Reference Point Heterogeneity

Abstract

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It is well-established that, when confronted with a decision to be taken under risk,individuals use reference payoff levels as important inputs. The purpose of this paper is tostudy which reference points characterize decisions in a setting in which there are severalplausible reference levels of payoff. We report an experiment, in which we investigate whichof four potential reference points: (1) a population average payoff level, (2) the announcedexpected payoff of peers in a similar decision situation, (3) a historical average level ofearnings that others have received in the same task, and (4) an announced anticipatedindividual payoff level, best describes decisions in a decontextualized risky decision makingtask. We find heterogeneity among individuals in the reference points they employ. Thepopulation average payoff level is the modal reference point, followed by experimenter’sstated expectation of a participant’s individual earnings, followed in turn by the averageearnings of other participants in previous sessions of the same experiment. A sizeableshare of individuals show multiple reference points simultaneously. The reference pointthat best fits the choices of the individual is not affected by a shock to her income.

Keywords

• Decision Making
• risk
• experiment
• reference point
• lotteries