Updating the Reference Level: Experimental Evidence

Uri Gneezy

Chapter Chapter 12 in Experimental Business Research, 2005, pp 263-284 from Springer

Abstract: Abstract Empirical findings suggest that in decisions under uncertainty people evaluate outcomes relative to a reference level: they are risk seeking in the domain of losses and risk averse in the domain of gains. This finding is used in the finance literature to predict/explain the “disposition effect,” which is the tendency of investors to sell assets that have gained value (“winners”) too early and ride assets that have lost value (“losers”) too long. The current experiment was designed to overcome some of the difficulties involved in using real market data to test the disposition effect. One of the main goals was to find evidence on how prior gains and losses influence the risk behavior of people, by shifting the reference level. The results were consistent with the disposition effect hypothesis. Furthermore, it was found that the data are best described by assuming that participants use the historical peak of the process as a reference level.

Keywords: reference level; disposition effect; experiments (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-0-387-24244-6_12

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DOI: 10.1007/0-387-24244-9_12

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