Strategic Planning

Reference-Dependent Preferences: A Theoretical and by Evelyn Stommel

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By Evelyn Stommel

Most of our day-by-day judgements are made less than uncertainty and danger, with out entire information regarding all proper facets. all of us consistently make such judgements, from the easiest “should I take my raincoat today?” to extra severe examples, comparable to these on funding and portfolio judgements, retaining of stocks, assurance styles, or negotiation methods. inside of those occasions, the bounded rationality of people and associations in the direction of possibility and uncertainty is embedded. The imperative idea underlying this learn is prospect concept, an sufficient version to foretell the true and generally bounded rationality of human habit given definite incentives, personal tastes, and constraints.

Evelyn Stommel investigates a vital query inside behavioral economics, particularly the learn on reference issues inside of human determination making procedures. in keeping with experimental investigations, she focuses 3 key demanding situations: what constitutes a reference aspect, the method of the formation of a reference aspect, and components influencing the formation of reference points.

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Extra resources for Reference-Dependent Preferences: A Theoretical and Experimental Investigation of Individual Reference-Point Formation

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389). They argued that goals serve as reference points not only after an outcome has occurred but also before and during decision making. 13 Van Osch et al. (2006) pointed out that goals are mostly set for the near future. Therefore, the adoption of goals as reference points is more apparent for outcomes in the near than in the remote future. 38 3 Reference-dependent preferences Expectations Theoretical results As mentioned above, Kahneman and Tversky suggested that expectations might serve as reference points besides the status quo, goals, or aspiration level.

For instance, Baltussen et al. (2006) studied a variant of Levy and Levy’s (2002a) experiment. They observed that a probability weighting function that was much more linear for gains than that observed in other studies and more curved for losses than for gains, contrary to previously reviewed studies (Wu & Markle, 2007). Payne (2005) investigated choice patterns for mixed gambles and observed inconsistencies with cumulative prospect theory, demonstrating that decision makers sometimes use a heuristic of selecting the mixed gamble with the highest probability of a gain.

Samuelson and Zeckhauser (1988) designed a series of decision making experiments to test for status quo effects. They confirmed that decision makers display a significant status quo bias across a range of decisions. Their results thus suggested that status quo serves as a salient reference point within decision tasks. The status quo as a reference point was also used to study models of choices. For instance, Masatlioglu and Ok (2005) introduced a model in which the default alternative serves as a status quo option.

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