An Approach to Testing Reference Points

Alex Rees-Jones and Ao Wang

No 30773, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a general approach to experimentally testing candidate reference points. This approach builds from Prospect Theory’s prediction that an increase in payoffs is perfectly offset by an equivalent increase in the reference point. Violation of this prediction can be tested with modifications to existing econometric techniques in experiments of a particular design. The resulting approach to testing theories of the reference point is minimally parametric, robust to broad classes of heterogeneity, yet still implementable in comparatively small sample sizes. We demonstrate the application of this approach in an experiment that tests the role of salience in setting reference points.

JEL-codes: C14 D9 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ecm, nep-exp and nep-upt
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