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An Approach to Testing Reference Points

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  • Alex Rees-Jones
  • Ao Wang

Abstract

We present a general approach to experimentally testing candidate reference points. This approach builds from Prospect Theory’s prediction that an increase in payoffs is perfectly offset by an equivalent increase in the reference point. Violation of this prediction can be tested with modifications to existing econometric techniques in experiments of a particular design. The resulting approach to testing theories of the reference point is minimally parametric, robust to broad classes of heterogeneity, yet still implementable in comparatively small sample sizes. We demonstrate the application of this approach in an experiment that tests the role of salience in setting reference points.

Suggested Citation

  • Alex Rees-Jones & Ao Wang, 2022. "An Approach to Testing Reference Points," NBER Working Papers 30773, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30773
    Note: TWP
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    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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