Reference dependence and loss aversion in consumer choice processes

Sankar Sen, University of Pennsylvania

Abstract

Much research suggests that consumers' perceptions of value are frequently articulated relative to a reference level; options are valued as gains and losses relative to a reference point. Moreover, losses from this reference point are weighed more heavily than equivalent gains. This asymmetry has been termed loss aversion. This dissertation examines the effects of reference dependence and loss aversion on the processes and outcomes of choice among multiattribute options in multialternative choice sets. Based on past research, we propose that consumers often designate one brand in the choice set as a reference brand and then evaluate, in a loss averse manner, the attractiveness of competing brands as gains and losses from this reference brand. In a set of two experimental studies, we propose and test hypotheses regarding the effects of reference dependence on choice outcomes and processes. Specifically, we examine how loss aversion affects preferences within two and three alternative efficient choice sets. Moreover, we investigate a loss aversion based explanation for the attraction effect. In terms of the choice process, we examine how reference dependence and loss aversion affect information search, and whether these process-level changes mediate reference-dependent preferences. In line with previous evidence, we find that in efficient choice sets, reference status enhances a brand's attractiveness. A similar reference effect is obtained for the dominating option in asymmetrically dominated choice sets. Moreover, we find some support for our account of the attraction effect that hinges on aggregate reference brand relocations and loss aversion. Based on information acquisition patterns, we find that the perceptual phenomena of reference dependence and loss aversion have specific cognitive processing analogs. Compared to a control condition, more attention is paid to reference and loss information. Similarly, more comparisons are made involving reference and loss information. In addition, we find some evidence for a process-level mediation of reference-dependent preferences. We conclude that a reference dependence can change the processes and outcomes of consumer choice in systematic and predictable ways. The implications of such reference-dependent choice behavior for consumers and marketers are discussed.

Subject Area

Marketing

Recommended Citation

Sen, Sankar, "Reference dependence and loss aversion in consumer choice processes" (1993). Dissertations available from ProQuest. AAI9321474.
https://repository.upenn.edu/dissertations/AAI9321474

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