A Range-Frequency Explanation of Shifting Reference Points in Risky Decision Making

An integration of range-frequency theory, a theory of psychophysical judgment, and prospect theory, a theory of choice behavior under risk, is proposed. A critical assumption of prospect theory is that the reference point, which helps govern the riskiness of choice behavior, is modeled after Helson′s (1964) adaptation level notion. It is proposed that range-frequency theory provides a better representation of the reference point and, thus, can be used to understand with greater precision the judgment of outcomes as gains or losses and the perceived riskiness of subsequent decisions. A computer-based decision task was performed using 199 graduate and undergraduate students. Hypotheses concerning range and frequency effects on the reference point were fully supported. The judgment hypotheses were generally supported under gains, but received inconsistent support under losses. Range and frequency effects on choice were consistent with predictions under both gains and losses with one exception. Implications of this work for previous and future research involving prospect theory are discussed.