Reference Dependence

What is reference dependence?

Reference dependence means that the value assigned to an outcome depends on a comparison level, such as the current situation or an expectation. Outcomes are evaluated as changes relative to that level.

Research foundation

Tversky and Kahneman’s 1991 model extends reference-dependent valuation to choices without risk. It treats reference dependence, loss aversion, and diminishing sensitivity as distinct features.

Reference-dependent valuation is part of prospect theory. It has also been used to explain the endowment effect, in which ownership can change what someone is willing to accept or pay for an item. That application needs more than a reference point alone: the other assumptions matter too.

Reference dependence example

Someone may compare a proposed salary with their current pay, while another person compares the same offer with an expected promotion. This example identifies possible benchmarks; it does not establish which one either person actually uses.

Limits of reference dependence

Reference-dependent models can describe preference patterns, but predictions require specifying the reference point and other model assumptions. Because expectations and circumstances can change, ask whether the same benchmark is being used across decisions or over time.