Only the wearer knows where the shoe pinches: The asymmetric adaptation of reference point
Date Issued
2008
Date
2008
Author(s)
Hsieh, Chao-Chung
Abstract
According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from current wealth, which serves as a reference point. People are risk seeking in the domain of losses and risk averse in the domain of gains. 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. Different from previous papers, we attempted to ascertain to what extent the reference point shifts following gains or losses by real transactions’ data. We calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We related our findings to several aspects of investor behaviors and compared our results to many questionnaire studies.
Subjects
Reference Point
Financial Behavior
Prospect Theory
Type
thesis
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