Reference Point Formation Over Time: A Weighting Function Approach

Baucells, Manel ; Weber, Martin ; Welfens, Frank

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URN: urn:nbn:de:bsz:180-madoc-17767
Document Type: Working paper
Year of publication: 2007
The title of a journal, publication series: None
Publication language: English
Institution: Business School > Sonstige - Fakultät für Betriebswirtschaftslehre
MADOC publication series: Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre (Weber) > Working Papers
Subject: 330 Economics
Classification: JEL: C91 D14 D81 G11 ,
Subject headings (SWD): Wirtschaft , Richtwert , Experiment
Keywords (English): Reference Point Formation , Experiment
Abstract: Although the concept of reference point dependent preferences has been adapted 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 inverse 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 student subjects' reference points to be best described by the first and the last price of the time series, with intermediate prices receiving smaller weights.
Additional information: Available at SSRN:

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