Reference dependence

Article summary

Reference dependence is a central principle in prospect theory and behavioral economics generally. It holds that people evaluate outcomes and express preferences relative to an existing reference point, or status quo. It is related to loss aversion and the endowment effect. In prospect theory it is appropriate to use the selected status quo to determine the reference point. However, depending on the particular research being conducted researchers have proven reference dependence from more than just well known brands and the status quo. The types of reference points used varies but studies have used individual goals, aspirations and social comparisons. Alternative reference points are used by researchers commonly in the school of psychology but present some challenges to the methodologies of studies. Measuring reference dependence in field studies and laboratory experiments presents challenges as reference point values are unique to individuals, they are highly malleable and can be predetermined based on life experiences. Reference dependence studies are commonly critiqued on the context in which they provoke responses and to the accuracies in measuring highly malleable reference points. Reference points that appear to be random in nature can also influence the decision of the individual choice. Ariely et al.…

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