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Testing for Reference Dependence: An Application to the Art Market

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Author Info
Alan Beggs
Kathryn Graddy

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Abstract

This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on "rule of thumb" learning from reference dependence based on "rational" learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky`s Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 228.

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Date of creation: 2005
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Handle: RePEc:oxf:wpaper:228

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Related research
Keywords: Reference Dependence Loss Aversion Prospect Theory Art Auctions

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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  1. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November. [Downloadable!] (restricted)
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  2. Orley Ashenfelter & Kathryn Graddy, 2003. "Auctions and the Price of Art," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 763-787, September.
    Other versions:
  3. Whitney K. Newey, 2001. "Flexible Simulated Moment Estimation Of Nonlinear Errors-In-Variables Models," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 616-627, November. [Downloadable!] (restricted)
  4. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  6. Bruno Jullien & Bernard Salanie, 2000. "Estimating Preferences under Risk: The Case of Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 503-530, June. [Downloadable!] (restricted)
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  7. Jianping Mei & Michael Moses, 2002. "Art as an Investment and the Underperformance of Masterpieces," American Economic Review, American Economic Association, vol. 92(5), pages 1656-1668, December. [Downloadable!]
  8. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February. [Downloadable!] (restricted)
  9. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Oxford University Press for Biometrika Trust, vol. 89(2), pages 484-489, June.
  10. Alan Beggs & Kathryn Graddy, 1997. "Declining Values and the Afternoon Effect: Evidence from Art Auctions," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 544-565, Autumn. [Downloadable!] (restricted)
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  11. Susanne M. Schennach, 2004. "Estimation of Nonlinear Models with Measurement Error," Econometrica, Econometric Society, vol. 72(1), pages 33-75, 01. [Downloadable!] (restricted)
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