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Reference point formation over time: a weighting function approach

Manel Baucells, Martin Weber and Frank Welfens

No 07-43, Papers from Sonderforschungsbreich 504

Abstract: Although the concept of reference point dependent preferences has been adopted to almost all fields of behavioral economics, especially marketing and behavioral finance, we still know very little about how decision makers form their reference points given a sequence of prices. Our paper provides both a theoretical framework on reference point formation over time, based on cumulative prospect theory’s s-shaped weighting function, and a new experimental method for eliciting subjects’ individual reference points in a finance context. Consistent with our model, we document our subjects’ reference points to be best described by the first and the last price of the time series, with the equally weighted average and the highest price receiving smaller weights.. Results, however, vary strongly on the individual level and are also affected by the elicitation question applied.

JEL-codes: C91 D14 D81 G11 (search for similar items in EconPapers)
Date: 2007
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