Working Paper: NBER ID: w24721
Authors: Ori Heffetz
Abstract: What explains the mixed evidence from laboratory tests of Kőszegi and Rabin’s (2006 and later) model of expectations-based reference-dependent preferences? We investigate one hypothesis: to become (behavior-affecting) reference points, probability beliefs have to sink in—being merely lagged, as the theory requires, is not sufficient. Past experiments with conflicting findings exogenously endowed subjects with beliefs that were equally lagged, but possibly unequally sunk-in. In four experiments, whose designs replicate past KR-nonsupporting experiments, we add new sink-in manipulations that endow individuals with additional, visual/physical probability impressions. Our findings are more KR-supporting in an endowment-effect setting but not in an effort-provision setting.
Keywords: reference-dependent preferences; expectations; endowment effect; effort provision
JEL Codes: D12; D84; D91; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| manipulation of expectations (D84) | behavior (C92) |
| sunk-in expectations (D84) | behavior (C92) |
| lagged beliefs (D83) | behavior (C92) |
| adequately sunk-in expectations (D84) | behavior alignment with model predictions (C52) |
| new treatments (C22) | results consistent with Köszegi and Rabin's predictions (D91) |
| new treatments in effort provision context (D91) | expected results (Y10) |