Abstract
This paper examines the importance of aspirations as reference points in a multi-period decision-making context. After stating their personal aspiration level, 172 individuals made six sequential decisions among risky prospects as part of a choice experiment. The results show that individuals make different risky-choices in a multi-period compared to a single-period setting. In particular, individuals’ aspiration level is their main reference point during the early stages of decision-making, while their starting status (wealth level at the start of the experiment) becomes the central reference point during the later stages of their multi-period decision-making.
Highlights
Risky-choice behavior is often reference-dependent (Sugden 2003; Bleichrodt 2007)
The majority of subjects whose wealth is above the aspiration level (Group Above) exhibit risk-averse behavior (χ 2 = 28.446, p < .000), while subjects whose wealth is between the starting status and aspiration level (Group Between) show a mixture of risk-seeking and risk-averse behavior (χ 2 = 4.091, p = .043), and subjects whose wealth is below their starting status (Group Below) display risk-seeking behavior (χ 2 = 12.600, p < .000)
For Group Above at t = 1, 2, and 4, no significant differences in risk-behavior are found, while for Group Between the results are widely dispersed across different t’s, and for Group Below there are no significant differences in risk-behavior at t = 2
Summary
Risky-choice behavior is often reference-dependent (Sugden 2003; Bleichrodt 2007). Prior work shows that typical reference points are individuals’ own current wealth or endowment (Kahneman and Tversky 1979; Munro and Sugden 2003). Current models of risky-choice start to include multiple reference points, which is especially relevant in real-life choice contexts with repeated decision-making (Sullivan and Kida 1995; Liu and Colman 2009). Subsequent studies on reference-dependency show that reference points can change over time (Lim 1995; Heyman et al 2005; Munro and Sugden 2003; Schmidt 2003; Bleichrodt 2007; Arkes et al 2008). Outcome framing and the results of preceding decisions, for example, influence a choice’s perceived riskiness (Weber and Milliman 1997; Cohen et al 2008) and the basis for evaluating choices changes as new choice situations occur (Gooding et al 1996)
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