Working Paper: CEPR ID: DP4982
Authors: Alan Beggs; Kathryn Graddy
Abstract: This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on ?rule of thumb? learning from reference dependence based on ?rational? learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky?s Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion.
Keywords: art auctions; loss aversion; prospect theory; reference dependence
JEL Codes: D44; D81; L82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| past prices (P22) | auctioneer estimates (D44) |
| reference dependence (D81) | auctioneer estimates (D44) |
| loss aversion (G41) | auctioneer estimates (D44) |
| reference dependence (D81) | hammer prices (L79) |
| auctioneer estimates (D44) | probability of sale (C69) |