Univrsity Of Tehran Press Accounting and Auditing Review 2645-8020 32 4 2025 09 23 Investor Reactions to Selected Mental Reference Points: A Prospect Theory Perspective Investor Reactions to Selected Mental Reference Points: A Prospect Theory Perspective 624 650 104314 10.22059/acctgrev.2025.383788.1009030 FA Rashid Entezari Ph.D. Candidate, Department of Accounting, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran. 0000-0002-6847-702X Alireza Mehrazeen Associate Prof., Department of Accounting, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran. 0000-0003-4326-8616 Hamid Reza Bazzaz Zadeh Torbati Assistant Prof., Department of Accounting, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran. Zahra Bagherzadeh Golmakani Assistant Prof., Department of Psychology, Neyshabur Branch, Islamic Azad University, Neyshabur, Iran. Journal Article 2024 10 19 <strong>Objective</strong> Based on Prospect Theory, investors make most of their decisions through instant and automatic processing of reference points, rather than through comprehensive information processing as would be expected from a rational investor. Investors’ intuitive reactions to information are often shaped by a general mental impression of the situation, which is perceived in terms of gains or losses. This study hypothesizes that when the Price-to-Earnings (P/E) ratio of a company is lower than that of the industry, investors’ reactions reflect a mental perception of gain, and conversely, when the company’s P/E ratio is higher than the industry’s, the reaction reflects a perception of loss. Therefore, this study examines the relationship between investors' intuitive reactions, as indicated by abnormal returns, and three alternative reference points: the deviation of the company's P/E ratio from the industry average for the current year’s actual figures, the deviation for the current year’s forecasted figures, and the previous year's abnormal returns. <strong>Methods</strong> This research is applied in nature and descriptive-correlational in method. Given that the study utilizes historical company data, it is categorized as ex-post facto research. Furthermore, as it derives conclusions based on empirical evidence and observable data, it aligns with a positivist research paradigm. The study collected and analyzed financial data and information from 105 companies, covering the period from 2010 to 2023, encompassing 1,470 firm-year observations. The data were gathered from annual financial statements and daily trading information during the estimation period (60 days before the shareholders' meeting) and the event period (three days before to three days after the meeting). <strong>Results</strong> The findings indicate that investors' intuitive reactions are significantly related to the three reference point indicators: the deviation of the company's P/E ratio from the industry average for the current year’s actual figures, the forecasted figures, and the previous year’s abnormal returns. These selected reference points effectively explain investors' intuitive reactions. This influence is particularly evident when investors, drawing on past experiences (previous period’s abnormal returns), perform quick calculations (the deviation of the company’s P/E ratio from the industry), and confirm a future outlook (the deviation of the forecasted P/E ratio from the industry) based on rapid judgments. These findings are consistent with Kahneman and Tversky's Prospect Theory, which suggests that investors are more likely to base their decisions on reference points, within a short timeframe, using automatic evaluations. <strong>Conclusion</strong>  Investors tend to form an intuitive perception of the situation, as either a gain or a loss, based on general data related to familiar reference points, and make decisions using an automatic system, which requires less time. These findings help bridge the existing research gap in the literature regarding Prospect Theory and the quantitative analysis of investors' intuitive reactions. They also provide a foundation for future research to better identify the reference points that underlie investors' intuitive decision-making processes. <strong>Objective</strong> Based on Prospect Theory, investors make most of their decisions through instant and automatic processing of reference points, rather than through comprehensive information processing as would be expected from a rational investor. Investors’ intuitive reactions to information are often shaped by a general mental impression of the situation, which is perceived in terms of gains or losses. This study hypothesizes that when the Price-to-Earnings (P/E) ratio of a company is lower than that of the industry, investors’ reactions reflect a mental perception of gain, and conversely, when the company’s P/E ratio is higher than the industry’s, the reaction reflects a perception of loss. Therefore, this study examines the relationship between investors' intuitive reactions, as indicated by abnormal returns, and three alternative reference points: the deviation of the company's P/E ratio from the industry average for the current year’s actual figures, the deviation for the current year’s forecasted figures, and the previous year's abnormal returns. <strong>Methods</strong> This research is applied in nature and descriptive-correlational in method. Given that the study utilizes historical company data, it is categorized as ex-post facto research. Furthermore, as it derives conclusions based on empirical evidence and observable data, it aligns with a positivist research paradigm. The study collected and analyzed financial data and information from 105 companies, covering the period from 2010 to 2023, encompassing 1,470 firm-year observations. The data were gathered from annual financial statements and daily trading information during the estimation period (60 days before the shareholders' meeting) and the event period (three days before to three days after the meeting). <strong>Results</strong> The findings indicate that investors' intuitive reactions are significantly related to the three reference point indicators: the deviation of the company's P/E ratio from the industry average for the current year’s actual figures, the forecasted figures, and the previous year’s abnormal returns. These selected reference points effectively explain investors' intuitive reactions. This influence is particularly evident when investors, drawing on past experiences (previous period’s abnormal returns), perform quick calculations (the deviation of the company’s P/E ratio from the industry), and confirm a future outlook (the deviation of the forecasted P/E ratio from the industry) based on rapid judgments. These findings are consistent with Kahneman and Tversky's Prospect Theory, which suggests that investors are more likely to base their decisions on reference points, within a short timeframe, using automatic evaluations. <strong>Conclusion</strong>  Investors tend to form an intuitive perception of the situation, as either a gain or a loss, based on general data related to familiar reference points, and make decisions using an automatic system, which requires less time. These findings help bridge the existing research gap in the literature regarding Prospect Theory and the quantitative analysis of investors' intuitive reactions. They also provide a foundation for future research to better identify the reference points that underlie investors' intuitive decision-making processes. https://acctgrev.ut.ac.ir/article_104314_c94d7b50f1ae895adc36b18a36fbb3c7.pdf