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Social Reference Points and Risk Taking

Author

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  • Frederik Schwerter

    (Department of Economics, Frankfurt School of Finance and Management, 60322 Frankfurt am Main, Germany; Center for Social and Economic Behavior, University of Cologne, 50923 Cologne, Germany)

Abstract

Social reference points have been identified to be important determinants of individuals’ welfare. We investigate the consequences of social reference points for risk taking in a laboratory experiment. In the main treatments, risk-taking subjects observe the predetermined earnings of peer subjects when making a risky choice. We exogenously manipulate peers’ earnings and find a significant treatment effect: decision makers make less risk-averse choices in the case of larger peers’ earnings. The treatment effect is consistent with an application of prospect theory to social reference points and cannot be explained by reference points based on counterfactual information, anchoring, and experimenter demand effects. In additional analyses, we show that diminishing sensitivity seems to play an important role in subjects’ risky choices. We explore also whether inequity aversion and expectations-based reference points can account for our findings and conclude that they do not provide plausible alternative explanations for them.

Suggested Citation

  • Frederik Schwerter, 2024. "Social Reference Points and Risk Taking," Management Science, INFORMS, vol. 70(1), pages 616-632, January.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:1:p:616-632
    DOI: 10.1287/mnsc.2023.4698
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