Core Readings

Abeler,  J., Falk, A., Goette, L., & Huffman, D. (2011). “Reference points and effort provision.” American Economic Review, 101(2), 470-492. 

Manipulates the rational expectations of subjects in a real-effort experiment, and checks whether this manipulation influences their effort provision. Finds that if expectations are high, subjects work longer and earn more money than if expectations are low.

Fryer Jr., Roland G., Steven D. Levitt, John List, and Sally Sadoff, (2022). "Enhancing the efficacy of teacher incentives through framing: A field experiment," AEJ: Applied 14(4): 269–299. 

The authors design incentive contracts that expose teachers to  loss aversion:  Teachers are paid a bonus in advance, but required to return it if their students do not improve sufficiently..  These contracts raise students' math test scores between  loss-framed incentives improve math achievement by an estimated 0.124 standard deviations. 

Chapman, Jonathan, Erik Snowberg, Stephanie W. Wang, and Colin Camerer 2022. Looming Large or Seeming Small? Attitudes Towards Losses in a Representative Sample NBER working paper no. 30243

The authors measure individual-level loss aversion using three incentivized, representative surveys of the U.S. population (combined N=3,000).  Contrary to many previous findings —which mostly come from lab/student samples— the authors find that around 50% of the U.S. population is loss tolerant, not loss-averse.  The authors reconcile their findings with previous literature by showing that loss aversion is more prevalent in people with high cognitive ability.  These results raise questions about applying loss-aversion-based models to workers who are, for example, not college educated. 

Newer Resources

Reference-dependence, loss aversion and wage cuts 

Ockenfels, Axel., Dirk Sliwka, and Peter Werner, (2010). “Bonus Payments and Reference Point Violations,” IZA Discussion paper number 4795.

Investigates how bonus payments affect satisfaction and performance of managers in a large, multinational company. Findings suggest that falling behind a naturally occurring reference point for bonus comparisons reduces satisfaction and subsequent performance. 

Marzilli Ericson., Keith M, and Andreas Fuster, (2011). "Expectations as endowments: Evidence on reference-dependent preferences from exchange and valuation experiments," Quarterly Journal of Economics 126(4): 1879-1907.

Uses two experiments --an exchange experiment and a valuation experiment-- to  show that reference points are determined, at least in part, by expectations. 

Pope, Devin G., and Uri Simonsohn, (2011). "Round Numbers as Goals: Evidence from Baseball, SAT Takers, and the Lab," Psychological Science,  22(1): 71-79. 

Reviews three studies showing that round numbers in performance scales act as reference points and that individuals exert effort to perform just above rather than just below such numbers. 

Chen, Daniel L., and John J. Horton, (2016). “Are Online Labor Markets Spot Markets for Tasks?: A Field Experiment on the Behavioral Response to Wage Cuts,” Information Systems Research, 27(2):403-423.

Shows via a field experiment that workers act more like parties to an employment contract: workers quickly form wage reference points and react negatively to proposed wage cuts by quitting. However, they can be mollified with “reasonable” justifications for why wages are being cut, highlighting the importance of fairness considerations in their decision making. 

Doerrenberg, Philipp., Denvil Duncan, and Max Loeffler, (2016). “Asymmetric labor-supply responses to wage-rate changes:  Evidence from a field experiment,” IZA Discussion paper number 9683.

Estimates the effect of wage increases and decreases on labor supply using a randomized field experiment with workers on Amazon's Mechanical Turk. The results provide evidence that wage increases have smaller effects than wage decreases, suggesting that the labor-supply response to wage changes is asymmetric. 

Allen, Eric., Patricia Dechow, Devin G. Pope, and George Wu, (2017). “Reference-Dependent Preferences: Evidence from Marathon Runners,” Management Science. 

Provides visual and statistical evidence that round numbers serve as reference points in this environment and as a result produce significant bunching of performance at these round numbers. 

Chapman, Jonathan., Mark Dean, Pietro Ortoleva, Erik Snowberg, and Colin Camerer, (2017). “Willingness to Pay and Willingness to Accept are Probably Less Correlated than You Think,” NBER working paper no: 23954.

Analyzes data from an incentivized survey of a representative sample of 3,000 U.S. adults, and finds that: WTA and WTP for a lottery are, at best, slightly correlated. Shows that the endowment effect is not related to individual-level measures of loss aversion, counter to Prospect Theory or Stochastic Reference Dependence.

Yoram, Halevy, and Michael Peters. “Behavioral Bargaining.” University of British Columbia, work in progress (no link currently available)

Models how people form reference points in a dictator game to understand the following fact:  When senders are required to transfer a minimum amount to receivers (just like the minimum required effort in Falk and Kosfeld's  “Hidden Costs of Control”), many senders decide to transfer just a little bit more than the required amount.  To fit these facts, the authors argue that a model needs to include both reference points and inequity aversion.   

 Gal David, (2018). "Why Is Behavioral Economics So Popular?" New York Times, October 8.

Behavioral economists point to loss aversion as a psychological glitch that explains a lot of puzzling human conduct.   But in an article published this year, the psychologist Derek D. Rucker and co-author contend that the behaviors most commonly attributed to loss aversion are a result of an "inertia effect" driven by lack of information about the market value of the available options. 

Homonoff A. Tatiana, (2018). "Can Small Incentives Have Large Effects? The Impact of Taxes versus Bonuses on Disposable Bag Use," American Economic Journal: Economic Policy, 10(4): 177-210, 

Investigates the effect of two similar policies aimed at reducing disposable bag use: a five-cent tax on disposable bag use and a five-cent bonus for reusable bag use. While the tax decreased disposable bag use by over forty percentage points, the bonus generated virtually no effect on behavior. These results are consistent with a model of loss aversion. 

Bulte, Erwin,  John A. List, and Daan Van Soest. 2019 Toward an Understanding of the Welfare Effects of Nudges: Evidence from a Field Experiment in Uganda  NBER working paper no. 26286  

Conducts a field experiment in Uganda that compares output levels across 1000 workers over similar tasks and incentives, framed as either losses or gains.   The authors find that loss aversion can be leveraged to increase the productivity of labor.  The estimated welfare costs of using the loss contract are quite modest, perhaps because workers view it as a (soft) commitment device.

Pierce, Lamar, Alex Rees-Jones and Charlotte Blank. The Negative Consequences of Loss-Framed Performance Incentives  Unpublished paper, University of Washington, January 2020.

The authors randomly introduced loss-framed financial incentives in a nationwide field experiment among 294 car dealers. Dealers randomized into loss-framed (but financially identical) contracts sold 5% fewer vehicles than control dealers, generating a revenue loss of $45 million over 4 months.   Interestingly, loss-framing did ‘work’ in the sense that it induced workers to take actions to reduce the chances of incurring a loss.  However, this harmed the company because of a multi-tasking problem:  dealers switched their efforts away from car models with lower bonuses attached to them.

Dodini, Samuel.  2020 “Making Reference-Dependent Preferences: Evidence from Door-to-Door Sales unpublished paper, Cornell University.

Using daily data on door-to-door salespeople, the author shows that the workers form sales expectations based on their personal long-run objectives regarding the company’s end-of-year bonus plan.  Once a worker has attained their expected sales for the day, they are much more likely to stop working, suggesting that these expectations function as reference points.  Importantly, however, these expectations are derived from long-run bonus contracts designed by firms to motivate their workers.

Agarwal, Sumit, Ximeng Fang, Lorenz Goette, Tien Foo Sing, Samuel Schoeb, Verena Tiefenbeck, Thorsten Staake, Davin Wang “The Role of Goals in Motivating Behavior: Evidence from a Large-Scale Field Experiment on Resource Conservation” unpublished paper, University of Bonn, 2017. 

The authors randomly assigned feedback and goals for water use to consumers taking showers.  No financial incentives are used, but users were (randomly) given real-time information on the amount of water used during a shower, and assigned random goals for consumption per shower.  Both feedback and goals reduce water consumption substantially.  Goals work best when they are neither too easy nor too hard.  Other patterns in the data suggest that users get direct utility from satisfying the goal that has been assigned to them. 

Seibold, Arthur. Reference Points for Retirement Behavior: Evidence from German Pension Discontinuities American Economic Review 2021, 111(4): 1126–1165

This paper shows that people view publicized “normal” retirement ages as reference points.  Large numbers of people choose to retire at exactly those ages, even though there is no economic incentive to do so. 

Beam, Emily A., Yusufcan Masatlioglu, Tara Watson, and Dean Yang 2022. Loss Aversion or Lack of Trust: Why Does Loss Framing Work to Encourage Preventative Health Behaviors?  NBER working paper no 29828.

Loss-framed incentives involve paying agents a lump sum up front, then ‘clawing back’ some of that money later if the agent underperforms.  In environments where principals do not have an established reputation, loss-framed incentives have the added benefit of ensuring agents that they will, in fact, be paid for their efforts.  In a health care experiment, the authors show that loss-framed incentives do incentivize patients to visit a clinic, but only because of this second, “principal reputation” effect.  Loss aversion does not play a role. 

Czibor, Eszter, Danny Hsu, David Jimenez-Gomez, Susanne Neckermann, and Burcu Subasi Loss-Framed Incentives and Employee (Mis-)Behavior Management Science, Vol. 68, No. 10: 7518-7537.

How do loss-framed incentives affect behavior in a multitasking environment, where participants have more than one way of recovering (expected) losses?  Using a laboratory experiment, the authors find that framing incentives as a penalty rather than as a reward does not significantly improve task performance, but it makes subjects less honest (by raising theft).

Steffen Andersen, Cristian Badarinza, Lu Liu, Julie Marx and Tarun Ramadorai 2022 Reference Dependence in the Housing Market American Economic Review , 112(10): 3398–3440.

The authors use a structural model to measure the amount of reference dependence and loss aversion in the Danish housing market. They estimate that households derive substantial utility from gains over the original nominal house purchase price; losses affect households roughly 2.5 times more than gains.

Teeselink, Bouke Klein , Martijn J. van den Assem, and Dennie van Dolder 2023 Does Losing Lead to Winning? An Empirical Analysis for Four Sports Management Science, Vol. 69, No. 1: 513-532

The authors replicate Berger and Pope’s (2011) well known study, which found that being slightly behind increases the likelihood of winning in professional and collegiate basketball.  Conducting similar analyses on large samples of Australian football, American football, and rugby matches, they find no evidence of such an effect for these three sports. Revising Berger and Pope’s basketball findings for other time periods and for Women’s Basketball, they also find no significant effects.