Modeling dynamic inconsistency with a changing reference point

A rational principle of decision making called dynamic consistency was tested by presenting decision makers with a sequence of two gambles. The first gamble was obligatory. Before playing the first gamble, participants were asked to make a planned choice as to whether they would take the second gamble. After experiencing the actual results of the first gamble, decision makers were asked to make a final choice regarding the second gamble. Dynamic consistency requires agreement between the planned and final choices. Violations of dynamic consistency were observed, e.g. anticipating a gain in the first gamble, decision makers planned to take the second gamble; after experiencing the gain, they changed their minds and rejected the second gamble. Two models of dynamic inconsistency were compared. One assumes that experience shifts the reference point and changes the utility associated with the gamble; another assumes that experience changes the subjective probability associated with the gamble. The reference point model provided the best account for the findings. Copyright (C) 2003 John Wiley Sons, Ltd.