Previous outcomes and reference dependence: A meta study of repeated investment tasks with and without restricted feedback

Hopfensitz, Astrid (2009): Previous outcomes and reference dependence: A meta study of repeated investment tasks with and without restricted feedback.

Abstract

When investment is repeated, previous outcomes (winning/losing) as well as the current budget level (gain/loss domain) influence decisions. The first is related to the so-called "gamblers fallacy". The second to value function relative to some reference point. Both effects have been extensively studied, however not their interaction. We present a meta-study of five experiments initially conducted to investigate myopic-loss-aversion. We observe that investment is related to the number of previous winning rounds as well as to the current budget position relative to a reference point. These effects persist when the analysis is extended to settings with restricted flexibility concerning investment.

• Item Type: MPRA Paper
• Language: English
• Keywords: reference point; gamblers fallacy; meta study; experiment; risk taking; myopic loss aversion
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior

References

Abdellaoui, M. (2000). Parameter-free Elicitation of Utility and Probability Weighting Functions, Management Science, 46(11), 1497–1512.

Abdellaoui, M., H. Bleichrodt and C. Parschiv (2007). Loss Aversion Under Prospect Theory: A Parameter-Free Measurement, Management Science, 53(10), 1659-1674.

Beattie, J., and G. Loomes (1997). The impact of incentives upon risky choice experiments. Journal of Risk and Uncertainty, 14:155–168.

Bellemare, C., M. Krause, S. Kroeger and C. Zhang (2005). Myopic loss aversion: information feedback vs. investment flexibility. Economics Letters. 87(3):319-324.

Benartzi, S. and R. Thaler (1995). Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics. 110(1):73-92.

Blavatskyy, P. and G. Pogrebna (2006). Myopic Loss Aversion Revisited: the Effect of Probability Distortions in Choice Under Risk. IEW Working Paper No. 249

Bleichrodt, H. and J.L. Pinto (2000). A parameter-free elicitation of the probability weighting function in medical decision analysis. Management Science. 46: 1485-1496.

Chapman, G. and J. Winquist (1998). The magnitude effect: Temporal discount rates and restaurant tips. Psychonomic Bulletin and Review. 5(1):119-123.

Charness, G. and U. Gneezy (2007). Strong Evidence for Gender Differences in Investment. working paper.

Croson, R. and J. Sundali (2005). The Gambler's Fallacy and the Hot Hand: Empirical Data from Casinos. The Journal of Risk and Uncertainty. 30:195-209.

Fehr-Duda, H, A. Bruhin, T.F. Epper and R. Schubert (2008). Rationality on the Rise: Why Relative Risk Aversion Increases with Stake Size, working paper, University of Zurich, no. 0708.

Fellner, G. and M. Sutter (2009). Causes, consequences and cures of myopic loss aversion - An experimental examination. The Economic Journal. 119(537): 900-916.

Fellner, G. and B. Maciejovsky (2007). Risk attitude and market behavior: Evidence from experimental asset markets. Journal of Economic Psychology. 28(3): 338-350.

Gimpel, H. (2007) Loss Aversion and Reference-Dependent Preferences in Multi-Attribute Negotiations. Group Decision and Negotiation, 16:303–319.

Gneezy, U. and J. Potters (1997). An experiment on risk taking and evaluation periods. The Quarterly Journal of Economics. 112(2):631-645.

Gneezy, U., A. Kapteyn and J. Potters (2003). Evaluation Periods and Asset Prices in a Market Experiment. Journal of Finance. 58: 821-838.

Green, L. and J. Myerson (2004). A Discounting Framework for Choice with Delayed and Probabilistic Rewards, Psychological Bulletin. 130(5): 769-792.

Haigh, M. and J. List (2005). Do professional traders exhibit myopic loss aversion? An experimental analysis. The Journal of Finance. 60(1):523-534.

Haisley, E., R. Mostafa and G. Loewenstein (2008). Myopic risk-seeking: The impact of narrow decision bracketing on lottery play. Journal of Risk and Uncertainty. 37: 57-75.

Hershey, J. and P. Schoemaker (1985). Probability versus Certainty Equivalence Methods in Utility Measurement: Are They Equivalent? Management Science, 31(10): 1213-1231.

Hopfensitz, A. and F. van Winden (2008). Dynamic Choice, Independence, and Emotions. Theory and Decision, 64: 249-300.

Hopfensitz, A. and T. Wranik (2008). Psychological and Environmental Determinants of Myopic Loss Aversion. NETSPAR discussion paper. nr. 2008-013.

Kahneman, D., and A. Tversky (1979). Prospect theory: An analysis of decision under risk. Econometrica. 47:263-291.

Kirchsteiger, G. (1994) The role of envy in ultimatum games. Journal of Economic Behavior and Organization, 25:373-389.

Kőszegi, B. and M. Rabin (2007). Reference-Dependent Risk Attitudes. American Economic Review. 97(4): 1047-1073.

Kumar, A. and L. Sonya Seongyeon (2008). How Do Decision Frames Influence the Stock Investment Choices of Individual Investors? Management Science. 54(6): 1052-1064.

Langer, E. (1975). The Illusion of Control, Journal of Personality and Social Psychology, 32: 311–328.

Langer, T. and M. Weber (2008). Does commitment or feedback influence myopic loss aversion? An experimental analysis. Journal of Economic Behavior and Organization. 67:810-819.

Markowitz, H. (1952). The utility of wealth. Journal of Political Economy. 60(2): 151–158.

Pinon, A. and M. Weber (2006). The influence of present and prior alternatives on risk aversion. Working paper.

Prelec, D. and G. Loewenstein (1991). Decision making over time and under uncertainty: A common approach. Management Science. 37: 770–786.

Read, D., G. Loewenstein and M. Rabin (1999). Choice Bracketing. Journal of Risk and Uncertainty. 19:171-197.

Samuelson, W. and R. Zeckhauser (1988). Status quo bias in decision making. Journal of Risk and Uncertainty,1(1):7-59.

Schwarz, N. and N. Strack (1999). Reports of subjective well-being: Judgmental processes and their methodological implications. In Kahneman, Diener and Schwarz, 61–84.

Shefrin, H. and M. Statman (1985). The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence. Journal of Finance. 40(3):777-790.

Thaler, R., A. Tversky, D. Kahneman and A. Schwartz (1997). The effect of myopia and loss aversion on risk taking: An experimental test. The Quarterly Journal of Economics. 112(2):647-661.

Thaler, R. and E. Johnson (1990). Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. Management Science, 36(6): 643-660.

Tversky, A. and D. Kahneman (1971). Belief in the law of small numbers. Psychological Bulletin, 76, 105-110.

Weber, B.J. and G.B. Chapman (2005). Playing for peanuts: Why is risk seeking more common for low-stakes gambles? Organizational Behavior and Human Decision Processes. 97: 31-46.

Weber, M. and H. Zuchel (2003). How do Prior Outcomes Affect Risk Attitude ? University of Mannheim, Working Paper.