Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments *

While evidence suggests that people evaluate outcomes with respect to reference points, little is known about what determines them. We conduct two experiments that show that reference points are determined, at least in part, by expectations. In an exchange experiment, we endow subjects with an item and randomize the probability they will be allowed to trade. Subjects that are less likely to be able to trade are more likely to choose to keep their item. In a valuation experiment, we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness-to-accept for it. The high probability treatment increases valuation of the item by 20--30%. Copyright 2011, Oxford University Press.