Valuing Environmental Resources: A Constructive Approach (Alternative Title: Valuing Nature and Its Protection: Psychological Perspectives). Paul Slovic firstname.lastname@example.org September,2006. A Wandering Tale
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Valuing Environmental Resources:A Constructive Approach(Alternative Title:Valuing Nature and Its Protection: Psychological Perspectives)
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)
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.
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.
(like rating, matching, or pricing)
Violation of Procedure Invariance:
Preference Reversals 1971-1973
P bet35/36 win $4.00 1/36 lose $1.00 3.86 EV
$ bet11/36 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)
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
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
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
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
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.
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
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
- new products
- ice cream
- job candidates
- job offers
- air quality
- punitive damage awards by juries
- countries in which to live (income distribution)
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.”
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.
Elements of Preference Construction (cont.):
Reliance on defaults
Value elicitation has barely begun to address the challenges posed by preference construction
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.
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.
The Quarterly Journal of Economics, February 2003
Tom Sawyer and the Construction of Value
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.
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.
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.
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.
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.
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.
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
7/36 win $9
29/36 lose 5¢
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¢
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 . . .
Mean WTP values for Dictionary A and Dictionary B. The numbers in parentheses indicate numbers of participants
Source: Adapted from Hsee (1998)
An Affect Account of the 5¢ Loss Effect
Probability is evaluable.
7/36 is a poor chance.
Payoff is less evaluable.
How good or bad is $9?
Adding the 5¢ loss makes $9 “come alive with feeling” and it then becomes weighted in the judgment.
A (9, 0)
B ($9,- 5¢)
C (9, +5¢)
Affect for $9
-4 (very bad)
to +4(very good)
Affect for 0, -5¢, +5¢
Results: April 2003
What Have We Learned from the Gambles?
the importance of contextual factors in determining affect and preference
the fact that meaning, utility, and weighting of even a very familiar and “well-understood” monetary outcome such as $9 is not fixed, but depends greatly on these contextual factions
Z makes X
Adding Z to the set of options
increases the probability that
X will be selected over Y.
(Psychology & Marketing, 1999)
The Bigger Picture: Converging Views
Images Affect Behavior
There is no dearth of evidence in everyday life that people apprehend reality in two fundamentally different ways, one variously labeled intuitive, automatic, natural, non-verbal, narrative, and experiential, and the other analytical, deliberative, verbal, and rational.
Seymour Epstein; 1994, p. 710
Many people lack dose-response sensitivity for exposure to chemicals that can produce effects that are dreaded, such as cancer (high affect).
If large exposures are bad, small exposures are also bad.
Strong Affect Distorts Valuation
Value functions based on calculations (dotted line) and based on feeling (solid line). The x-axis of the function is the scope of a stimulus, and the y-axis is subjective value. Source: Hsee & Rottenstreich.
Much behavioral research has been devoted to illustrations of choices that violate the logic of the economic model. The implied claim is that people do not have preferences, in the sense in which that term is used in economic theory. It is therefore fair to ask: if people do not have economic preferences, what do they have instead?
…Statements of WTP are better viewed as expressions of attitudes than as indications of economic preferences.
The core of an attitude is a valuation, which assigns to the entity an affective value that can range from extremely positive to extremely negative.
(Kahneman, Ritov, and Schkade, 1993)
Valuation: Insensitivity to scope
Desvousges et al. (1992) asked separate groups of participants how much they would donate to save 2,000, 20,000, or 200,000 migrating birds from drowning in uncovered oil ponds. The mean responses were $80, $78, and $88 respectively.
Kahneman et al. (1999) argue that these results could be explained by the notion that these questions evoke a mental representation of a prototypical incident, perhaps an image of an exhausted oil-soaked bird and that respondents decide how much to donate based on their affective reactions to this image.
If values are constructed during the elicitation process in a way that is strongly determined by context and has profound effects on the resultant evaluation, we should take a deliberate approach to value construction in a manner designed to rationalize the process.
Key Concept: The Construction of Preference
Extensive research in human judgment and decision making indicates that people often do not hold values that are well defined in monetary units. Unless the items valued are simple and familiar—and most environmental goods are neither—individuals will construct values during the elicitation process, based on the context that is provided.
2. Assess utilities
3. Calculate total value (on 1 or perhaps several dimensions)
4. Perform sensitivity analysis
Case studies using constructed preference methods:
- Gregory, R., & Failing, L. (2002). Using decision analysis to encourage sound deliberation: Water use planning in British Columbia, Canada. Journal of Policy Analysis and Management,21, 492-499.
- Gregory, R.S., & Keeney, R.L. (2002). Making smarter environmental management decisions. Journal of the American Water Resources Association, 38, 1601-1612.
- Keeney, R. L., & Gregory, R. (2005). Selecting attributes to measure the achievement of objectives. Operations Research, 53(1), 1-11.
- Trousdale, W., & Gregory, R. (2004). Property evaluation and biodiversity conservation: Decision support for making hard choices. Ecological Economics, 48, 279-291.