Multiple determinants of framing referents in tax reporting and compliance

Prospect theory's implications for tax reporting have been investigated primarily by examining taxpayers' risk preferences surrounding two potential reference points: their current cash position and their expectations regarding payments and/or refunds due. Evidence has generally supported the role of cash position in framing reporting decisions while failing to support a similar role for expectations. However, most research examining the role of expectations in framing risky choice has experimentally assigned expectations to decision makers. If expectations become meaningful referents via adaptation, the construct validity of experimentally-assigned expectations is suspect. Using participants' own prior tax filings to determine expectations, we find evidence that expectations and cash position jointly frame the filing decision. Further, consistent with adaptation serving as the mechanism through which expectations frame reporting preferences, we find that the severity of the framing effect attributed to expectations was significantly mitigated when time to adapt to variances from those expectations was allowed. (C) 2002 Elsevier Science (USA).