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Reference points are an integral part of many organizational practices and theories. In spite of their widespread use, there has been very little theory development on reference points themselves. We investigate and propose a general theory of reference points. First, we develop a definition of reference points. We then identify reference point dimensions and how they contribute to reference point selection. Lastly, we propose a model of reference point selection and suggest how several moderators may affect the process.
"Put your hand on a stove for a minute and it seems like an hour. Sit with that special girl for an hour and it seems like a minute. That's relativity." - Albert Einstein
Einstein's theory of relativity gave birth to the axiom, "everything is relative." Management theory and practice has certainly embraced this concept through the use of reference points. A reference point is something we use to compare new stimuli against in order to make sense of that stimuli. Using reference points is part of the perceptual process from which we describe, evaluate, and/or make decisions about things, people, and events. For example, a manager may compare this week's performance to last week's (reference point) and determine that it is substandard.
Employee A may compare her salary to employee B's (reference point) and decide she is paid fairly. Or, a human resources manager may determine that an employee's dress is inappropriate for the times. Everything is relative to some reference point.
A discussion of reference points is incorporated in many business research areas such as marketing (Shoham & Fiegenbaum, 1999; Van Auken & Adams, 1998), economics (Brown, 1995), and the management fields of strategy (Fiegenbaum, Hart & Schendel, 1996; Fershtman, 1996), decision-making (Tversky & Kahneman, 1991), negotiations (Blount, Thomas-Hunt & Neale, 1996; Kristensen & Gärling, 1997a, 1997b; White et al., 1994), compensation (Blau, 1994), ethics (Boyle, Dahlstrom & Kellaris, 1998), and risk (Kahneman & Tversky, 1979). Reference points are a central component of numerous management theories and practices including prospect theory, equity theory, performance evaluations, benchmarking, and stock market analyses.
In spite of their ubiquitous use in descriptions, evaluation, and decision-making, the question of what determines the choice of reference points remains relatively unexplored in management literature. For example, Kahneman and Tversky...