Do individuals perform better when the performance reference point is stricter? Evidence from golf competitions with handicap rules

It is well-documented that individuals’ behavior is influenced by reference points. However, while there is plentiful research on the role of loss aversion in financial decision-making, less is known about how individuals adopt, and react to, reference points for their own job performance. Is the performance reference value for a given task based on a rational evaluation of the task’s difficulty level or can individuals be induced to adopt other more salient but less rationally grounded reference points? The answer could have important implications for, e.g., managerial practices. I contribute with evidence from Stableford golf competitions, in which an individual-specific expected result, or reference point, is set for each hole based on the player’s ability (i.e. handicap) and the hole’s difficulty level. Exploiting the fact that the reference point varies across holes for a given ability and across ability for a given hole, I estimate the effect of a stricter reference point on performance in a model with ability and hole fixed effects. In line with adoption of reference points that are salient but not always informative of the hole’s true difficulty level, I find that a stricter exogenously set reference point causally improves players’ performance.