Investment Targets as Reference Points

We provide the first evidence of forward-looking reference points in investor behavior. Combining administrative data on option traders with a stacked difference-in-differences design, we show that investors' propensity to sell options spikes precisely when the underlying asset crosses the strike price, which retail investors frequently select to match their target price. The effect is difficult to explain using the standard disposition effect, nominal returns, salience, option Greeks, or complex option trading strategies. Moreover, the effect is present only for options bought out of the money, for which the strike price acts as a natural target, but absent for options bought in the money, for which it does not. The evidence is most consistent with investors evaluating gains and losses relative to a forward-looking target, in sharp contrast with the backward-looking purchase price widely used in the disposition effect literature. Our findings suggest that standard tests of reference dependence in selling decisions are misspecified when investors evaluate outcomes relative to reference points other than the purchase price.