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Price Expectations and Reference-Dependent Preferences

Author

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  • Rutledge, Robert

    (University of Sydney)

  • Alladi, Vinayak

    (University of Sydney)

  • Cheung, Stephen L.

    (University of Sydney)

Abstract

We experimentally test Kőszegi and Rabin's (2006, 2007) theory of reference-dependent preferences in the context of price expectations. In an incentivised valuation task, participants are endowed with a mug and provide their willingness to accept (WTA) to sell it. We manipulate the sale price in a separate, exogenous forced sale scenario, which is predicted to produce a 'comparison effect', moving WTA in the opposite direction to the forced sale price. Consistent with the theory, we observe a treatment effect of between AUD $0.79 and $2.06 in the hypothesised direction; however, it is statistically insignificant. We also elicit participants' loss aversion to account for heterogeneity in the theorised effect; however, controlling for the interaction between our treatment and loss aversion does not consistently strengthen our result.

Suggested Citation

  • Rutledge, Robert & Alladi, Vinayak & Cheung, Stephen L., 2022. "Price Expectations and Reference-Dependent Preferences," IZA Discussion Papers 15375, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15375
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    References listed on IDEAS

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    4. Heffetz, Ori, 2021. "Are reference points merely lagged beliefs over probabilities?," Journal of Economic Behavior & Organization, Elsevier, vol. 181(C), pages 252-269.
    5. A. Banerji & Neha Gupta, 2014. "Detection, Identification, and Estimation of Loss Aversion: Evidence from an Auction Experiment," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 91-133, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    reference dependence; price expectations; comparison effect; loss aversion;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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