An Approach to Testing Reference Points

Speaker: Dr Ao Wang
Affiliation: National University of Singapore
Location: Room 617, Sir Llew Edwards Building (#14), UQ St Lucia Campus or, 
Via Zoom link: https://uqz.zoom.us/j/82603079317

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.