Social Reference Points and Risk Taking

Abstract

Social reference points have been identified to be important determinants of individuals’ welfare. We investigate the consequences of social reference points for risk taking in a laboratory experiment. In the main treatments, risk-taking subjects observe the predetermined earnings of peer subjects when making a risky choice. We exogenously manipulate peers’ earnings and find a significant treatment effect: decision makers make less risk-averse choices in the case of larger peers’ earnings. The treatment effect is consistent with an application of prospect theory to social reference points and cannot be explained by reference points based on counterfactual information, anchoring, and experimenter demand effects. In additional analyses, we show that diminishing sensitivity seems to play an important role in subjects’ risky choices. We explore also whether inequity aversion and expectations-based reference points can account for our findings and conclude that they do not provide plausible alternative explanations for them. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This research was financially supported by the Bonn Graduate School of Economics and the Center for Economics and Neuroscience in Bonn. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4698 .