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Framing, Expectations and Reference Points

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  • Oliver März

Abstract

Recent theories of expectation-based reference-dependent preferences offer a structured approach of the formation of reference points, yet do not incorporate important context-specific characteristics. One implicit assumption is that individuals form their reference point as expectations by correctly predicting the probabilistic environment they are facing. In an experimental setup, we demonstrate that a simple change in the framing of a decision problem alters the reference point formation by evoking a different moment of first focus. Apart from providing evidence on the limitations of current theories of expectation-based reference dependence, this paper further offers a theoretical extension that overcomes these limitations and allows reference points to be contingent on contextual effects.

Suggested Citation

  • Oliver März, 2016. "Framing, Expectations and Reference Points," Working Papers ECARES ECARES 2016-40, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/240785
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    References listed on IDEAS

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    1. Götte, Lorenz & Cerulli-Harms, Annette & Sprenger, Charles, 2014. "Randomizing Endowments: An Experimental Study of Rational Expectations and Reference-Dependent Preferences," IZA Discussion Papers 8639, Institute for the Study of Labor (IZA).
    2. Charles Sprenger, 2015. "An Endowment Effect for Risk: Experimental Tests of Stochastic Reference Points," Journal of Political Economy, University of Chicago Press, vol. 123(6), pages 1456-1499.
    3. Vincent P. Crawford & Juanjuan Meng, 2011. "New York City Cab Drivers' Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income," American Economic Review, American Economic Association, vol. 101(5), pages 1912-1932, August.
    4. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
    5. David Gill & Victoria Prowse, 2012. "A Structural Analysis of Disappointment Aversion in a Real Effort Competition," American Economic Review, American Economic Association, vol. 102(1), pages 469-503, February.
    6. Furnham, Adrian & Boo, Hua Chu, 2011. "A literature review of the anchoring effect," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(1), pages 35-42, February.
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    More about this item

    Keywords

    framing; expectations; stochastic reference points; salience effects;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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