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Prospect Theory: Where is the Reference Point?

In a new experiment, we compare two cases: a classical choice between two lotteries and the possibility of substituting one lottery to another one. Although we found the classical preference reversal phenomenon, there is no endowment effect in the case of selecting one lottery, even if the subjects start with one of both options. The subjects seem to anticipate and integrate into their reference point the potential wealth increase. By assuming that the reference point could is a lottery in the case of the willingness to accept, third-generation prospect theory explains the disparity between selling and buying prices and the preference reversal phenomenon. However, indentifying the reference point in the case of a choice requires further investigation because zero appears too low. Assuming that the reference point is a compounded lottery (equal chance of having both lotteries) appears as a worthwhile precision of the reference point in prospect theory, consistent with the preference reversal phenomenon.