ABSTRACT
The standard economic model of decision making assumes that preferences do not depend on — they are independent of — reference points. Although this assumption serves to make the standard model simpler, it potentially does so at the expense of accurately describing behavior in the real world. This chapter documents anomalous behaviors that are inconsistent with reference-independent preferences. It begins with evidence of the endowment effect, i.e., individuals value an object in their possession more than if the same object were not in their possession. The next section suggests that individuals code risky outcomes as gains or losses, and are excessively averse to small-stakes lotteries. The chapter concludes with a famous anomaly from finance: the equity premium puzzle. The evidence throughout the chapter comes from a wide range of methods, including lab experiments, field experiments, thought experiments, and observational data. Each anomaly points to preferences that not only depend on reference points, but that weight losses more than gains.
