TEL  Vol.4 No.9 , December 2014
Experimental Studies of Impacts of Reference Point and Its Change on Individual Value
ABSTRACT
Prospect theory believes that value judgments of decision-makers are associated with reference point. Based on this intuition, this paper analyzes the impacts of reference point as well as its change on individual value with two risk selection experiments, which are at the same wealth level but have different reference points. Experiments find that reference point has significant influences on value function and decision weight at the same wealth level. Moreover, via the value function diagram, we find that the value of a certain wealth level rising from a relatively low reference point is higher than the value of the same wealth level declining from a relatively high reference point which initially is raised from the lower reference one. Intuitively, it also explains that the changes of the reference point will lead to a decline in the overall value of decision-maker.

Cite this paper
Qian, J. , Zhao, Y. and Yu, J. (2014) Experimental Studies of Impacts of Reference Point and Its Change on Individual Value. Theoretical Economics Letters, 4, 795-802. doi: 10.4236/tel.2014.49100.
References
[1]   Kahneman, D. and Tversky, A. (1979) Prospect Theory: An Analysis of Decision under Risk. Econometrica: Journal of the Econometric Society, 47, 263-291. http://dx.doi.org/10.2307/1914185

[2]   Neumann, L.J. and Morgenstern, O. (1947) Theory of Games and Economic Behavior. Princeton University Press, Princeton.

[3]   Savage, L.J. (1954) The Foundations of Statistics. Wiley, New York.

[4]   Tversky, A. and Kahneman, D. (1992) Advances in Prospect Theory: Cumulative Representation of Uncertainty. Journal of Risk and Uncertainty, 5, 297-323. http://dx.doi.org/10.1007/BF00122574

[5]   Benartzi, S. and Thaler, R.H. (1993) Myopic Loss Aversion and the Equity Premium Puzzle. National Bureau of Economic Research. http://dx.doi.org/10.3386/w4369

[6]   Köszegi, B. and Rabin, M. (2006) A Model of Reference-Dependent Preferences. The Quarterly Journal of Economics, 121, 1133-1165.

[7]   Schmidt, U. and Zank, H. (2008) Risk Aversion in Cumulative Prospect Theory. Management Science, 54, 208-216. http://dx.doi.org/10.1287/mnsc.1070.0762

[8]   Farquhar, P.H. (1984) State of the Art—Utility Assessment Methods. Management Science, 30, 1283-1300. http://dx.doi.org/10.1287/mnsc.30.11.1283

[9]   McCord, M. and De Neufville, R. (1986) “Lottery Equivalents”: Reduction of the Certainty Effect Problem in Utility Assessment. Management Science, 32, 56-60.
http://dx.doi.org/10.1287/mnsc.32.1.56

[10]   Abdellaoui, M., Bleichrodt, H. and Paraschiv, C. (2007) Loss Aversion under Prospect Theory: A Parameter-Free Measurement. Management Science, 53, 1659-1674.
http://dx.doi.org/10.1287/mnsc.1070.0711

[11]   Abdellaoui, M., Bleichrodt, H. and l’Haridon, O. (2008) A Tractable Method to Measure Utility and Loss Aversion under Prospect Theory. Journal of Risk and Uncertainty, 36, 245-266.
http://dx.doi.org/10.1007/s11166-008-9039-8

[12]   Abdellaoui, M., Bleichrodt, H., l’Haridon, O., et al. (2013) Is There One Unifying Concept of Utility? An Experimental Comparison of Utility under Risk and Utility over Time. Management Science, 59, 2153-2169. http://dx.doi.org/10.1287/mnsc.1120.1690

[13]   Booij, A.S. and Van de Kuilen, G. (2009) A Parameter-Free Analysis of the Utility of Money for the General Population under Prospect Theory. Journal of Economic Psychology, 30, 651-666.
http://dx.doi.org/10.1016/j.joep.2009.05.004

[14]   Schunk, D. and Betsch, C. (2006) Explaining Heterogeneity in Utility Functions by Individual Differences in Decision Modes. Journal of Economic Psychology, 27, 386-401.
http://dx.doi.org/10.1016/j.joep.2005.08.003

[15]   Bruhin, A., Fehr-Duda, H. and Epper, T. (2010) Risk and Rationality: Uncovering Heterogeneity in Probability Distortion. Econometrica, 78, 1375-1412. http://dx.doi.org/10.3982/ECTA7139

 
 
Top