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On complementary symmetry and reference dependence

Author

Listed:
  • Michał Lewandowski
  • Łukasz Woźny
Abstract
This paper reevaluates the complementary symmetry hypothesis and the supporting experimental evidence. Originally the hypothesis was stated for binary risky prospects. We generalize the hypothesis to arbitrary state-contingent real-valued acts, thus extending the domain from risk to uncertainty/ambiguity and allowing for multiple outcomes. Existing experiments tested the hypothesis using selling and buying prices and found systematic violations. We argue that in order to be consistent with the hypothesis one should replace selling with short-selling. We thus define a new elicitation task and run an experiment to test our conjecture. We replicate previously observed violations in the old setting and find strong support for the hypothesis in the new setting. In addition, our results shed new light on the validity of various reference point setting rules.

Suggested Citation

  • Michał Lewandowski & Łukasz Woźny, 2020. "On complementary symmetry and reference dependence," KAE Working Papers 2020-059, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2020059
    as

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    File URL: http://kolegia.sgh.waw.pl/pl/KAE/Documents/WorkingPapersKAE/WPKAE_2020_059.pdf
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    References listed on IDEAS

    as
    1. Ulrich Schmidt & Chris Starmer & Robert Sugden, 2008. "Third-generation prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 203-223, June.
    2. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    3. Sayman, Serdar & Onculer, Ayse, 2005. "Effects of study design characteristics on the WTA-WTP disparity: A meta analytical framework," Journal of Economic Psychology, Elsevier, vol. 26(2), pages 289-312, April.
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    5. Michael H. Birnbaum, 2018. "Empirical evaluation of third-generation prospect theory," Theory and Decision, Springer, vol. 84(1), pages 11-27, January.
    6. Birnbaum, Michael H. & Zimmermann, Jacqueline M., 1998. "Buying and Selling Prices of Investments: Configural Weight Model of Interactions Predicts Violations of Joint Independence," Organizational Behavior and Human Decision Processes, Elsevier, vol. 74(2), pages 145-187, May.
    7. Krzysztof Kontek & Michal Lewandowski, 2018. "Range-Dependent Utility," Management Science, INFORMS, vol. 64(6), pages 2812-2832, June.
    8. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
    9. Mellers, Barbara A. & Ordonez, Lisa D. & Birnbaum, Michael H., 1992. "A change-of-process theory for contextual effects and preference reversals in risky decision making," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(3), pages 331-369, August.
    Full references (including those not matched with items on IDEAS)

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    Keywords

    complementary symmetry; short selling price; buying price; reference dependence.;
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