Preference Reversals in Equal-probability Gambles: A Case for Anchoring and Adjustment

Scheibehenne

2017

Psychon Bull Rev

People often indicate a higher price for an object when they own it (i.e., as sellers) than when they do not (i.e., as buyers)-a phenomenon known as the endowment effect. We develop a cognitive modeling approach to formalize, disentangle, and compare alternative psychological accounts (e.g., loss aversion, loss attention, strategic misrepresentation) of such buyer-seller differences in pricing decisions of monetary lotteries. To also be able to test possible buyer-seller differences in memory and learning, we study pricing decisions from experience, obtained with the sampling paradigm, where people learn about a lottery's payoff distribution from sequential sampling. We first formalize different accounts as models within three computational frameworks (reinforcement learning, instance-based learning theory, and cumulative prospect theory), and then fit the models to empirical selling and buying prices. In Study 1 (a reanalysis of published data with hypothetical decisions), models assuming buyer-seller differences in response bias (implementing a strategicmisrepresentation account) performed best; models assuming buyer-seller differences in choice sensitivity or memory (implementing a loss-attention account) generally fared worst. In a new experiment involving incentivized decisions (Study 2), models assuming buyer-seller differences in both outcome sensitivity (as proposed by a loss-aversion account) and response bias performed best. In both Study 1 and 2, the models implemented in cumulative prospect theory performed best. Model recovery studies validated our cognitive modeling approach, showing that the models can be distinguished rather well. In summary, our analysis supports a loss-aversion account of the endowment effect, but also reveals a substantial contribution of simple response bias. Keywords Computational modeling . Endowment effect . Risky decision making . Decision from experience . Loss aversionThe minimum price at which people are willing to accept to sell an object they own is often higher than the maximum price they are willing to pay for the same object when they do not own it. This systematic difference between buying and selling prices-which can also occur within the same person when taking different perspectives-is known as the endowment effect (Kahneman, Knetsch, & Thaler, 1990, 1991Thaler, 1980; see also Birnbaum & Stegner, 1979). The endowment effect has attracted considerable attention because it contradicts a central tenet of economic theory: According to the Coase theorem, the value of an object should be independent of its initial ownership (Kahneman et al., 1990).There have been several proposals as to which cognitive mechanisms give rise to the endowment effect, or how buyers' and sellers' cognitive mechanisms might differ generally.1 For instance, there may be asymmetries between buyers and sellers in terms of the order in which they search for positive 1 Note that this issue is orthogonal to the question of which aspects of being endowed-such as ownership, expectations...

Section: Resultsmentioning

confidence: 99%

Unpacking buyer-seller differences in valuation from experience: A cognitive modeling approach

Scheibehenne

2017

Psychon Bull Rev

“…Note. Lotteries taken from Slovic et al (1990) and Ganzach (1996) are indicated by the superscripts S and G , respectively. The second superscript indicates whether the lottery was a high-variance lottery (i.e., H ) or a low-variance lottery (i.e., L ).…”

Section: Resultsmentioning

confidence: 99%

“…We used lotteries from previous studies on lottery pricing by Slovic, Griffin, and Tversky (1990) and Ganzach (1996;cf. J. G. Johnson & Busemeyer, 2005).…”

Section: Methodsmentioning

confidence: 99%

“…where o w is the average outcome in the current sampling window of size w and rv is the reference value (i.e., the midpoint of the 1 Otherwise, the results would mainly reflect the valuations for the lottery problems in Ganzach (1996), which had considerably higher outcomes than those in Slovic et al (1990;see Appendix A).…”

Section: Information Search In Experience-based Decisionsmentioning

confidence: 99%

See 1 more Smart Citation

Constructing preference from experience: The endowment effect reflected in external information search.

Journal of Experimental Psychology: Learning, Memory, and Cogni

Scheibehenne

2012

People often attach a higher value to an object when they own it (i.e., as seller) compared with when they do not own it (i.e., as buyer)-a phenomenon known as the endowment effect. According to recent cognitive process accounts of the endowment effect, the effect is due to differences between sellers and buyers in information search. Whereas previous investigations have focused on search order and internal search processes (i.e., in memory), we used a sampling paradigm to examine differences in search termination in external search. We asked participants to indicate selling and buying prices for monetary lotteries in a within-subject design. In an experience condition, participants had to learn about the possible outcomes and probabilities of the lotteries by experiential sampling. As hypothesized, sellers tended to terminate search after sampling high outcomes, whereas buyers tended to terminate search after sampling low outcomes. These differences in stopping behavior translated into samples of the lotteries that were differentially distorted for sellers and buyers; the amount of the distortion was predictive of the resulting size of the endowment effect. In addition, for sellers search was more extended when high outcomes were rare compared with when low outcomes were rare. Our results add to the increasing evidence that the endowment effect is due, in part, to differences in predecisional information search.

“…Second, they administered two sets of lotteries (Table 1). Set A, taken from Ganzach (1996), included lotteries where all outcomes occur with the exact same probability. In these lotteries, EV sensitivity depends only on sensitivity to changes in outcomes (because the probability is fixed, at .2).…”

Section: Study 1: Do Sellers and Buyers Differ In Expected Value Sensmentioning

confidence: 99%

The Seller's Sense: Buying–Selling Perspective Affects the Sensitivity to Expected Value Differences

Yechiam

Abofol

Behavioral Decision Making

2016

Previous work comparing pricing decisions by buyers and sellers has primarily focused on the endowment effect, the phenomenon that selling prices exceed buying prices. Here, we examine whether pricing decisions by buyers and sellers also vary in sensitivity to differences between objects' expected values (EVs). Both a loss-aversion account (which posits that losses are weighted more heavily than gains) and a lossattention account (which posits increased attention to a task when it involves possible losses) predict that pricing decisions by sellers should exhibit higher sensitivity. The latter, however, additionally predicts that this pattern should only emerge under certain conditions. In studies 1 and 2, we reanalyzed two published datasets in which participants priced monetary lotteries as sellers or buyers. It emerged that sellers showed greater EV sensitivity (defined as the rank correlation between the set price for each lottery and its EV) except in a condition with an extended deliberation time of 15 seconds. In study 3, the buyer-seller difference in EV sensitivity was replicated even when the pricing task was presented repeatedly, while in study 4, it was eliminated when buying and selling trials were randomly mixed. The reduction of the "seller's sense" in long deliberation and mixed trials settings supports an attentional resource-based account of the differences between sellers and buyers in their EV sensitivity.