In a lab experiment, we test standard consumption and portfolio choice predictions against those of expectations-based reference-dependent and hyperbolic-discounting preferences. The experiment consists of four periods. In the first period, subjects are endowed with experimental wealth. Then, subjects decide how much of their experimental wealth to "consume" by surfing the internet instead of performing an alternative monotone task. To consume in future periods, they either store their wealth safely or invest it into a risky lottery. The main predictions of reference-dependent preferences, which stand in contrast to those of standard and hyperbolic-discounting preferences are: First, the consumption share is decreasing in the investment outcome. Intuitively, the agent delays painful cuts in consumption to let his expectations-based reference point decrease. Second, the portfolio share is decreasing in the outcome. The agent increases his risk exposure in bad states to not realize too many loss feelings about future consumption. Third, the agent's behavior is not time consistent. The agent likes to increase his consumption and risky asset holdings above expectations today, but considers his expectations when making plans about tomorrow.
Pagel, Michaela, and Christopher Zeppenfeld. "Expectations-Based Reference-Dependent Consumption and Portfolio Choice: Evidence from the Lab." Columbia Business School, 2013.
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