Expectations as Endowments: Reference-Dependent Preferences and Exchange Behavior∗

Evidence on loss aversion and the endowment effect suggests that people evaluate outcomes with respect to a reference point. Yet little is known about what determines reference points. This experiment shows that expectations determine reference points. We endow subjects with an item and randomize the probability they will be allowed to trade it for an alternative. Subjects that are less likely to be able to trade are more likely to choose to keep their item, as predicted when reference points are determined by expectations, but not when reference points are determined by the status quo or when preferences are reference-independent