“Constructed” preferences1/n heuristic & partition dependence in the lab (cf. “corporate socialism”Context-dependence (comparative)Description-dependent “framing” (descriptions guide attention)Reference-dependenceReference-dependence modellingProspect 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 reviewData from young (PCC) and old (80 yr olds) using PZ instructions (Kovalchik et al JEBO in press 04)“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 03Disposition effects in housing (Genesove and Mayer, 2001)Boston condo slump in nominal pricesG-M econometric modelResults: m is significant, smaller for investors (not owner-occupants; less “attachment”?)Cab driver “income targeting” (QJE 97)Cab driver instrumental variables (IV) showing experience effectAnchored 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” valuationsWhat econ. would happen if valuations are arbitrary?Is too much choice bad?Choice-aversionExperimental markets & prob judgmentIIlusions of transparency““Constructed” preferencesConstructed” preferencesStudy effects relative to “complete, transitive” u(x)Study effects relative to “complete, transitive” u(x)““Constructed” means expression of preference is like Constructed” means expression of preference is like problem-solving: problem-solving: Will you vote for John Kerry? Will you vote for John Kerry? Answered by rapid intuition (tall, good hair) and deliberate Answered by rapid intuition (tall, good hair) and deliberate logic (positions on issues)logic (positions on issues)Context-dependence (comparative)Context-dependence (comparative)Description-dependent “framingDescription-dependent “framing (descriptions guide attention) (descriptions guide attention)Reference-dependence (changes, not levels; anchoring)Reference-dependence (changes, not levels; anchoring)Some values “protected”/sacred (health, environment)Some values “protected”/sacred (health, environment)Is too much choice bad?Is too much choice bad?Open questions:Open questions:Are effects smaller with familiar choices? Are effects smaller with familiar choices? Experts? Experts? Markets?Markets?New predictions (e.g. “big tip” labor supply experiment)New predictions (e.g. “big tip” labor supply experiment)1/n heuristic & partition dependence in the lab (cf. 1/n heuristic & partition dependence in the lab (cf. “corporate socialism”“corporate socialism”Context-dependence (comparative)Context-dependence (comparative)Objects judged relative to others in a Objects judged relative to others in a choice setchoice setAsymmetric dominanceAsymmetric dominanceCompromise effectsCompromise effectsEconomic question: What is seller’s Economic question: What is seller’s optimal choice set given context-optimal choice set given context-dependent preferences? dependent preferences?Description-dependent “framing” (descriptions Description-dependent “framing” (descriptions guide attention)guide attention)Analogy to figure-ground in perceptionAnalogy to figure-ground in perceptionActual study with n=792 docs (Harvard Med, Brigham Actual study with n=792 docs (Harvard Med, Brigham &Women’s, Hebrew U; McNeil et al JAMA ’80s)&Women’s, Hebrew U; McNeil et al JAMA ’80s)treatment 1 yr 5 yrstreatment 1 yr 5 yrschoicechoiceSurgery 10% 32% 66%Surgery 10% 32% 66%53%53%Radiation 0% 23% 78% Radiation 0% 23% 78% 47%47%treatment 1 yr 5 yrstreatment 1 yr 5 yrschoicechoice both frames both framesSurgery 90% 68% 34%Surgery 90% 68% 34% 82% 82% 60% 60%Radiation 100% 77% 22% Radiation 100% 77% 22% 18% 40% 18% 40%Asian disease problemAsian disease problemPro-choice vs pro-lifePro-choice vs pro-lifeEconomic idea: Competitive framing; which frame “wins”? Economic idea: Competitive framing; which frame “wins”? Politics: “spin” (Lakoff)Politics: “spin” (Lakoff)e.g. aren’t we better off w/ Hussein gone? e.g. aren’t we better off w/ Hussein gone? Liberation vs. occupationLiberation vs. occupationReference-dependenceReference-dependenceSensations depend on reference points rSensations depend on reference points rE.g. put two hands in separate hot and cold E.g. put two hands in separate hot and cold water, then in one large warm bathwater, then in one large warm bathHot hand feels colder and the cold hand feels hotter Hot hand feels colder and the cold hand feels hotter Loss-aversion Loss-aversion ≡ v’(x)|≡ v’(x)|++ < v’(x) | < v’(x) |- - a “kink” at 0; “first-order risk-aversion” aka a “kink” at 0; “first-order risk-aversion” aka focussing illusion?focussing illusion?Requires theory of “mental accounting”Requires theory of “mental accounting”What gains/losses are grouped together?What gains/losses are grouped together?When are mental accounts closed/opened?When are mental accounts closed/opened?Conjecture: time and space matter, and cognitive Conjecture: time and space matter, and cognitive boundariesboundariesExample: Last-race-of-the-day effect (bets switch to Example: Last-race-of-the-day effect (bets switch to longshots to “break even”, McGlothlin 1956)longshots to “break even”, McGlothlin 1956)Reference-dependence modellingReference-dependence modellingWhere does r come from?Where does r come from?Experiments: Usually status quo or pre-Experiments: Usually status quo or pre-experiment conditionexperiment conditionKoszegi-Rabin ’03: Reference point is based on Koszegi-Rabin ’03: Reference point is based on (lagged) expectations(lagged) expectationsSolves problem of why r is not chosen to be Solves problem of why r is not chosen to be superlowsuperlowConcept of “personal equilibrium” in