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Reference-Point Formation and Updating

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Author Info

  • Manel Baucells

    ()
    (Department of Economics and Business, Universitat Pompeu Fabra, 08005 Barcelona, Spain)

  • Martin Weber

    ()
    (Lehrstuhl fuer Bankbetriebslehre, Universitaet Mannheim, 68131 Mannheim, Germany; and Centre for Economic Policy Research, London EC1V 3PZ, United Kingdom)

  • Frank Welfens

    ()
    (Lehrstuhl fuer Bankbetriebslehre, Universitaet Mannheim, 68131 Mannheim, Germany)

Abstract

Reference-dependent preferences have been well accepted in decision sciences, experimental economics, behavioral finance, and marketing. However, we still know very little about how decision makers form and update their reference points given a sequence of information. Our paper provides some novel experiments in a financial context to advance the understanding of reference-point formation over time. Our subjects' reference price is best described as a combination of the first and the last price of the time series, with intermediate prices receiving smaller and nondecaying weights. Hence, reference prices are not recursive. We provide a parsimonious formula to predict the reference points, which we test out-of-sample. The fit of the model is reasonably good. This paper was accepted by George Wu, decision analysis.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1286
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 57 (2011)
Issue (Month): 3 (March)
Pages: 506-519

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Handle: RePEc:inm:ormnsc:v:57:y:2011:i:3:p:506-519

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Related research

Keywords: reference-point formation; reference-dependent preferences; disposition effect; probability weighting;

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Citations

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Cited by:
  1. Mattos, Fabio & Poirier, Jamie, 2013. "Formation and adaptation of reference prices in grain marketing: An experimental study," Working Papers 148591, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  2. Pahlke, Julius & Strasser, Sebastian & Vieider, Ferdinand M., 2012. "Responsibility effects in decision making under risk," Discussion Papers, WZB Junior Research Group Risk and Development SP II 2012-402, Social Science Research Center Berlin (WZB).
  3. Lisa Bruttel & Tim Friehe, 2010. "On the path-dependence of tax compliance," TWI Research Paper Series 59, Thurgauer Wirtschaftsinstitut, Universit├Ąt Konstanz.
  4. Lefebvre, Mathieu & Vieider, Ferdinand M., 2014. "Risk taking of executives under different incentive contracts: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 97(C), pages 27-36.
  5. Mattos, Fabio, 2012. "Do producers exhibit disposition effect? Evidence from grain marketing," Working Papers 125279, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  6. Frederik Schwerter, 2013. "Social Reference Points and Risk Taking," Bonn Econ Discussion Papers bgse11_2013, University of Bonn, Germany, revised Jan 2014.
  7. Urs Fischbacher & Gerson Hoffmann & Simeon Schudy, 2014. "The causal effect of stop-loss and take-gain orders on the disposition effect," TWI Research Paper Series 89, Thurgauer Wirtschaftsinstitut, Universit├Ąt Konstanz.
  8. Mattos, Fabio & Poirier, Jamie, 2013. "Formation and Adaptation of Reference Prices in Grain Marketing: An Experimental Study," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149672, Agricultural and Applied Economics Association.
  9. Mathieu Lefebvre & Ferdinand Vieider, 2013. "Reining in excessive risk-taking by executives: the effect of accountability," Theory and Decision, Springer, vol. 75(4), pages 497-517, October.
  10. Zhang, Juan & Gou, Qinglong & Liang, Liang & Huang, Zhimin, 2013. "Supply chain coordination through cooperative advertising with reference price effect," Omega, Elsevier, vol. 41(2), pages 345-353.

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