Valuing Environmental Resources: A Constructive Approach (Alternative Title: Valuing Nature and Its Protection: Psycholo

1. Valuing Environmental Resources:A Constructive Approach(Alternative Title:Valuing Nature and Its Protection: Psychological Perspectives) Paul Slovic pslovic@darkwing.uoregon.edu September,2006

2. A Wandering Tale The psychological complexity of values and preferences and their resulting lability (instability) Empirical studies: From preference reversals to preference construction A method for constructing quantified values (if you must)

3. The Measurement Problem Measurement of physical qualities (e.g., weight, distance) requires the satisfaction of description invariance and procedure invariance. Measures of preference systematically violate both of these fundamental requirements.

4. 2. Procedure Invariance Different (but equivalent) measures for eliciting preferences should lead to the same preference ordering, just as different but equivalent measures of heaviness—for example, placing two objects on opposite sides of a pan balance to see which is heavier versus measuring each object separately on a scale—should yield the same ordering of weight.

5. (like choice)

6. (like rating, matching, or pricing)

7. Preference measures often violate procedure invariance. • Object A may be clearly preferred over object B under one method of measurement (e.g., choice), while B is clearly preferred under a different but presumably equivalent measurement procedure (e.g., matching or pricing). • This fact has significant implications for the valuation of environmental resources and many other goods as well.

8. Violation of Procedure Invariance: Early Studies Preference Reversals 1971-1973 P bet 35/36 win $4.00 1/36 lose $1.00 3.86 EV $ bet 11/36 win $16.00 25/36 lose $1.50 3.85 EV Many Ss choose the P bet but attach higher $ values (buying and selling prices; cash equivalents) to the $ bet. (Slovic & Lichtenstein, 1971 and 1973)

11. A body of data and theory has been developing within psychology which should be of interest to economists. Taken at face value the data are simply inconsistent with preference theory and have broad implications about research priorities within economics. The inconsistency is deeper than the mere lack of transitivity or even stochastic transitivity. It suggest that no optimization principles of any sort lie behind even the simplest of human choices and that the uniformities in human choice behavior which lie behind market behavior may result from principles which are of a completely different sort from those generally accepted. This paper reports the results of a series of experiments designed to discredit the psychologists’ works as applied to economics. -Grether and Plott, 1979, p. 623

12. Criticism of Lichtenstein and Slovic Studies: 1) Misspecified incentives 2) Income effects 3) Indifference not allowed 4) Confusion and misunderstanding 5) Unsophisticated subjects 6) Experimenters were psychologists

13. Needless to say the results we obtained were not those expected when we began this study. Our design controlled for all the economic-theoretic explanations of the phenomenon which we could find. The preference reversal phenomenon which is inconsistent with the traditional statement of preference theory remains. It is rather curious that this inconsistency between the theory and certain human choices should be discovered at a time when the theory is being successfully extended to explain choices of nonhumans. -Grether and Plott, 1979, p. 634

14. The one theory that we cannot reject…is…the least satisfactory since it allows individual choice to depend upon the context [i.e., response mode] in which the choices are made. Grether and Plott

15. Reactions to Grether and Plott: More attempts to make reversals disappear. Some modifications of choice theory axioms. About 400 citations of Grether and Plott in the literature. Preference reversals continually demonstrated —except in some aggressive arbitrage situations.

17. This review has attempted to show how preference reversals fit into a larger picture of information-processing effects that, as a whole, pose a collective challenge to preference theories far exceeding that from reversals alone. These effects seem unlikely to disappear, even under rigorous scrutiny. -Slovic and Lichtenstein, 1983, p. 603

18. We urge economists not to resist these developments but, instead, to examine them for insights into the ways that decisions are made and the ways that the practice of decision making can be improved. -Slovic and Lichtenstein, 1983, p. 603

19. The Blossoming of Preference Reversals • Choose X; also reject X (Shafir, 1993) • Ratings of value  prices  choices • Wide range of stimuli - new products - ice cream - job candidates - job offers - air quality - salaries - punitive damage awards by juries - countries in which to live (income distribution) Etc.

20. Construction of Preference: The Broader Perspective Emerges The reality of preference reversals has gradually become accepted, even among economists (see, e.g., Camerer, 1995; Starmer, 2000; and Seidl, 2002) and most efforts today by economists and others are rightly attempting to discover the conditions that allow preference instability to exist in important settings outside the laboratory. Something significant has been occurring in the world of preference reversals. Slowly, the study of reversals has metamorphized from a curious phenomenon observed with simple gambles in laboratory settings to a method for documenting a broad, encompassing view of human behavior that has come to be known as “the construction of preference.”

21. The Construction of Preference(published last week)

22. The thesis of preference construction is that we often do not know our own values and must construct them “on the spot,” using not only our knowledge, feelings, and memory, but also many aspects of the current environment, including how the preference question is posed and what type of response is required.

23. Some elements of preference construction: • Editing • Elimination by aspects • Prominence effects • Framing • Dominance structuring • Choice bracketing and mental accounting • Reason-based choice • Miswanting • Decision Utility, Predicted Utility, Experienced Utility • Focalism • Immune Neglect • Duration Neglect

24. Elements of Preference Construction (cont.): Contingent weighting Distinction bias Lay rationalism Reliance on defaults Affect Evaluability Value elicitation has barely begun to address the challenges posed by preference construction

25. Preference Reversal Between Joint and Separate Evaluations Work by Chris Hsee and Colleagues Whereas traditional preference reversals involve different types of responses (e.g., choices and prices), differences in response modes (e.g., joint evaluation–JE–vs. separate evaluation–SE) also produce reversals. JE  SE due to evaluability factors (dictionary study) or other causes.

26. Irwin et al. (1993) found that, in JE, people were willing to pay more for improving the air quality in Denver than for improving a consumer product such as a VCR, but in SE, WTP values were higher for improving the consumer product. • Kahneman and Ritov (1994) found that, in JE, people would contribute more to programs that save human lives (e.g., farmers with skin cancers), but in SE, they would contribute more to programs that save endangered animals (e.g., dolphins)

27. Hsee and Zhang (2004) demonstrate that, in JE, people overpredict the differences that different values of an attribute (e.g., different salaries) will make to their happiness in SE. This is called distinction bias. Predicted utility  experienced utility.

28. The Quarterly Journal of Economics, February 2003

29. Tom Sawyer and the Construction of Value Dan Ariely George Loewenstein Drazen Prelec (in press)

30. The apparent orderliness in . . . choices, their stability for a given individual, and the generally correct directional response to changing incentives, encourages the belief that the choices are firmly rooted in personal likes and dislikes—in fundamental values. We suggest, in contrast, that correct directional responses to changing incentives do not provide strong support for fundamental valuation, but can follow from the fact that people try to behave in a sensible manner when it is obvious how to do so.

31. Modern economics assumes that exogenous consumer preferences interact with ‘technologies’ and initial endowments to produce equilibrium states of the economy—prices and production levels. This analysis falls apart if preferences are themselves influenced by the very equilibrium states that they are presumed to create. By posting a price for a new product, for instance, a firm invites consumers to consider whether they would purchase at that price and so replicates the anchoring manipulation as conducted in our experiments. If prices and other economic parameters function like public anchors, then consumer tastes no longer exist independently of prices but are endogenous to the economy.

32. When Web Pages Influence Choice:Effects of Visual Primes on Experts and NovicesNaomi Mandel and Eric J. JohnsonJournal of Consumer Research, 2002 This article extends the idea that priming can influence preferences by making selected attributes focal. Our on-line experiments manipulate the background pictures and colors of a Web page, affecting consumer product choice. We demonstrate that these effects occur for both experts and novices.

36. Evaluating the Attractiveness of a Bet We would like you to indicate how attractive the prospect of playing the following bet is to you. The bet is 7/36 to win $9.00. This means that there are 7 chances out of 36 that you will win the bet and receive $9.00 and 29 chances out of 36 that you will win nothing. Visualize a roulette wheel on the left with 36 numbers along the circumference. If a ball lands on any of the 7 numbers between 1 and 7 inclusive, you win $9.00. If it lands on numbers 8-36, you win nothing. • Response modes • 1. Pricing: buying price, selling price, cash equivalent • 2. Choice: e.g., gamble vs. sure gain (e.g., $2) • 3. Attractiveness rating

37. Strategic Equivalence:Bet Preference • Play the bet you chose • Two bets will be selected randomly: Play the bet that • had the higher cash equivalent (price) • had the higher attractiveness rating or or

38. Attractiveness Rating

39. Preference Reversals: People choose bets with higher probabilities of winning but smaller payoffs and also rate these bets as more attractive But they assign higher buying and selling prices to bets with lower probabilities of winning larger payoffs. Example:

40. A conjoint study showed that rated attractiveness was influenced far more by probability then by payoff even though respondents thought they were weighting both attributes about equally. Payoff Pr obab i l i t y

41. A Compatibility Explanation Probability maps easily onto the 0-20 attractiveness scale Payoff is less easily mapped: e.g. how attractive is $9? Perhaps adding a small loss would make payoff more compatible (e.g. more precisely mapped into the response) and then be given more weight (see e.g. Mellers, Richards, & Birnbaum 1992: Distributional theories of impression formation) A “mutant” bet was created to enhance attractiveness: 7/36 win $9 Became: 7/36 win $9 29/36 lose 5¢

42. Gamble 1. 7/36 chance to win $9 Otherwise win nothing Gamble 2. 7/36 chance to win $9 29/36 chance to lose 5¢ Mean attractiveness (0-20 scale) 9.4 14.3 Attractiveness of Simple Gambles

43. Choice Responses

44. Enter affect: • A valenced quality (e.g., goodness or badness) associated with a stimulus • Affect is one of many elements in preference construction (but a powerful one)

46. Information • Affect conveys meaning upon information • Without affect, information lacks meaning and will not be used in judgment and decision making • Affect is a key ingredient of rational behavior • Affect sometimes leads to poor decision making Affect Meaning

47. Evaluability Chris Hsee (University of Chicago) “To say that an attribute is hard to evaluate . . . means that people do not know whether a given value on the attribute is good or bad . . .

48. B A 27 (39) A 24 (39) B 19 (39) 20 (38) Mean WTP values for Dictionary A and Dictionary B. The numbers in parentheses indicate numbers of participants Attributes of Two Dictionaries in Hsee’s Study Source: Adapted from Hsee (1998)