IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc15/112889.html
   My bibliography  Save this paper

Social Reference Points and Risk Taking

Author

Listed:
  • Schwerter, Frederik

Abstract

We test whether social reference points impact individual risk taking. In a laboratory experiment, decision makers observe the earnings of a peer subject before making a risky choice. We exogenously manipulate the peer earnings across two treatments. We find a significant treatment effect on risk taking: decision makers vary their risk taking in order to surpass or stay ahead of their peer. Our findings are consistent with a social-comparison-based, reference-dependent preference model that formalizes relative concerns via social loss aversion. Additionally, we relate our findings to the impact of private reference points on risk taking.

Suggested Citation

  • Schwerter, Frederik, 2015. "Social Reference Points and Risk Taking," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112889, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:112889
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/112889/1/VfS_2015_pid_303.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Neumark, David & Postlewaite, Andrew, 1998. "Relative income concerns and the rise in married women's employment," Journal of Public Economics, Elsevier, vol. 70(1), pages 157-183, October.
    2. 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, President and Fellows of Harvard College, vol. 112(2), pages 407-441.
    3. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    4. Dirk Engelmann & Guillaume Hollard, 2010. "Reconsidering the Effect of Market Experience on the “Endowment Effect”," Econometrica, Econometric Society, vol. 78(6), pages 2005-2019, November.
    5. 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.
    6. Peter Kuhn & Peter Kooreman & Adriaan Soetevent & Arie Kapteyn, 2011. "The Effects of Lottery Prizes on Winners and Their Neighbors: Evidence from the Dutch Postcode Lottery," American Economic Review, American Economic Association, vol. 101(5), pages 2226-2247, August.
    7. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    8. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    9. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-824, December.
    10. Benny Moldovanu & Aner Sela & Xianwen Shi, 2007. "Contests for Status," Journal of Political Economy, University of Chicago Press, vol. 115, pages 338-363.
    11. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 963-1002.
    12. Armin Falk & Andrea Ichino, 2006. "Clean Evidence on Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 39-58, January.
    13. Clark, Andrew E. & Oswald, Andrew J., 1996. "Satisfaction and comparison income," Journal of Public Economics, Elsevier, vol. 61(3), pages 359-381, September.
    14. Alexandre Mas & Enrico Moretti, 2009. "Peers at Work," American Economic Review, American Economic Association, vol. 99(1), pages 112-145, March.
    15. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    16. J. Michelle Brock & Andreas Lange & Erkut Y. Ozbay, 2013. "Dictating the Risk: Experimental Evidence on Giving in Risky Environments," American Economic Review, American Economic Association, vol. 103(1), pages 415-437, February.
    17. Gary E Bolton & Jordi Brandts & Axel Ockenfels, 2005. "Fair Procedures: Evidence from Games Involving Lotteries," Economic Journal, Royal Economic Society, vol. 115(506), pages 1054-1076, October.
    18. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    19. Samuel Bowles & Yongjin Park, 2005. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," Economic Journal, Royal Economic Society, vol. 115(507), pages 397-412, November.
    20. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    21. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-686, May.
    22. David Card & Alexandre Mas & Enrico Moretti & Emmanuel Saez, 2012. "Inequality at Work: The Effect of Peer Salaries on Job Satisfaction," American Economic Review, American Economic Association, vol. 102(6), pages 2981-3003, October.
    23. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 817-869.
    24. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    25. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    26. Ori Heffetz, 2011. "A Test of Conspicuous Consumption: Visibility and Income Elasticities," The Review of Economics and Statistics, MIT Press, vol. 93(4), pages 1101-1117, November.
    27. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    28. 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.
    29. Alexander W. Cappelen & James Konow & Erik ?. S?rensen & Bertil Tungodden, 2013. "Just Luck: An Experimental Study of Risk-Taking and Fairness," American Economic Review, American Economic Association, vol. 103(4), pages 1398-1413, June.
    30. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 73-92.
    31. Chaim Fershtman & Uri Gneezy & John A. List, 2012. "Equity Aversion: Social Norms and the Desire to Be Ahead," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 131-144, November.
    32. David E. Bell, 1982. "Regret in Decision Making under Uncertainty," Operations Research, INFORMS, vol. 30(5), pages 961-981, October.
    33. Bruce Sacerdote, 2001. "Peer Effects with Random Assignment: Results for Dartmouth Roommates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(2), pages 681-704.
    34. Manel Baucells & Martin Weber & Frank Welfens, 2011. "Reference-Point Formation and Updating," Management Science, INFORMS, vol. 57(3), pages 506-519, March.
    35. Fliessbach, Klaus & Weber, Bernd & Trautner, P. & Dohmen, Thomas J. & Sunde, Uwe & Elger, C. E. & Falk, Armin, 2007. "Social comparison affects reward-related brain activity in the human ventral striatum," Munich Reprints in Economics 20362, University of Munich, Department of Economics.
    36. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    37. Keith M. Marzilli Ericson & Andreas Fuster, 2011. "Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(4), pages 1879-1907.
    38. Uri Gneezy & Lorenz Goette & Charles Sprenger & Florian Zimmermann, 2017. "The Limits of Expectations-Based Reference Dependence," Journal of the European Economic Association, European Economic Association, vol. 15(4), pages 861-876.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zeng Lian & Jaimie W. Lien & Lin Lu & Jie Zheng, 2021. "International trade with social comparisons," Review of International Economics, Wiley Blackwell, vol. 29(3), pages 533-556, August.
    2. Simon Gächter & Lingbo Huang & Martin Sefton, 2018. "Disappointment Aversion And Social Comparisons In A Real‐Effort Competition," Economic Inquiry, Western Economic Association International, vol. 56(3), pages 1512-1525, July.
    3. Alexandros Karakostas & Giles Morgan & Daniel John Zizzo, 2023. "Socially interdependent risk taking," Theory and Decision, Springer, vol. 95(3), pages 365-378, October.
    4. Schmidt, Ulrich & Friedl, Andreas & Eichenseer, Michael & Lima de Miranda, Katharina, 2021. "Social comparison and gender differences in financial risk taking," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 58-72.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schwerter, Frederik, 2013. "Social Reference Points and Risk Taking," Bonn Econ Discussion Papers 11/2013, University of Bonn, Bonn Graduate School of Economics (BGSE).
    2. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    3. Nickolas Gagnon & Riccardo D. Saulle & Henrik W. Zaunbrecher, 2021. "Decreasing Incomes Increase Selfishness," Papers 2107.02888, arXiv.org.
    4. Axel Ockenfels & Dirk Sliwka & Peter Werner, 2015. "Bonus Payments and Reference Point Violations," Management Science, INFORMS, vol. 61(7), pages 1496-1513, July.
    5. Jacobs Martin, 2016. "Accounting for Changing Tastes: Approaches to Explaining Unstable Individual Preferences," Review of Economics, De Gruyter, vol. 67(2), pages 121-183, August.
    6. Zaunbrecher, Henrik & Gagnon, Nickolas, 2020. "Declining Wages Increase Selfish Redistribution in an Environment with Fixed Income Inequality," Research Memorandum 023, Maastricht University, Graduate School of Business and Economics (GSBE).
    7. Zhihua Li & Songfa Zhong, 2023. "Reference Dependence in Intertemporal Preference," Management Science, INFORMS, vol. 69(1), pages 475-490, January.
    8. Flynn, James, 2022. "Salary disclosure and individual effort: Evidence from the National Hockey League," Journal of Economic Behavior & Organization, Elsevier, vol. 202(C), pages 471-497.
    9. Alex Markle & George Wu & Rebecca White & Aaron Sackett, 2018. "Goals as reference points in marathon running: A novel test of reference dependence," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 19-50, February.
    10. Christian Grund & Johannes Martin, 2017. "Monetary Reference Points of Managers – Empirical Evidence of Status Quo Preferences and Social Comparisons," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(1), pages 70-87, February.
    11. Juanjuan Meng & Xi Weng, 2018. "Can Prospect Theory Explain the Disposition Effect? A New Perspective on Reference Points," Management Science, INFORMS, vol. 64(7), pages 3331-3351, July.
    12. Committee, Nobel Prize, 2017. "Richard H. Thaler: Integrating Economics with Psychology," Nobel Prize in Economics documents 2017-1, Nobel Prize Committee.
    13. Rosato, Antonio & Tymula, Agnieszka A., 2019. "Loss aversion and competition in Vickrey auctions: Money ain't no good," Games and Economic Behavior, Elsevier, vol. 115(C), pages 188-208.
    14. Smith, Alec, 2019. "Lagged beliefs and reference-dependent utility," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 331-340.
    15. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    16. Lahno, Amrei M. & Serra-Garcia, Marta, 2012. "Peer Effects in Risk Taking," Discussion Papers in Economics 14309, University of Munich, Department of Economics.
    17. Clark, Andrew E. & D'Ambrosio, Conchita, 2014. "Attitudes to Income Inequality: Experimental and Survey Evidence," IZA Discussion Papers 8136, Institute of Labor Economics (IZA).
    18. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    19. Grund, Christian & Martin, Johannes, 2012. "Monetary Reference Points of Managers: An Empirical Investigation of Status Quo Preferences and Social Comparisons," IZA Discussion Papers 7097, Institute of Labor Economics (IZA).
    20. Elena Cettolin & Arno Riedl & Giang Tran, 2017. "Giving in the face of risk," Journal of Risk and Uncertainty, Springer, vol. 55(2), pages 95-118, December.

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc15:112889. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.