Revisiting Reference Point Formation, Gains-losses Asymmetry and Non-linear Sensitivities: One Size Does Not Fit All!



Revisiting Reference Point Formation, Gains-losses Asymmetry and Non-linear Sensitivities: One Size Does Not Fit All!

Authors

A Stathopoulos, University of Trieste, IT; S Hess, ITS, University of Leeds, UK

Description

This paper aims to broaden existing work by presenting a multi-attribute framework, more in line with the real context of many decisions.

Abstract

In contrast with expected utility theory, empirical findings indicate that decision-makers are sensitive to departures from reference points rather than states. Several tests of the reference-dependent preference framework have been carried out in experimental economics, and to a smaller extent in a choice modelling setting, to date. However, these empirical applications have generally focussed on a single behavioural phenomenon using uniform modelling approaches.

This paper aims to broaden existing work by presenting a multi-attribute framework, more in line with the real context of many decisions. Data is drawn from a discrete choice experiment (DCE) presenting alternative commuter trips. Departing from a linear-in-attributes utility definition, we progressively incorporate insights from a reference-dependent approach, namely:

- non-linearity and decreasing sensitivity in responses in terms of the currently experienced attribute point-of-departure as well as impact of shifts from the base, value

- asymmetries when separating attribute reactions into gains and losses from the reference,

- referencing occurring against other cognitive anchors (apart from current conditions).

To account for this last possibility, gains and losses are modelled against additional plausible reference points, namely ideal and acceptable travel conditions.

The framework reveals important gains in model fit and further insights into behaviour compared to standard modelling approaches, including substantial impacts on implied welfare measures.

Keywords: Choice modelling, discrete choice experiment, reference effects, non-linearity, gain/loss deviations, commuting

JEL: C25, C9, D03, R49

Publisher

Association for European Transport