Risk taking after absolute and relative wealth changes: The role of reference point adaptation

Abstract

We conducted an experiment to compare subjects’ attitudes toward risk before and after they experienced wealth changes induced by a real-effort task. We identified and estimated the subjects’ levels of reference point adaptation to absolute and relative wealth changes. We found that after experiencing a larger loss than others, the subjects did not completely adapt their reference points to the absolute wealth loss and the relative negative wealth gap, and thus significantly increased their risk-taking behavior. However, the subjects also did not adjust their attitudes toward risk after experiencing a smaller loss than others, a smaller gain than others, or a larger gain than others. This may be because they promptly adapted to wealth changes or because they did not adapt to wealth changes but the effects of absolute and relative wealth changes mostly offset each other.