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Reference point formation: Does the market whisper in the background?

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  • Tianyang Wang
  • Robert G. Schwebach
  • Sriram V. Villupuram

Abstract

Well‐established studies in behavioral finance confirm that investors are highly influenced by subjective reference points when making economic decisions. Although the literature examines reference point formation for individual stocks based on observed price sequences, the stocks are often treated without considering market context. We extend this literature by incorporating market price information as background to the behavior experiment, and we consider both prospect theory and anticipation/disappointment‐based utility functions in a combined framework to investigate the impact of market context on reference point formation. Our article provides new evidence and insights for investment practitioners and behavioral researchers.

Suggested Citation

  • Tianyang Wang & Robert G. Schwebach & Sriram V. Villupuram, 2022. "Reference point formation: Does the market whisper in the background?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 384-421, June.
    • Handle: RePEc:bla:jfnres:v:45:y:2022:i:2:p:384-421
    DOI: 10.1111/jfir.12278
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