Transcript Endowment effects and defaults

“Constructed” preferences
SS200 Colin Camerer
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Preferences: “complete, transitive” u(x), tradeoffs among goods
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“Constructed” suggests expression of preference is like problemsolving:
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Will you vote for John Kerry?
Answered by rapid intuition (tall, good hair) and/or deliberate logic
(positions on issues)
Alternative views of preference:
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Historical note: Axioms not empirically well-founded. They were
designed to provide simple mathematical framework for aggregation
(utility demand) and because Pareto won the “what is utility?” battle
Learned (reinforcement, “locked in a closet” story)
“Discovered” (Plott, implies path-independence)
Hybrid view: Combination of predisposition (e.g., language,
“preparedness”), learning and logic
“Constructed” preference: effects
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Context-dependence (comparative)
Description-dependent “framing
(descriptions guide attention)
Reference-dependence (changes, not levels; anchoring)
Some values “protected”/sacred (health, environment)
Is too much choice bad?
Open questions:
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Are effects smaller with familiar choices?
Experts?
Markets?
New predictions (e.g. “big tip” labor supply experiment)
Cross-species (pigeons, rats, capuchins)
1/n heuristic & partition dependence in the lab
(cf. “corporate socialism”, Scharfstein & Stein, at corporate level)
Context-dependence (comparative)
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Objects judged relative to others in a
choice set
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Asymmetric dominance
Compromise effects
Economic question: What is seller’s
optimal choice set given contextdependent preferences?
Description-dependent “framing” (descriptions
guide attention)
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Analogy to figure-ground in perception
Actual study with n=792 docs (Harvard Med,
Brigham &Women’s, Hebrew U; McNeil et al
JAMA ’80s)
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Surgery
Radiation
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Surgery
Radiation
10%
0%
treatment
90%
100%
1 yr
32%
23%
1 yr
68%
77%
5 yrs
choice
5 yrs
choice
66%
78%
34%
22%
53%
47%
82%
18%
both frames
60%
40%
Asian disease problem (-200 vs (1/3) of -600 / +400 vs (2/3) 600
Pro-choice vs pro-life
Politics: “spin” (Lakoff)
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treatment
e.g. aren’t we better off w/ Hussein gone?
Liberation vs. occupation
…other examples?
Supply-side response: Competitive framing; which frame “wins”?
Reference-dependence
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Sensations depend on reference points r
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E.g. put two hands in separate hot and cold water, then
in one large warm bath
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Loss-aversion ≡ -v(-x) > v(x) for x>0 (KT 79)
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Hot hand feels colder and the cold hand feels hotter
Or v’(x)|+ < v’(x) |- …a “kink” at 0; “first-order riskaversion” aka focussing illusion?
Requires theory of “mental accounting”
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What gains/losses are grouped together?
When are mental accounts closed/opened?
Conjecture: time, space, cognitive boundaries matter
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Example: Last-race-of-the-day effect (bets switch to longshots
to “break even”, McGlothlin 1956)
Reference-dependence modelling
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Where does r come from? MORE TBA HERE
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Default: Usually status quo or pre-experiment
condition
Koszegi-Rabin ’05: Reference point r is based on
“recent” expectations…“personal equilibrium” in which
choices optimize ref-dependent utility given r, and r is
fulfilled
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Utility from u(c)+µ(c-r)|+ λµ(r-c)|+
Exhibits multiple equilibria,Giffen good effects, endowment
effect (sensitive to “how much” one owns an object, e.g. PZ
end-of-trial or J List effects)
Prospect theory value function:
Note kink at zero and diminishing marginal sensitivity
(concave for x>0, convex for x<0)
Endowment effects (KKT JPE ’90)
KKT “mugs” experiment (JPE ‘90)
Plott-Zeiler review
Data from young (PCC) and old (80 yr olds) using
PZ instructions (Kovalchik et al JEBO in press 04)
Plott-Zeiler (AER 05) results:
replication (top) vs mugs-first (bottom)
“Status quo bias” and defaults in organ
donation (Johnson-Goldstein Sci 03)
Loss-aversion in savings decisions (note few points
with actual utility <0) from Chua & Camerer 03
(slopes .86 +, .33 - ratio 2.63)
Actual Utility Vs Optimal Utility
Actual Utility Gains/Losses
50
40
30
20
10
-50
-30
0g
-10
-10
10
-20
-30
-40
-50
Optimal Utility Gains/Losses
Data Points
Jack Knife Regression
30
50
Disposition effects in housing (Genesove and
Mayer, 2001)
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Why is housing important?
It's big:
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It’s likely that limited rationality persists
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Residential real estate $ value is close to stock market value.
most people buy houses rarely (don't learn from experience).
Very emotional ("I fell in love with that house").
House purchases are "big, rare" decisions -- mating, kids, education, jobs
Advice market may not correct errors
buyer and seller agents typically paid a fixed % of $ price (Steve Levitt
study shows agents sell their own houses more slowly and get more $).
Claim:
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People hate selling their houses at a "loss" from nominal [not inflationadjusted!] original purchase price.
Boston condo slump in nominal prices
G-M econometric model
Model: Listing price L_ist depends on “hedonic terms” and m*Loss_ist
(m=0 is no disposition effect)
…but *measured* LOSS_ist excludes unobserved quality v_i
…so the error term η_it contains true error and unobserved quality v_i
…causes upward bias in measurement of m
Intuitively: If a house has a great unobserved quality v_i, the purchase
price P^0_is will be too high relative to the regression. The model will
think that somebody who refused to cut their price is being loss-averse
whereas they are really just pricing to capture the unobserved
component of value.
Results: m is significant, smaller for investors (not
owner-occupants; less “attachment”?)
Cab driver “income targeting” (Camerer et al QJE 97)
Cab driver instrumental variables
(IV) showing experience effect
Anchored valuation: Valuations for listening to
poetry framed as labor (top) or leisure (bottom)
(Ariely, Loewenstein, Prelec QJE 03 and working
paperhttp://sds.hss.cmu.edu/faculty/Loewenstein/downloads/Sawyersubmitted.pdf
“Arbitrary” valuations
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Stock prices?
Wages (what are different jobs really worth?)
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Depends on value to firm (hard to measure)
& “compensating differentials/disutility (hard to
measure)
Exotic new products
Housing (SF Pittsburgh tend to buy “too much
house”; Simonsohn and Loewenstein 03)
Exec comp'n (govt e.g. $150k for senator, vs
CEO's, $38.5 million Britney Spears)
What econ. would happen if valuations are arbitrary?
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Perfect competition price=marginal cost…anchoring influences
quantity, not price; expect large Q variations for similar products
Attempts to influence the anchor (QVC home shopping, etc., "for
you just $59.95”).
Advertising!!!
If social comparison/imitation is an anchor, expect geographical,
temporal, social clustering (see this in law & medical practice)
E.g., CEO pay linked to pay of Directors on Board's comp'n
committee. Geographical differences in housing prices,
London,Tokyo, NYC, SF.
Interindustry wage differentials for the same work (Stanford
contracts out janitorial service so it doesn't have to pay as much; cf.
airline security personnel??)
Sports salaries: $100k/yr Miami Dolphins 1972 vs $10million/yr
modern football
Huge rise in CEO comp'n from 1990 (42 times worker wage) to 2000
(531 times); big differentials between US and Europe
Consumers who are most anchorable or influenceable will be most
faddish -- children and toys!!? (McDonald's happy meal etc)
Is too much choice bad?
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Jams study (Iyengar-Lepper):
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Assignment study:
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Short list
Long list
40% stopped, 30% purchased
60% stopped, 3% purchased
74% did the extra credit assignment
60% did the extra credit assignment
Participation in 401(k) goes down 2% for every 10 extra funds
Shoe salesman: Never show more than 3 pairs of shoes…
Medical
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6 jams
24 jams
65% of nonpatients said they would want to be in charge of medical
treatment…but only12% of ex-cancer patients said they would
Camerer conjecture: The curse of the composite
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Paraphrased personals ad: “I want a man with the good looks of Brad
Pitt, the compassion of Denzel Washington…”
Is there “too much” mate choice in big cities?
Choice-aversion
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How to model “too much choice”?
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Anticipated regret from making a mistake
“grass is greener”/buyer’s remorse
Direct disutility for too-large choice set (e.g. too complex)
Policy question:
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Markets are good at expanding choice…what is a good
institution for limiting choice?
Example: Bottled water in supermarkets
Limit “useless” substitution? What is the right amount?
Pro-govt example: Swedish privatized social security
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Offered hundreds of funds
Default fund is low-fee global index (not too popular)
Most popular fund is local tech, down 80% 1st yr
Capuchins obey law of demand
(K. Chen et al 05)
Monkey loss-aversion
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(a,b,c) means display a,
then pay b or c
One: stochastic
dominance
Two: referencedependence (risky)
Three: referencedependence (riskless)
Experimental markets & prob judgment
1. Abstract stimuli vs natural events??
pro: can precisely control information of individuals
can conpute a Bayesian prediction
con: maybe be fundamentally different mechanisms than for concrete events...
2. Do markets eliminate biases?
Yes: specialization
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Market is a dollar-weighted average opinion
Uninformed traders follow informed ones
Bankruptcy
No: Short-selling constraints
Confidence (and trade size) uncorrelated with information
Camerer (1987): Experience reduces pricing biases but *increases* allocation
biases
Contingent claims markets:
Markets enforce correct prices..BUT probability judgment influences
allocations and volume of trade (example: Iowa political markets)
IIlusions of transparency
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“Curse of knowledge”
Difficult to recover coarse partition from fine-grained one
Piaget example: New PhD’s teaching
EA Poe, “telltale heart”
Computer manuals
“ The tapper” study (tapping out songs with a pencil)
Hindsight bias
Recollection of P_t(X) at t+1 biased by whether X occurred
“I should have known!”
“You should have known” (“ignored warning signs”)
--> juries in legal cases (securities cases)
implications for principal-agent relations?
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Spotlight effect (Tom Gilovich et al)
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Eating/movies alone
Wearing a Barry Manilow t-shirt
 psychology: Shows how much we think others are attending when they’re not