Journal Article

Reference-Point Formation and Updating

Weber, Martin, Baucells, Manel, Welfens, Frank

2011

Overview

Reference-dependent preferences have been well accepted in decision sciences, experimental economics, behavioral finance, and marketing. However, we still know very little about how decision makers form and update their reference points given a sequence of information. Our paper provides some novel experiments in a financial context to advance the understanding of reference-point formation over time. Our subjects' reference price is best described as a combination of the first and the last price of the time series, with intermediate prices receiving smaller and nondecaying weights. Hence, reference prices are not recursive. We provide a parsimonious formula to predict the reference points, which we test out-of-sample. The fit of the model is reasonably good. This paper was accepted by George Wu, decision analysis.

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Applied sciences / Average prices / Consumer preferences / Decision makers / Decision making / Decision making models / Decision theory / Decision theory. Utility theory / disposition effect / Economics / Exact sciences and technology / Experimental economics / Experiments / False alarms / Financial analysis / Firm modelling / General aspects / Happiness / Information / Investors / Management science / Marketing / Modelling / Operational research and scientific management / Operational research. Management science / P values / Portfolio theory / Preferences / Prices / Probability / probability weighting / Prospect Theory / Präferenztheorie / Purchase price / Recursion / reference-dependent preferences / reference-point formation / Stock prices / Studies / Test / Time series / Verhaltensökonomik / Weighting functions / Zeitverwendung