ISSN 1671-3710
CN 11-4766/R

Advances in Psychological Science ›› 2013, Vol. 21 ›› Issue (8): 1331-1346.doi: 10.3724/SP.J.1042.2013.01331

• Editor-In-Chief Invited •     Next Articles

Tri-Reference Point Theory of Decision Making: From Principles to Applications

X. T. WANG;WANG Peng   

  1. (1 University of South Dakota, SD 57069, USA) (2 School of Psychology and Cognitive Science, East China Normal University, Shanghai, 200062, China)
  • Received:2013-03-20 Online:2013-08-15 Published:2013-08-15
  • Contact: X. T. WANG

Abstract: Tri-reference point (TRP) theory (Wang, 2008a; Wang & Johnson, 2012) makes use of three reference points, minimum requirement (MR), status quo (SQ), and goal (G) to demarcate choice outcome space into four functional regions: failure, loss, gain, and success. Based on the priority order of the reference points: MR > G > SQ, the model derives from the four regions a double S-shaped value function, connected at the point of SQ. Risk preferences switched between risk-seeking and risk-aversion when the distribution of a gamble straddles a different reference point and resulted in gain-loss and success-failure asymmetries. In sum, the basic task in making risky choices is to maximize the likelihood of reaching a goal and minimize the likelihood of falling below the MR at the same time. The TRP theory synthetically combines the powerful concept of mean-variance used in statistics and finance with the concept of reference points in the behavioral decision making literature takes into consideration the mean-variance distribution of a choice option and its relationship with the three reference points in order to reach adaptive decisions. In this paper, we introduce the basic assumptions, operational principles, experimental tests of the TRP theory, and compare the TRP theory against expected utility theory, and prospect theory. We also discuss practical guidance and implications of the TRP theory for managerial decision making.

Key words: decision making, risky choice, expected utility, reference point, value function, prospect theory