Universität Mannheim
Sequential Decision Behavior with Reference-Point Preferences: Theory and Experimental Evidence
People are heterogeneous with respect to their behavior in sequential decision situations. This paper develops models for behavior in a simple sequential decision situation under the assumption of expected utility maximization and under the assumption of sequential updating of utility reference points during the decision task. I find experimental evidence that supports the new reference point model: Individual loss aversion is systematically related to the observed behavior in a way that is consistent with the predictions of the reference point model; that is, loss aversion helps to predict heterogeneity in behavior. Risk attitude is not related to observed behavior. The finding that many people set reference points in sequential decision tasks is of interest in, e.g., consumer economics, labor economics, finance, and decision theory.