One of the most important finding in social science in my opinion is that people think and make decision in relative terms. We always compare everything cost and benefit to somekind of a reference point. Kahnemann and Tversky discovered this in the 70's with the well celebrated notion of Prospect theory. In Addition to this, apparently human's hatred toward loss, always exceed their interest in gaining something.
Two interesting question arises here, First, what is the main ingredients of our reference point, experience (physical contact) or additional new information? . Frederick, Ariely et al (2010) in psychology buletin shows that experience outperform information in decision making for Beer. The Second interesting question is what are the potential implication to this? we can imagined that this can affect all aspect of human being's decision making.
example :
Right after office hours Me and Wifey had an argument on how much we value our job/work today. How much should we be paid, or are we working hard enough to get a certain amount. It turns out we have different value. I was frustated that she underestimate the value that she did today, which I think worth a lot more than she stated. Once we arrived at home we realize that we are setting different "reservation price" simply because we had different reference point. Her reference point/point of departure was working at home, while mine was working at the office. I valued more staying at home, while she value more working at an office full with computers and hard working people.
This makes prediction of how much should be the appropriate amount of labor wages much more difficult, which is a function of past wage, Past experience (reference point) and subsequent information of future cost of living. Enrst Fiscbacher and simon gachter made several experiments on the effect of reference points and labor productivity. But I think we need more experiments with more non (lagged) wage- variables explaining labor reference points
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