Evidence on Reference-Dependent
Preferences from Exchange Valuation
Experiments
An experiment by: K. Ericson and A. Fuster
By Harry Marshall
Quick Summary:
Evidence from a variety of settings indicates that people are loss adverse. This
simply means that they dislike losses much more than they enjoy equal-sized
gains.
• Despite our knowledge of this trait in humans little is known about the
determination of the reference points relative to which gains and losses
are defined.
– One of the most common assumptions is that this reference point is
given by a person’s current endowment.
Ericson and Fuster attempt to provide evidence that a person’s expectations
about outcomes determine their reference points.
Experiment One: Expectations and
Exchange Behaviour
When subjects arrive at the lab they are endowed with an item (university
travel mug)
• Subjects allocated randomly assigned probability of exchanging their item
for another (university metal pen)
• Subjects asked to complete personality questionnaire to both distract
them and provide them with time to think
• Subjects are asked to make their decision re; keep item or trade
Result: The results were that subjects who had a 10% chance of being able to
exchange items were significantly less likely to be willing to exchange than
subjects that had a 90% chance.
Experiment Two: Expectations and
Valuation
• Subjects are seated at a desk with a mug on it and assigned probabilities
of either 10% or 80% randomly and transparently
• Subjects are told that if a ten-sided die that is rolled individually for each
subject at the end of the study comes up lower than their index card they
will receive the mug in front of them for free and leave with it at the end
of the experiment.
• They are also told that if the die comes up 9 they will have the option to
keep the mug or exchange it for a randomly determined amount of money
between $0-$10
Experiment Two Cont.
• Thus, subject’s who coin came up 1 have a 10% chance of receiving the
mug without making a choice while subjects who’s coin came up 8 have an
80% chance of receiving the mug without making a choice.
• Subjects in both treatments have a 10% chance of having a choice
between the money and the mug
•
The next phase of the experiment is then identical to experiment one;
filling out a personally questionnaire.
•
They are also asked to make choices between different monetary
amounts or keeping the mug (and not getting the money).
• From here, if the die comes up with 9, they will receive their choice
from one randomly selected row.
Experiment Two Cont.
•
The subjects are then told that in the case the die comes up with 8
(where they previously expected to get neither mug nor money) they will
get their choice between a pen and a randomly determined dollar
amount.
•
They are then given the pen to inspect and are again asked to make
choices between keeping the pen and different dollar amounts.
Result: subjects that had a high chance of leaving with the mug value it
significantly higher than subjects that have a lower chance of leaving with the
mug.
Conclusion:
• Increasing a subject’s expectation of leaving with an item has an effect on
both:
– Exchange behaviour (they are more likely to keep the item) and
– Valuation (they demand more compensation to give it up)
• Reference points are determined, at least in part, by expectations.
– However while this is the case other factors such as social norms, aspirations, salience,
and history may also influence reference points and will require further experimentation
in the future