Reference Point Adaptation: Tests in the Domain of Security Trading

According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from current wealth, which serves as a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior.Prospect theory; reference point; asset pricing; security trading

Experimental study of effectiveness of nonpoint source water pollution control group contract.

The goal of this experimental study was to test an effectiveness of a group contract designed to control nonpoint source water pollution from farms' runoff (Pushkarskaya 2003). In particular, the regulator pays for pollution reduction credits earned by the group of the farmers, who voluntary enter the contract, and is concerned only with the total level of the abatement achieved, while the group of farmers undertakes responsibility to distribute the payment so as to induce the farmers to deliver the desired level of abatement. First round of experiments was conducted using as subjects undergraduate students from the Ohio State University, second round of experiments was conducted using as a subjects Kentucky farmers, who would be an actual subjects to this policy if it is ever implemented. Experiments with farmers can be considered as an intermediate step between traditional experiments with undergraduate students and field experiments. Results of these experiments suggest, in contrast to common believes among environmental economists, that uncertainty, associated with diffusive nature of nonpoint source water pollution, not only does not affect negatively farmers' participation in the program, but also might play a positive role in promoting a cooperation within a group.Environmental Economics and Policy,

Holistic Review in Race-Conscious University Admissions

The Supreme Court has held that race may be considered as “a factor of a factor of a factor” within a “holistic” program of university admissions if the university can satisfy a heavy burden of proving that the program is “narrowly tailored” to achieve the educational benefits of diversity. The Court has listed the desired benefits of racial diversity, but it has not discussed what evidence a university needs to prove that its program is “narrowly tailored” to achieve those benefits. This article addresses that issue. The field of psychology offers abundant research about the process of judgment and decision-making (“JDM”) and testing the validity of any particular program of decision-making. This knowledge offers valuable insights about how a university can design and, later, measure the validity of its admissions process so that it is “narrowly tailored” to achieve the educational benefits of racial diversity approved by the Supreme Court. Part I describes the standard that the Court has laid down for race-conscious admissions programs. Part II reviews the JDM literature on holistic and disaggregated decision-making. Part III discusses how the conclusions of this literature can guide the courts in applying the standard of review laid down by the Supreme Court

Reference Point Adaptation: Tests in the Domain of Security Trading

According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from current wealth, which serves as a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior

A Cross-Cultural Study of Reference Point Adaptation: Evidence from the China, Korea, and the US

We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects in all countries adapted their reference points more after a gain than after an equal-sized loss. When we introduced a forced sale intervention that highlighted a prior price change, Americans showed greater adaptation toward the new price, whereas Asians showed less adaptation. We offer possible explanations both for the cross-cultural similarities and the cross-cultural differences

A Cross-Cultural Study of Reference Point Adaptation: Evidence from the China, Korea, and the US

We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects in all countries adapted their reference points more after a gain than after an equal-sized loss. When we introduced a forced sale intervention that highlighted a prior price change, Americans showed greater adaptation toward the new price, whereas Asians showed less adaptation. We offer possible explanations both for the cross-cultural similarities and the cross-cultural differences

Reference Point Adaptation: Tests in the Domain of Security Trading

According to prospect theory (Kahneman & Tversky, 1979), gains and losses are measured from current wealth, which serves as a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the Becker, DeGroot, and Marschak (1964) procedure, we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior

Author Correction: A consensus-based transparency checklist.

An amendment to this paper has been published and can be accessed via a link at the top of the paper