominantly on the first information they consider, thus, being more susceptible to reference points as compared to more reflective individuals. In Experiment 1, we confirmed that individuals who scored high on the Cognitive Reflection Test discount less strongly than less reflective individuals, but we also show that such individuals are less susceptible to imposed reference points. Experiment 2 replicated these findings additionally providing evidence that cognitive reflection predicts discounting strength and (in)dependency to reference points over and above individual difference in numeracy.

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