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Although reference dependence plays a central role in explaining behavior, little is known about the way that reference points are selected. This paper identifies empirically which reference point people use in decision under risk. We assume a comprehensive reference-dependent model that nests the main reference-dependent theories, including prospect theory, and that allows for isolating the reference point rule from other behavioral parameters. Our experiment involved high stakes with payoffs up to a week’s salary. We used an optimal design to select the choices in the experiment and Bayesian hierarchical modeling for estimation. The most common reference points were the status quo and a security level (the maximum of the minimal outcomes of the prospects in a choice). We found little support for the use of expectations-based reference points. This paper was accepted by David Simchi-Levi, decision analysis.

Privacy decision making has been examined in the literature from alternative perspectives. A dominant “normative” perspective has focused on rational processes by which consumers with stable preferences for privacy weigh the expected benefits of privacy choices against their potential costs. More recently, a behavioral perspective has leveraged theories from decision research to construe privacy decision making as a process in which cognitive heuristics and biases predictably occur. In a series of experiments, we compare the predictive power of these two perspectives by evaluating the impact of changes in the objective risk of disclosure and the impact of changes in the relative perceptions of risk of disclosure on both hypothetical and actual consumer privacy choices. We find that both relative and objective risks can, in fact, influence consumer privacy decisions. However, and surprisingly, the impact of objective changes in risk diminishes between hypothetical and actual choice settings. Vice versa, the impact of relative risk becomes more pronounced going from hypothetical to actual choice settings. Our results suggest a way to integrate diverse streams of the information systems literature on privacy decision making: in hypothetical choice contexts, relative to actual choice contexts, consumers may both overestimate their response to normative factors and underestimate their response to behavioral factors.

Theories of reference-dependent preferences propose that individuals evaluate outcomes as gains or losses relative to a neutral reference point. We test for reference dependence in a large data set of marathon finishing times ( n = 9,789,093). Models of reference-dependent preferences such as prospect theory predict bunching of finishing times at reference points. We provide visual and statistical evidence that round numbers (e.g., a four-hour marathon) serve as reference points in this environment and as a result produce significant bunching of performance at these round numbers. Bunching is driven by planning and adjustments in effort provision near the finish line and cannot be explained by explicit rewards (e.g., qualifying for the Boston Marathon), peer effects, or institutional features (e.g., pacesetters). Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2417 . This paper was accepted by John List, behavioral economics .

Using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes, we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample. In addition to ambiguity aversion, we confirm an ambiguity component recently found in laboratory studies: a-insensitivity, the tendency to treat subjective likelihoods as 50-50, thus overweighting extreme events. Our ambiguity measurements are associated with real economic decisions; specifically, a-insensitivity is negatively related to stock market participation. Ambiguity aversion is also negatively related to stock market participation, but only for subjects who perceive stock returns as highly ambiguous. This paper was accepted by James Smith, decision analysis .

We study the prevalence of multiattribute loss aversion and reference effects in a revenue management setting based on data of individual-level purchases over a series of concert performances. The reference dependence that drives consumer choice is not only based on the price but also on observed sales (as a fraction of the seating capacity) during their past visits. We find that consumers suffer from loss aversion on both prices and seats sold: consumers incur significant utility loss when prices are above their references or when the actual seat sales are lower than their references. We suggest pricing policies that can address consumer decisions driven by such reference dependence and loss aversion. This paper was accepted by Vishal Gaur, operations management.

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is a need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an “endowment effect” for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behaviour is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data.

Recent years have seen a surge of applied work using bunching approaches, a development that is closely linked to the increased availability of administrative data. These approaches exploit the incentives for bunching created by discontinuities in the slope of choice sets (kinks) or in the level of choice sets (notches) to study the behavior of individuals and firms. Although the bunching approach was originally developed in the context of taxation, it is beginning to find applications in many other areas, such as social security, social insurance, welfare programs, education, regulation, private sector prices, and reference-dependent preferences. This review provides a guide to bunching estimation, discusses its strengths and weaknesses, surveys a range of applications across fields, and considers reasons for the ubiquity of kinks and notches.

The reverse-contingency task is a task in which one is given a choice between two rewards, but one receives the larger amount only if one chooses the smaller amount. This task is very difficult for chimpanzees unless the choice is between symbolic representations of the amounts. We found that pigeons can learn this task easily, if the reward amounts are associated with distinctive colors and the choice is delayed by 5 s. The reverse-contingency task involves three components: a loss when choosing one alternative, a gain when choosing the other, and the contrast between what was expected and what occurred. In Experiment 2 we separated the loss from the gain and found that experiencing a loss is sufficient for pigeons to learn to avoid that alternative. Finally, we found evidence for perceived loss aversion. When pigeons were offered a small amount of food and they received that amount, they preferred it over an alternative that offered them a larger amount but gave them only the smaller amount (a perceived loss). The results indicate that loss aversion, based on reference dependence, is likely a general phenomenon, and not only found in humans and other primates. We suggest that it can be attributed to contrast, the difference between what is expected and what is obtained, and it is related to the endowment effect and the mere ownership effect found in humans.

In a large-scale field study of marathon runners, we test whether goals act as reference points in shaping the valuation of outcomes. Theories of referencedependent preferences, such as Prospect Theory, imply that outcomes that are just below or just above a reference point are evaluated differently. Consistent with the Prospect Theory value function, we find that satisfaction as a function of relative performance (the difference between a runner's finishing time goal and her actual finishing time) exhibits loss aversion and diminishing sensitivity in both predictions of and actual experienced satisfaction. However, in contrast to Prospect Theory, we observe that loss aversion is partially driven by a discontinuity or jump at the reference point. In addition, we find that a runner's time goal as well as their previous marathon times simultaneously impact runner satisfaction, providing support for the impact of multiple reference points on satisfaction.