WHAT IS THE REFERENCE DEPENDENCE EFFECT?
Everything is assessed in relation to everything else. We use relative value rather than absolute value to make judgments and therefore we are predisposed to compare choices.
One example of the reference dependence effect is if you were to take your friend to a movie theatre. It may have been a long time since you have been to this particular cinema or movie theatre. Last time you went you thought that high-quality seats and decadent concession stand were extremely appealing. In this hypothetical situation, you have a friend who coincidentally has a near-identical preference of cinema or movie theatre to you but has never been to the aforementioned one – and your favorite.
Upon arrival, you are surprised to find that there are no longer the same concession stand and high-quality seats that you remember and that you thought were unique to this cinema or movie theatre. In fact, many other elements have also now changed to a cheaper, lower quality and moved to a more efficient system of self-service products.
Since you last went, the seats have now become more worn and tired due to the age and as a result, they have lost the luxury appeal that you first remembered. Whilst the price has gone down, the quality has also declined. Understandably, you are disappointed by this trade-off between price and luxury but your friend, on the other hand, is more than happy with the efficiency of the service and loves the low price point.
An individual’s utility function is generally affected by their initial reference point. Reference dependence asserts a value onto a service or product and this can be assigned with numerous varying attributes where the value is measured by the deviation from that initial reference point or status quo, which is perceived as either a gain or an overall loss in value.
In summary, reference dependence is one of the core principles of prospect theory and also in behavioral economics in a more general perspective. Prospect theory is slightly different to reference dependence in that people evaluate the outcome of a situation relative to the reference point, and then classify any potential gains and losses in their mind (which are also known as other influence principles – known as loss aversion or the endowment effect).
Reference dependence can also apply to any decision-making process that involves risk and uncertainty. Online privacy research is one example. This has demonstrated that the use of identical privacy notices or different websites do not result in the same levels of disclosure all the time.
In fact, consumers regularly evaluate privacy notices relative to their status quo or their current or receipt of the past level of protection that they have held. When privacy notices are preceded by notices that are generally less protective, people are more inclined to disclose more information in comparison to those who have experienced little or no change in their privacy protection. The converse is also the case if preceding privacy notices are more protective too.
Studying influence strategies like these allow you to remain vigilant as to how you may be affected but equally leverage them to your own advantage too, to help you influence other people’s decisions.
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Duncan share more influence strategies as well as the reference dependence effect on his Youtube Channel on Youtube.com/duncanstevens – to discover more about the reference dependence effect or to even hire him to speak about influence, sales, leadership or collaboration at your event you can follow the link below. Duncan is a professional keynote speaker and global authority on influence and persuasion.