Double Reference Points: the Effects of Social and Financial Reference Points on Decisions Under Risk

The existing literature is inconsistent about how social comparison affects risk attitudes. We propose a framework where the total utility is composed of the social and financial utilities. The financial utility is consistent with prospect theory (i.e., an S-shaped utility function with a financial reference point), whereas the social utility is affected by both social and financial reference points. Therefore, social risk attitudes are determined by interaction between gains/losses in both social and financial contexts. On the basis of safety-first principle, we propose that when experiencing financial gains, individuals tend to seek upside potential and take social risks (i.e., a convex social utility function). In contrast, when facing financial losses, people would be more risk seeking in social gains but more risk averse in social losses to maximize security (i.e., an inverse S-shaped utility function). We also propose that the relative importance of financial and social utilities depends on the saliency of the reference points and size of stakes. Studies 1 and 2 showed that individuals were risk seeking in both social gains and losses with social reference points alone. Studies 3 and 4 demonstrated that when both financial and social reference points were salient, participants were risk averse in both social gains and losses when facing financial gains, but risk seeking in social gains and risk averse in social losses when facing financial losses. The hypotheses derived from the theoretical framework were in general supported by our experiments.