Reference Point Formation Over Time: A Weighting Function Approach
Although the concept of reference point dependent preferences has been adopted to almost all fields of behavioral economics, especially marketing and behavioral finance, we still know very little about how decision makers form their reference points given a sequence of prices. Our paper provides both a theoretical framework on reference point formation over time, based on cumulative prospect theory’s s-shaped weighting function, and a new experimental method for eliciting subjects’ individual reference points in a finance context. Consistent with our model, we document our subjects’ reference points to be best described by the first and the last price of the time series, with the equally weighted average and the highest price receiving smaller weights.. Results, however, vary strongly on the individual level and are also affected by the elicitation question applied.
|Date of creation:||27 Jun 2007|
|Note:||Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.|
|Contact details of provider:|| Postal: D-68131 Mannheim|
Phone: (49) (0) 621-292-2547
Fax: (49) (0) 621-292-5594
Web page: http://www.sfb504.uni-mannheim.de/
More information through EDIRC
Web page: http://www.sfb504.uni-mannheim.de
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark Grinblatt, 2001.
"What Makes Investors Trade?,"
Journal of Finance,
American Finance Association, vol. 56(2), pages 589-616, 04.
- David R. Bell & James M. Lattin, 2000. "Looking for Loss Aversion in Scanner Panel Data: The Confounding Effect of Price Response Heterogeneity," Marketing Science, INFORMS, vol. 19(2), pages 185-200, May.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
- David Bowman & Deborah Minehart & Matthew Rabin, 1994.
"Loss aversion in a consumption/savings model,"
International Finance Discussion Papers
492, Board of Governors of the Federal Reserve System (U.S.).
- Bruno Jullien & Bernard Salanié, 1997.
"Estimating Preferences under Risk : The Case of Racetrack Bettors,"
97-39, Centre de Recherche en Economie et Statistique.
- 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.
- Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Camerer, Colin & Babcock, Linda & Loewenstein, George & Thaler, Richard, 1996.
"Labor Supply of New York City Cab Drivers: One Day At A time,"
960, California Institute of Technology, Division of the Humanities and Social Sciences.
- Colin Camerer & Linda Babcock & George Loewenstein & Richard Thaler, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 407-441.
- Haipeng (Allan) Chen & Akshay R. Rao, 2002. "Close Encounters of Two Kinds: False Alarms and Dashed Hopes," Marketing Science, INFORMS, vol. 21(2), pages 178-196, August.
- Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
- March, James G., 1988. "Variable risk preferences and adaptive aspirations," Journal of Economic Behavior & Organization, Elsevier, vol. 9(1), pages 5-24, January.
- Daniel Kahneman & Peter P. Wakker & Rakesh Sarin, 1997. "Back to Bentham? Explorations of Experienced Utility," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 375-406.
- Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
- Nicholas Barberis & Wei Xiong, 2009.
"What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation,"
Journal of Finance,
American Finance Association, vol. 64(2), pages 751-784, 04.
- Nicholas Barberis & Wei Xiong, 2006. "What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation," NBER Working Papers 12397, National Bureau of Economic Research, Inc.
- Chip Heath & Steven Huddart & Mark Lang, 1999. "Psychological Factors and Stock Option Exercise," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 601-627.
- Cicchetti, Charles J & Dubin, Jeffrey A, 1994. "A Microeconometric Analysis of Risk Aversion and the Decision to Self-Insure," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 169-186, February.
- Philip J. Cook & Charles T. Clotfelter, 1991.
"The Peculiar Scale Economies of Lotto,"
NBER Working Papers
3766, National Bureau of Economic Research, Inc.
- Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
- Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-291, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Bell, David R & Bucklin, Randolph E, 1999. " The Role of Internal Reference Points in the Category Purchase Decision," Journal of Consumer Research, Oxford University Press, vol. 26(2), pages 128-143, September.
- Arkes, Hal & Hirshleifer, David & Jiang, Danling & Lim, Sonya, 2006.
"Reference Point Adaptation: Tests in the Domain of Security Trading,"
4259, University Library of Munich, Germany.
- Arkes, Hal R. & Hirshleifer, David & Jiang, Danling & Lim, Sonya, 2008. "Reference point adaptation: Tests in the domain of security trading," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 67-81, January.
- Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
- Lin, Chien-Huang & Huang, Wen-Hsien & Zeelenberg, Marcel, 2006. "Multiple reference points in investor regret," Journal of Economic Psychology, Elsevier, vol. 27(6), pages 781-792, December.
- Andrea Frazzini, 2006. "The Disposition Effect and Underreaction to News," Journal of Finance, American Finance Association, vol. 61(4), pages 2017-2046, 08.
- Weber, Martin & Camerer, Colin F., 1998. "The disposition effect in securities trading: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 167-184, January.
- Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
- Philippe Jehiel & Oliver Compte, 2007. "Bargaining with Reference Dependent Preferences," Levine's Bibliography 122247000000001552, UCLA Department of Economics.
- Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
When requesting a correction, please mention this item's handle: RePEc:xrs:sfbmaa:07-43. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carsten Schmidt)
If references are entirely missing, you can add them using this form.