Experimental Economics Semiar - Ao Wang (National University of Singapore)

Title:  An Approach to Testing Reference Points

Abstract:  We present a general approach to experimentally testing candidate reference points. This approach builds from Prospect Theory's prediction that an increase in payos is perfectly oset by an equivalent increase in the reference point. Violation of this prediction can be tested with modications 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.