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A Study of Preferences Under Constraint. Jayson Shi Jia Kunal Patel. Research Question. Will the existence of a consumption constraint result in higher consumption at some point? How does the modification of a consumption constraint change an agent’s consumption pattern? - PowerPoint PPT Presentation
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A Study of Preferences Under Constraint
Jayson Shi JiaKunal Patel
Research Question Will the existence of a consumption
constraint result in higher consumption at some point?
How does the modification of a consumption constraint change an agent’s consumption pattern?
Inspired by the “Yale College Law School Run” - of yore
Expect loss aversion and information effect with budget constraints
Why use an experiment? Can try to solve different FOC’s and
Lagrangians for different constraints Hard to conjecture what people will do
because we are interested in a behavioral effect
Needed at least a survey instrument Used the experiment and Excel to try some
other things, like looking at information effects Harder for subjects to ‘screw up’ when we
design things on excel as opposed to pencil and paper
Loss Aversion in Riskless Choice: A Reference Dependence Model (1991)
Reference Dependence
Gains and losses relative to reference level
Loss Aversion Losses loom larger than
gains Diminishing
Sensitivity The marginal value of
both gains and losses decreases with their size
Losses
Value
GainsReferencePoint
x-x
V(x)
V(-x)
Mental Accounting (Thaler 1985, 1990, 1999)
Framing: How a person subjectively frames a transaction in their mind will determine the utility they receive/expect
Expenditures grouped into a number of non-fungible accounts
Frequency with which accounts are evaluated and ‘choice bracketing’
What we initially wanted… Scenario 0: buffet – tell people to ‘eat’ as much as
they would normally like– don’t tell people how much they paid – see how much they would like to consume – use this to calculate x
Scenario 1: buffet where people are told they paid $x
Scenario 2: impose a constraint on consumption at $x, for which you pay $x
Scenario 3: pay $x for a constraint y, where y<x Scenario 4: pay $x for a constraint z, where z>x
Try to capture effects of loss aversion: scenario 0 is reference point, scenario 3 is loss, scenario 4 is gain
Menu Experiment (1)
Choose Items on a Menu (too easy?)
In each question, you have essentially solved a maximization problem and told us what amount of food maximizes your utility
Menu Experiment (2)
Gain and Loss treatments Control: all you can eat with no price -
measure natural reference point Give new reference points with new
budget constraints: Buffet, Buffet with market value price
tags, +$2 budget, +$4 budget, -10% budget, -20% budget
Menu Experiment (3)
Information treatment Reveal Percentage spending of others
– people see how efficient others are Reveal Absolute spending – people
realize base values are very different
Results – Part 1
Scenario Consumption ($)
Consumption relative to price/ budget (%)
Ideal World 12.80 n/a
Buffet - No Price 21.73 1.82
Buffet - Price 22.35 1.85
Retail x+$0 12.65 0.99
Retail x+$2 14.55 0.99
Retail x+$4 16.65 0.99
Retail x-10% 9.93 0.97
Retail x-20% 7.45 0.97
Results – Part 2Total Consumption ($)
ScenarioSituation 2: Revealed Percentage Spending
Situation 3: Revealed Absolute Spending
Retail x+$0 12.70 12.72
Retail x+$2 14.67 14.68
Retail x+$4 16.47 16.47
Retail x-10% 10.02 9.98
Retail x-20% 7.45 7.42
Criticism Small sample size (trading games didn’t
have this problem because bids were individual data points) – not much we can say now
Experiment design: diversity seeking bias with a big menu
Overly involved sample population – sabotage, trying to open hidden pages, too much talking, context and group effects
Future Improvements Larger sample size to allow for
statistical analysis Focus on one commodity, e.g. cell
phone minutes, emission credits Ask people to rate satisfaction for
different gains and losses – this is to measure the value function
No PhD students in sample
Thanks for listening!