Varying reference-point salience

TL;DR

This paper empirically tests how the salience of reference points affects loss aversion in effort provision using a natural experiment with professional individuals in competitive settings.

Contribution

It provides the first direct real-world evidence that reference-point salience influences loss aversion in effort decisions.

Findings

Individuals with positive expectations outperform those with negative expectations.

The effect of expectations on effort is significant only when the reference point is salient.

Salience of reference points moderates the impact of expectations on effort provision.

Abstract

The salience of reference points may theoretically influence the loss aversion mechanism in effort provision. However, we still lack a direct test from real competitive settings that uses exogenous variation to measure the effect of salience. We exploit a natural experiment where highly professional and incentivized individuals perform in real competitive settings with exogenous variation of reference-point salience. While a relevant reference point is salient in some cases, it is obscured in others, which, under reasonable assumptions, may affect individuals' expectations. This enables us to examine the effect of reference-point salience on the loss aversion mechanism in effort provision. Our regression discontinuity analyses reveal that individuals with positive expectations outperform those with negative expectations, but only when the reference point is salient.