Comparing Theories of Reference-Dependent Choice

Preferences are influenced by the presence or absence of salient choice options, known as reference points. This behavioral tendency is traditionally attributed to the loss aversion and diminishing sensitivity assumptions of prospect theory. In contrast, some psychological research suggests that reference dependence is caused by attentional biases that increase the subjective weighting of the reference point's primary attributes. Although both theories are able to successfully account for behavioral findings involving reference dependence, this article shows that these theories make diverging choice predictions when available options are inferior to the reference point. It presents the results of 2 studies that use settings with inferior choice options to compare these 2 theories. The analysis involves quantitative fits to participant-level choice data, and the results indicate that most participants are better described by models with attentional bias than they are by models with loss aversion and diminishing sensitivity. These differences appear to be caused by violations of loss aversion and diminishing sensitivity in losses.