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Testing for Reference Dependence: An Application to the Art Market

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  • Alan Beggs
  • Kathryn Graddy

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.

Suggested Citation

  • Alan Beggs & Kathryn Graddy, 2005. "Testing for Reference Dependence: An Application to the Art Market," Economics Series Working Papers 228, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:228
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    1. 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.
    2. Susanne M. Schennach, 2004. "Estimation of Nonlinear Models with Measurement Error," Econometrica, Econometric Society, vol. 72(1), pages 33-75, January.
    3. 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.
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    5. Victor Ginsburgh & Pierre-Michel Menger, 1996. "Economics of the arts: selected essays," ULB Institutional Repository 2013/1655, ULB -- Universite Libre de Bruxelles.
    6. 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.
    7. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    8. 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.
    9. 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.
    10. 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.
    11. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
    12. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 1-53.
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    Cited by:

    1. Kathryn Graddy & Lara Loewenstein & Jianping Mei & Mike Moses & Rachel A. J. Pownall, 2023. "Empirical evidence of anchoring and loss aversion from art auctions," Journal of Cultural Economics, Springer;The Association for Cultural Economics International, vol. 47(2), pages 279-301, June.
    2. Kathryn Graddy & Lara Loewenstein & Jianping Mei & Mike Moses & Rachel Pownall, 2014. "Empirical Evidence of Anchoring and Loss Aversion from Art Auctions," Working Papers 73, Brandeis University, Department of Economics and International Business School, revised Apr 2015.
    3. Erdős, Péter & Ormos, Mihály, 2012. "Pricing of collectibles: Baedeker guidebooks," Economic Modelling, Elsevier, vol. 29(5), pages 1968-1978.
    4. Kathryn Graddy & Lara Loewenstein & Jianping Mei & Mike Moses & Rachel A J Pownall, 2014. "Anchoring or Loss Aversion? Empirical Evidence from Art Auctions," ACEI Working Paper Series AWP-04-2014, Association for Cultural Economics International, revised Jun 2014.
    5. Erdos, Péter & Ormos, Mihály, 2010. "Random walk theory and the weak-form efficiency of the US art auction prices," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1062-1076, May.
    6. Assaf, Ata, 2018. "Testing for bubbles in the art markets: An empirical investigation," Economic Modelling, Elsevier, vol. 68(C), pages 340-355.

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    More about this item

    Keywords

    Reference Dependence; Loss Aversion; Prospect Theory; Art; Auctions;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media

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