Reference-Dependent Risk-Taking in the NBA

This paper examines whether risk preferences in the NBA are reference-dependent and attempts to identify the reference point. Using data from 10 NBA seasons (12,890 games), I find that teams are more likely to attempt a riskier three-point shot (vs. a less risky two-point shot) when below the reference point than above it, consistent with Prospect Theory. The results further show that teams are not influenced by a single fixed reference point, but instead, their choices depend on the score difference, most recent score change, and pregame expectations. Additionally, the weight given to the reference point changes over the course of the game. Teams show a breakeven effect, such that they are more likely to attempt a three-point shot when doing so can tie the game. They also show behavior consistent with mental accounting, as the reference point carries more weight at the end of a quarter than at the beginning. These results provide further real-world evidence for reference-dependent risk preferences while highlighting the challenge of applying reference-dependent models to real-world settings.