research

Why the reference point matters

by Piotr Zielonka
Posted on May 07, 2019

Let's imagine two petrol stations: station A sells petrol for €1.30 per litre, while station B sells for €1.20 per litre. In an experiment to motivate people to pay in cash rather than by credit card, station A offers a 10 cents discount for payments in cash. Station B, on the other hand, "punishes" credit card payers by charging 10 cents extra. Where would you rather go to if you had to pay by card?

Interestingly, the petrol price is exactly the same at station A as station B when paying in cash (€1.20) or by card (€1.30). Apparently, customers are drawn by a "reference point": €1.30 for station A and €1.20 for station B. Any purchase at a price above the reference point will be seen as a loss, whereas a purchase at a price below that point is regarded as a gain. That's why credit card holders will be more willing to buy petrol at the first petrol station: they will not feel punished for paying by card – they just will not receive a reward in the form of a price reduction. If they were to buy petrol at the other station, they would feel punished by the required surcharge and suffer a loss.

This is just one example of how our daily (financial) decisions are affected by reference points and framing. Dr. Piotr Zielonka explains to you in more detail why it is important to take your reference point in mind when making financial decisions.

Read the full study report below!