Be ambitious or lower your expectation: Goals as optimal reference points

• Published in: Journal of behavioral and experimental economics 2023-10, Vol.106, p.102064, Article 102064
• Main Author: Kim, Doyoung
• Format: Article
• Language: English
• Subjects: Goal setting; Loss aversion; Optimal reference points; Reference-dependent preference
• ISSN: 2214-8043; 2214-8051
• DOI: 10.1016/j.socec.2023.102064

•We suggest that an agent sets a goal for her task and take it as her reference point.•We show that the goal and effort chosen by the agent are complementary.•We show that both high and low goals can be optimal for the agent. When people undertake a task for themselves or the organization in which they work, they often set the target outcome of the task as their goal. We suggest that people take this goal as their reference point around which they evaluate their performance as a gain or loss. We also suggest that people derive utility from their goal as it can give consumption and/or signaling values. Incorporating these ideas into a simple model in which an agent optimally chooses her goal and effort, we show that the goal and effort chosen by the agent are complementary and that both high and low goals can be optimal for her. These results are consistent with the fact that some people set high goals and work hard, while others set low goals and settle down.