Degree Granting Department
expectations, expectations-based reference-dependent preferences, experimental, Reference points, risky decision making
This study examines whether reference levels change over time and the impact on individuals' risk-taking behavior. I apply expectations-based reference-dependent preferences theory to analyze whether individuals' reference levels change over time in an economic setting. The theory suggests that individuals develop reference levels based on expectations of future outcomes (Koszegi and Rabin 2006). Therefore, this study examines whether individuals' expectations affect the setting of their reference level and how possible changes in reference levels affect subsequent risk-taking behavior. This study also provides evidence on how budget-based contracts impact individual risk taking behavior in a single period setting. Prior research has used multiple theories in an attempt to explain contradictory results relating to budget target difficulty and risk-taking behaviors. This study provides more evidence to the literature by further examining the impact of budget-based contracts on individuals' risk-taking behavior. A 1 x 2 between subjects experiment was conducted over five periods. Budget target was the manipulated factor at two levels: easy and moderate. Results suggest that individuals under easy budget targets make riskier decisions. Additionally, individuals' reference levels change over time and the change in reference level is greater for those individuals who continually attain their budget target, suggesting that expectations do increase the reference level. Lastly, in the current study, changes in reference level do not have a significant impact on risky decision making.
Scholar Commons Citation
Kersting, Lee Michael, "Do Changing Reference Levels affect the Long-Term Effectiveness of Incentive Contracts?" (2013). Graduate Theses and Dissertations.