Thursday, April 28, 2011

Expectations and reference points: Andreas Fuster

Andreas Fuster successfully defended his dissertation today on various aspects of behavioral economics. The part that was his job talk was his experimental paper, “Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments,” written with his fellow graduate student Keith Ericson and forthcoming in the QJE. The high level motivation for the paper is to study carefully in the lab how expectations are important for consumer decisions, and to better understand how expectations are formed. The more particular focus of the paper is reference-dependent preferences, with the idea that reference points are determined by expectations as formulated by Koszegi and Rabin. And the very particular focus of the paper is the recently controversial “endowment effect,” related to experimental observations that subjects seem reluctant to trade objects with which they are endowed.

Andreas and Keith explore whether the “reference point” that subjects form is related more to their expectations about what they may own in the future than to their current endowment. In a very carefully designed experiment, they manipulate expectations by assigning subjects a probability that they will receive an object, or have an opportunity to trade it, and then observe various measures of how subjects evaluate the object as a function of these probabilities.  Their results provide the most convincing support to date of the Koszegi-Rabin model of expectation based reference points.

When asked how he planned to spend the rest of the day, Andreas replied "PhD: pretty heavy drinking."

Welcome to the club, Andreas.

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