Modelling Choice and Valuation in Decision Experiments
This paper develops a parsimonious descriptive model of individual choice and valuation in the kinds of experiments that constitute a substantial part of the literature relating to decision making under risk and uncertainty. It suggests that many of the best-known ‘regularities’ observed in those experiments may arise from a tendency for participants to perceive probabilities and payoffs in a particular way. This model organises more of the data than any other extant model and generates a number of novel testable implications which are examined with new data.
The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect", Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: A Reassessment (with A. Isoni and R. Sugden)
Plott and Zeiler (2005) report that the willingness-to-pay/willingness-to-accept disparity is absent for mugs in a particular experimental setting, designed to neutralize misconceptions about the procedures used to elicit valuations. This result has received sustained attention in the literature. However, other data from that same study, not published in that paper, exhibit a significant and persistent disparity when the same experimental procedures are applied to lotteries. We report new data confirming both results, thereby suggesting that the presence or absence of a disparity may be a more complex issue than some may have supposed.
Preference Reversals and Disparities between Willingness to Pay and Willingness to Accept in Repeated Markets, (with Chris Starmer and Robert Sugden)
Previous studies suggest that two otherwise robust ‘anomalies’ – preference reversals and disparities between buying and selling valuations – are eroded when respondents participate in repeated markets. We report an experiment which investigates whether this is true when factors neglected in previous studies are controlled, and which distinguishes between anomalies revealed in the behaviour of individual market participants and anomalies revealed in market prices. Our results confirm the decay of buy/sell disparities, but not of preference reversal. This raises doubts about the hypothesis that, in general, repeated markets reveal anomaly-free preferences, even among the marginal traders who determine prices.
Responsibility, Scale and the Valuation of Rail Safety (with Judith Covey, Angela Robinson and Michael Jones-Lee)
We report the results of two stated-preference surveys (one conducted using face-to-face interviews, the other via the internet) which examined how the values people place on preventing fatalities from rail accidents are affected by the extent to which victims are responsible for their death, and the scale of the accident. The results showed that respondents placed a premium on preventing deaths which involved a failure of the rail system, rather than the irresponsible behaviour of an adult victim, though this differential was less marked when the person behaving irresponsibly was a child, rather than an adult. However, the prevention of a death in a multiple-fatality accident was not accorded a significantly higher value than the prevention of death in the single-fatality case. As far as the overall results are concerned, there was an encouragingly close correspondence between the findings of the face-to-face and internet surveys.
Taste Uncertainty and Status Quo Effects in Consumer Choice
We use reference-dependent expected utility theory to develop a model of status quo effects in consumer choice. We hypothesise that, when making their decisions, individuals are uncertain about the utility that will be yielded by their consumption experiences in different ‘taste states’ of the world. If individuals have asymmetric attitudes to gains and losses of utility, the model entails acyclic reference-dependent preferences over consumption bundles. The model explains why status quo effects may vary substantially from one decision context to another and why some such effects may decay as individuals gain market experience.
Trying to Estimate a Monetary Value of a QALY
In this paper we study the feasibility of estimating a monetary value for a QALY (MVQ). Using two different surveys of the Spanish population (total n = 892), we consider whether willingness to pay (WTP) is (approximately) proportional to the health gains measured in QALYs. We also explore whether subjects’ responses are prone to any significant biases. We find that the estimated MVQ varies inversely with the magnitude of health gain. We also find two other (ir)regularities: the existence of ordering effects; and insensitivity of WTP to the duration of the period of payment. Taken together, these effects result in large variations in estimates of the MVQ. If we are ever to obtain consistent and stable estimates, we should try to understand better the sources of variability found in the course of this study.
Conflicting Violations of Transitivity and Where They May Lead Us
The literature contains evidence from some studies of asymmetric patterns of choice cycles in the direction consistent with regret theory, and evidence from other studies of asymmetries in the opposite direction. This article reports an experiment showing that both patterns occur within the same sample of respondents operating in the same experimental environment. We discuss the implications for modelling behaviour in such environments
The Sensitivity of Subjective Probability to Time and Elicitation Method
The paper reports the results of a survey designed to elicit probability judgements for different types of events: ‘pure chance’ events, for which objective probabilities can be calculated; ‘public’ events, about which there may be some discussion in social groups and the media; and ‘personal’ events, such as those relating to crime or accidental injury. Even among respondents deemed to be ‘well-calibrated’ in the domain of pure chance events we find limited sensitivity to the ‘temporal scope’ of public and personal events—this being especially marked for personal events. We discuss possible reasons and some implications for policy-related survey work.
Imprecision as an Account of the Preference Reversal Phenomenon
Many individuals’ choices and valuations involve a degree of uncertainty/imprecision. This paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms, one of which appears not to have been reported previously. The model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained. The results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people’s decisions.
Can Ranking Techniques Elicit Robust Values?
This paper reports two experiments which examine the use of ranking methods to elicit ‘certainty equivalent’ values. It investigates whether such methods are able to eliminate the disparities between choice and value which constitute the ‘preference reversal phenomenon’ and which thereby pose serious problems for both theory and policy application. The results show that ranking methods are vulnerable to distorting effects of their own, but that when such effects are controlled for, the preference reversal phenomenon, previously so strong and striking, is very considerably attenuated.
(How) Can We Value Health, Safety and the Environment?
The assumptions that underpin the conventional economic model of ‘rational agents’ tend to be substantially violated by data from surveys that try to elicit people’s values for health, safety and environmental goods. Psychological research suggests that there may be a large affective component in people’s responses to such surveys, with the result that those data are not amenable to the ‘logic’ of economic rationality. This raises questions both about the way we model human judgment and decision processes, and also about the use of survey data to guide public policy in these and other areas.
Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data
This paper considers some of the questions raised by the fact that people's behaviour—including their behaviour in experimental environments—has a stochastic component. The nature of this component may be crucial to the interpretation of the patterns of data we observe and the choice of statistical criteria for favouring one hypothesis at the expense of others. However, it is arguable that insufficient consideration has been given to the way(s) in which the stochastic element is modelled. The paper aims to explore some of the issues involved.
The Willingness To Accept Value of Statistical Life Relative to the Willingness To Pay Value: Evidence and Policy Implications
Large disparities between willingness to accept (WTA) and willingness to pay (WTP) based values of statistical life are commonly encountered in empirical studies. Standard economic theory suggests that if a public good is easily substitutable there should be no marked disparity between WTA and WTP values for the good, though the disparity increases with reduced substitutability. However, psychologists have shown that people often treat gains and losses asymmetrically and tend to require a substantially larger increase in wealth to compensate for a loss than the amount they would be willing to pay for an equivalent gain. Although most transport projects may aim to improve safety, situations arise when a relaxation of an existing regulation saves resources but increases the risk of death and injuries. A survey was recently carried out in New Zealand to determine people’s willingness to pay to reduce road risks and their willingness to accept compensation for an increase in risk. This paper reports the disparity observed between the two measures and considers some of the problems posed for policymakers.
Estimating the Intangible Victim Costs of Violent Crime
Current estimates of the intangible costs of violent crime, such as the pain, grief and suffering experienced by victims, are not very robust. This paper sets out the different methods that can be used to provide more defensible cost estimates, and that use data that are currently available. One of these methods involves estimating the number of quality-adjusted life years (QALYs) that victims of crime lose. The estimates suggest that rape results in the biggest losses, followed (in descending order) by: other wounding, common assault, serious wounding, murder, robbery and sexual assault.
Do Anomalies Disappear in Repeated Markets?
There is some evidence that, as individuals participate in repeated markets, 'anomalies' tend to disappear. One interpretation is that individuals – particularly marginal traders – are learning to act on underlying preferences which satisfy standard assumptions. An alternative interpretation, the 'shaping' hypothesis, is that individuals' preferences are adjusting in response to cues given by market prices. The paper reports an experiment designed to discriminate between these hypotheses with particular reference to the disparity between willingness to pay and willingness to accept.
A Microeconometric Test of Alternative Stochastic Theories of Risky Choice,
The random preference, Fechner (or ‘white noise’), and constant error (or ‘tremble’) models of stochastic choice under risk are compared. Various combinations of these approaches are used with expected utility and rank-dependent theory. The resulting models are estimated in a random effects framework using experimental data from two samples of 46 subjects who each faced 90 pairwise choice problems. The best fitting model uses the random preference approach with a tremble mechanism, in conjunction with rank-dependent theory. As subjects gain experience, trembles become less frequent and there is less deviation from behaviour consistent with expected utility theory.
Public Perceptions of Risk and Preference-Based Values of Safety
This article reports the results of two studies aimed at estimating preference-based values of safety in three contexts—namely rail, domestic fires and fires in public places—relative to the corresponding value for roads using matching (or equivalence ) questions. In addition, both studies included a variety of questions intended to shed light on respondents' perceptions of risk and attitudes to safety in the various contexts. While the two studies were, to all intents and purposes, identical in the procedure that they employed, the essential difference between them was that the first study took place in late 1998, whereas the second study was carried out in early 2000 in the aftermath of a major rail accident at Ladbroke Grove near London's Paddington station which occurred in October 1999 and in which 29 passengers and 2 train drivers died. In addition, the second study sample was deliberately weighted to contain an above-average proportion of regular rail users. These studies demonstrated how certain factors which have been shown to affect people's perception of risk also affected our respondents' priorities over safety programs. The results also showed, however, that the impact of these perceptions upon the trade-offs between preventing deaths in different hazard contexts was a good deal less pronounced than has been suggested by the value differentials that are currently implicit—and in some cases, explicit—in public policy making.