“Constructed” preferences SS200 Colin Camerer“Constructed” preference: effects1/n heuristic & partition dependence in the lab (cf. “corporate socialism”, Scharfstein & Stein, at corporate level)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)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)Disposition 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” (Camerer et al 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-aversionCapuchins obey law of demand (K. Chen et al 05)Monkey loss-aversionExperimental markets & prob judgmentIIlusions of transparency““Constructed” preferencesConstructed” preferencesSS200 Colin CamererSS200 Colin CamererPreferences: “complete, transitive” u(x), tradeoffs among Preferences: “complete, transitive” u(x), tradeoffs among goodsgoodsHistorical note: Axioms not empirically well-founded. They were Historical note: Axioms not empirically well-founded. They were designed to provide simple mathematical framework for designed to provide simple mathematical framework for aggregation (utilityaggregation (utility demand) and because Pareto won the demand) and because Pareto won the “what is utility?” battle“what is utility?” battle““Constructed” suggests expression of preference is like Constructed” suggests 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/or deliberate Answered by rapid intuition (tall, good hair) and/or deliberate logic (positions on issues)logic (positions on issues)Alternative views of preference: Alternative views of preference: Learned (reinforcement, “locked in a closet” story) Learned (reinforcement, “locked in a closet” story) ““Discovered” (Plott, implies path-independence)Discovered” (Plott, implies path-independence)Hybrid view: Combination of predisposition (e.g., language, Hybrid view: Combination of predisposition (e.g., language, “preparedness”), learning and logic“preparedness”), learning and logic““Constructed” preference: effectsConstructed” preference: effectsContext-dependence (comparative)Context-dependence (comparative)Description-dependent “framingDescription-dependent “framing (descriptions guide attention) (descriptions guide attention)Reference-dependence (changes, not levels; Reference-dependence (changes, not levels; anchoring)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)Cross-species (pigeons, rats, capuchins)Cross-species (pigeons, rats, capuchins)1/n heuristic & partition dependence in the lab 1/n heuristic & partition dependence in the lab (cf. “corporate socialism”, Scharfstein & Stein, at corporate level)(cf. “corporate socialism”, Scharfstein & Stein, at corporate level)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, Actual study with n=792 docs (Harvard Med, Brigham &Women’s, Hebrew U; McNeil et al Brigham &Women’s, Hebrew U; McNeil et al JAMA ’80s)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 problem (-200 vs (1/3) of -600 / +400 vs (2/3) Asian disease problem (-200 vs (1/3) of -600 / +400 vs (2/3) 600600Pro-choice vs pro-lifePro-choice vs pro-life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. occupation……other examples? other examples? Supply-side response: Competitive framing; which frame Supply-side response: Competitive framing; which frame