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Reference Dependence

Definition 1

Reference dependence is one of the fundamental principles of prospect theory and behavioral economics more generally. In prospect theory (Kahneman & Tversky, 1979), people evaluate outcomes relative to a reference point, and then classify gains and losses (see also loss aversion, endowment effect). Reference dependence can apply to any decision involving risk and uncertainty. Online privacy research, for example, has shown that identical privacy notices do not always result in the same levels of disclosure (Adjerid et al., 2013). Consumers evaluate privacy notices relative to the status quo—their current or past level of protection. When privacy notices are preceded by notices that are less protective, people disclose more compared to those who have experienced no change in privacy protection. The converse is the case if preceding privacy notices are more protective.

Source: Behavioral Economics

Definition 2

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