Prospect Theory and Reference Point Adaptation: Evidence from the US, China, and Korea
AbstractWe examined prospect theory and reference point adaptation following gains or losses using participants from China, Korea, and the US. Supporting prospect theory, we found in Studies 1 and 2 that subjects from all three countries generally exhibited loss aversion and a greater propensity for risk seeking in the loss domain than in the gain domain. In Study 3 we used the Becker, DeGroot, and Marschak (1964) procedure to ascertain the valuation subjects placed on a gamble after either a prior gain or a prior loss on a stock. After inferring the shift in each subject’s reference point following this prior gain or loss, we found that reference point adaptation following a gain exceeded that following a loss in all three countries. In our third study we also had subjects sell and then immediately repurchase a stock that had experienced a prior gain or loss, which was designed to “punctuate” or close the mental account containing the prior gain or loss. This manipulation caused an increase in reference point adaptation among the Americans but a decrease among the Asians.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 4009.
Date of creation: 09 Jul 2007
Date of revision:
prospect theory; cross-cultural differences; reference point adaptation; mental accounting;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-07-20 (All new papers)
- NEP-CBE-2007-07-20 (Cognitive & Behavioural Economics)
- NEP-CNA-2007-07-20 (China)
- NEP-EXP-2007-07-20 (Experimental Economics)
- NEP-SEA-2007-07-20 (South East Asia)
- NEP-UPT-2007-07-20 (Utility Models & Prospect Theory)
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