Overpredicting and Underprofiting in Pricing Decisions

This research examines sellers' price‐setting behavior and discovers a naturally occurring mismatch between sellers and buyers: Sellers who make a price decision often consider alternative prices and engage in the joint evaluation mode, whereas buyers who make a purchase decision see only the finally set price and are in the single evaluation mode. This mismatch in evaluation modes leads sellers to overpredict buyers' price sensitivity and underprice their products. However, these effects apply only to products unfamiliar to buyers and without salient reference prices and can be alleviated if sellers are encouraged to mimic single evaluation when making pricing decisions. These propositions are empirically tested and verified. Copyright © 2011 John Wiley & Sons, Ltd.     

Time pressure and the endowment effect

This research examines how time pressure influences bidding behavior in experiment auctions. The studies reported herein investigate how time pressure systematically impacts individual trading of an endowed object by looking at the disparity between buying and selling prices for that object. Study 1 tests whether the effect of time pressure eliminates the disparity between selling and buying prices. In Study 2, transaction demand is employed to see whether sellers and buyers are more sensitive to changes in the item (amount of work). In Study 3, sellers and buyers access information of differing valence in the task. In Study 4, the framing of the reference price is manipulated to moderate the endowment effect. These studies indicate that under time pressure, endowment bias is reduced and, more generally, elucidate the role of trading behavior in decision making.     

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

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 strategic-misrepresentation 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.     

How beliefs influence the relative magnitude of pleasure and pain

Loss aversion is an economic assumption about utility—people value giving up a good more than they value getting it. It also has hedonic meaning—the pain of a loss is greater in magnitude than the pleasure of a comparable gain. But value and pleasure are not necessarily identical. We test the hedonic interpretation of loss aversion in experimental markets. With hedonic forecasts, sellers imagine the pain of losing their endowment, and buyers imagine the pleasure of being endowed. With hedonic experiences, sellers rate the pleasure of having the endowment, and buyers rate the pain of being without it. Contrary to loss aversion, predicted pleasure is greater in magnitude than predicted pain, and experienced pleasure surpasses experienced pain. We show that the relative magnitude of pleasure and pain depends on beliefs about the likelihood of outcomes, as well as utilities. Surprise makes gains more pleasurable and losses more painful. With surprising gains and expected losses, pleasure can surpass pain. But when gains and losses are equally likely (or losses are surprising and gains are expected), the opposite pattern can occur. Finally, within‐group and between‐group prices are significantly correlated with hedonic experiences. Sellers who feel better with their endowments assign higher selling prices, and buyers who feel worse about the absence of endowment assign higher buying prices. Despite the fact that hedonic experiences deviate from loss aversion, these emotions predict the endowment effect. Copyright © 2009 John Wiley & Sons, Ltd.     

The Role of Anticipated Emotions in the Endowment Effect

This research explored the role of anticipated negative feelings in the observed disparity between buying and selling prices for the same endowed object. We assumed that anticipated negative reactions to losses deter people from trading an endowed object and therefore psychological variables that attenuate the emotional response to negative events should further reduce the price disparity between buyers and sellers. In 3 studies, we tested whether factors that either decrease concern about negative feelings (e.g., positive mood, framing of the transaction as involving no action) or increase the anticipated negative reaction to failure to act (e.g., priming errors of omission) further eliminate the disparity between buying and selling prices. These studies provide a novel conceptualization of the endowment bias and, more generally, illustrate the role of anticipated negative feelings in decision making.     

Beyond mere ownership: transaction demand as a moderator of the endowment effect

Transaction demand refers to the motivation to complete a transaction. As transaction demand increases, owners should sell at lower prices and buyers should buy at higher ones. It was predicted that the endowment effect—the tendency for minimum selling price to exceed maximum buying price for a particular commodity—should be minimized when buyers and sellers have high transaction demand. The results of two experiments supported this hypothesis: In Experiment 1, the endowment effect was observed when participants imagined another individual wanting to buy from or sell to them, but not when they imagined wanting to buy from or sell to another individual. In Experiment 2, a reversal of the endowment effect was observed when transaction demand was high for both prospective buyers and sellers. The findings highlight the importance of motivational factors in addition to other factors (e.g., loss aversion, reference dependence) in determining behavior.     

Buying and Selling Prices of Investments: Configural Weight Model of Interactions Predicts Violations of Joint Independence

Judges evaluated buying and selling prices of hypothetical investments, based on the previous price of each investment and estimates of the investment's future value given by advisors of varied expertise. Effect of a source's estimate varied in proportion to the source's expertise, and it varied inversely with the number and expertise of other sources. There was also a configural effect in which the effect of a source's estimate was affected by the rank order of that source's estimate, in relation to other estimates of the same investment. These interactions were fit with a configural weight averaging model in which buyers and sellers place different weights on estimates of different ranks. This model implies that one can design a new experiment in which there will be different violations of joint independence in different viewpoints. Experiment 2 confirmed patterns of violations of joint independence predicted from the model fit in Experiment 1. Experiment 2 also showed that preference reversals between viewpoints can be predicted by the model of Experiment 1. Configural weighting provides a better account of buying and selling prices than either of two models of loss aversion or the theory of anchoring and insufficient adjustment.     

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

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.     

Heart strings and purse strings: Carryover effects of emotions on economic decisions

Abstract— We examined the impact of specific emotions on the endowment effect, the tendency for selling prices to exceed buying or "choice" prices for the same object. As predicted by appraisal-tendency theory, disgust induced by a prior, irrelevant situation carried over to normatively unrelated economic decisions, reducing selling and choice prices and eliminating the endowment effect. Sadness also carried over, reducing selling prices but increasing choice prices—producing a "reverse endowment effect" in which choice prices exceeded selling prices. The results demonstrate that incidental emotions can influence decisions even when real money is at stake, and that emotions of the same valence can have opposing effects on such decisions.     

Moral Realism as a Moral Doctrine

This paper argues for the legalization of vote markets. I contend that the state should not prohibit the sale of votes under certain institutional conditions. Jason Brennan has recently argued for the moral permissibility of vote selling; yet, thus far, no philosopher has argued for the legal permissibility of vote selling. I begin by giving four prima facie reasons in favour of legalizing vote markets. First, vote markets benefit both buyers and sellers. Second, citizens already enjoy significant discretion in their use of their vote, including the ability to use their vote in ways antithetical to justice and the public interest. Third, vote markets are relevantly similar to other democratic practices that are legally permissible. Fourth, vote markets enable elections to better reflect the intensity of citizens’ preferences. Next, I reply to two counter-arguments. The first contends that vote markets will increase the political power of the wealthy; the second contends that votes must be used in the service of the public interest rather than private interests or influenced by participation in collective political deliberation. I argue that vote markets will not increase political inequalities relative to democracies without vote markets. There is little reason to expect electoral regulations to be less effective in satisfying egalitarian criteria in democracies with vote markets than in democracies without vote markets. Moreover, the claim that votes must be influenced by participation in collective deliberation or serve the common good implies counter-intuitive restrictions on political liberties beyond a ban on vote buying and selling, including an abridgement of equal suffrage.     

Buyers Versus Sellers: How They Differ in Their Responses to Framed Outcomes

Consumers’ reactions to a difference in price can depend on how it is framed. If buyers interpret paying $60 rather than $65 as getting a $5 discount, then they are likely to consider paying $60 to be a gain and paying $65 to be a nongain. Alternatively, if they interpret having to pay $65 rather than $60 as incurring a $5 penalty, then they may consider paying $60 to be a nonloss and paying $65 to be a loss. Similarly, sellers can also experience gains, nongains, nonlosses, and losses. This article suggests that buyers are prevention focused and consequently place a greater emphasis on loss‐related frames, whereas sellers are promotion focused and place a greater emphasis on gain‐related frames. Therefore, for equivalent positive outcomes, buyers feel better about nonlosses, but sellers feel better about gains. For equivalent negative outcomes, buyers feel worse about losses, but sellers feel worse about nongains. These effects, however, disappear when there is little motivation to process information about the monetary transaction.     

Taboo Trade‐Offs,Relational Framing,and the Acceptability of Exchanges

This article reports 4 experiments demonstrating the power of social‐relational framing to complicate superficially straightforward economic exchanges of goods and services. Drawing from Alan Fiske's theoretical framework as well as Tetlock's sacred value protection model, the experiments demonstrate (a) pricing distortions and refusals to answer certain questions when people contemplate buying or selling objects endowed with special relational significance; (b) moral outrage and cognitive confusion when people are asked whether they would allow market‐pricing norms to influence decisions that fall under the normative purview of communal‐sharing, authority‐ranking, and equality‐matching relationships; and (c) elements of tactical flexibility in how people respond to breaches of relational boundaries (a willingness to turn a blind eye to taboo trade‐offs when it is in their interest to do so). An agenda for future work is offered that explores how pragmatic, economic interests are balanced against the desire to be (or appear to be) the type of person who honors social–relational constraints on what should be considered fungible.     

We‐commerce: Exploring factors influencing online group‐buying intention in Taiwan from a conformity perspective

Group buying is a relatively new online consumption practice. Consumers negotiate product or service prices with businesses to obtain low prices or an increased number of products. This study investigates factors influencing online group‐buying intention from a conformity perspective. An online survey is used to sample 650 online group buyers in Taiwan. Structural Equation Modelling (SEM) is applied to examine the hypotheses within the theoretical framework. Analytical results indicate that social factors (online recommendations, media recommendations, and personal recommendations) positively affect social influence and online group‐buying intention. Individual factors (compliance and attention‐to‐social‐comparison‐information) positively affect social influence and conformity. Psychological factors (financial risk, performance risk, and social risk) negatively affect online group‐buying intention, and are positively correlated with social influence and conformity. Furthermore, social influence (informational influence and normative influence) are positively correlated with conformity and online group‐buying intention. Social influence and conformity are positively correlated with online group‐buying intention. Finally, implications of analytical findings are discussed.     

Self‐Control Moderates Decision‐Making Behavior When Minimizing Losses versus Maximizing Gains

We examined (1) whether people would be more responsive to the delayed consequences of their decisions when attempting to minimize losses than when attempting to maximize gains in a history‐dependent decision‐making task and (2) how trait self‐control would moderate such an effect. In two experiments, participants performed a dynamic decision‐making task where they chose one of two options on each trial. The increasing option always gave a smaller immediate reward but caused future rewards for both options to increase. The decreasing option always gave a larger immediate reward but caused future rewards for both options to decrease. In Experiment 1 where the two options had equivalent expected value in the long run, participants were more prone to select the increasing option, which yielded larger benefits on future trials, in the loss‐minimization condition than in the gain‐maximization condition. Trait self‐control moderated the effect of losses by enhancing the effect for low self‐control participants while attenuating it for high self‐control participants. In Experiment 2 where selecting the increasing option was suboptimal, low self‐control participants still attempted to reduce losses on future trials by selecting the increasing option more often than high self‐control participants. These results suggest that decision makers value delayed consequences of their actions more in a losses domain relative to a gains domain and low self‐control individuals are more susceptible to such an effect. Copyright © 2014 John Wiley & Sons, Ltd.     

Numeracy as a Predictor of Adaptive Risky Decision Making

Numeracy or one's ability to appropriately process and use numerical information has been shown to be an important individual difference factor in decision making. The current study utilized a risky decision‐making task (called the “cups task”) in which choices are made to both earn and avoid losing hypothetical money. Critically, this design allowed investigators to examine numeracy‐related differences in adaptive decision‐making as measured by sensitivity to expected value (EV) differences over 54 paired‐choice trials—some in which it was advantageous to take a risk and some in which it was not. Results showed that in an undergraduate sample of 114 individuals, the less numerate took more risks and were less sensitive to varying EV levels than the more numerate, especially when it was disadvantageous to take a risk and when the choice involved a potential loss (rather than a gain). These results are consistent with a dual processing account in which the more numerate are much better than the less numerate at extracting the precise affective “gist” of the numerical information, which is then used to determine the goodness or badness of a particular choice. Copyright © 2012 John Wiley & Sons, Ltd.     

引入中立方参照：对禀赋效应的再探讨

在以往禀赋效应研究的基础上, 本研究引入中立方估价值作为参照, 在时间维度上探讨了禀赋效应的变化趋势, 并尝试延伸禀赋效应的定义。研究发现, 随着卖方拥有物品的时间延长, 买卖双方的估价呈下降趋势, 卖方的估价总是显著高于买方, 但买卖双方的估价之差不随卖方拥有物品的时间延长发生变化; 以中立方的估价为参照, 在较短的时间内卖方的估价倾向于理性, 在较长的时间内买方的估价倾向于理性; 卖方的估价在时间水平上相对于中立价格呈递增性, 而买方的估价相对于中立价格呈递减性。引入中立方再探讨禀赋效应并没有否定它的存在, 而且能够更好地解释生活中的非理性行为。     

Buying/Selling Price Preference Reversals: Preference for Environmental Changes in Buying versus Selling Modes

Many studies have shown that the most people are willing to pay to obtain an object often is significantly less than the least they will accept to relinquish the object (i.e., selling prices tend to be higher than buying prices). Most tests of the buying/selling price discrepancy have elicited values either for everyday market items (e.g., mugs, candy bars) or for environmental changes (e.g., a decrease in air quality, a landfill clean-up). The literature indicates a possible interaction between buying/selling prices and commodity type; buying/selling price differences seem greater for environmental improvements than for market items. In other words, people show more relative preference for environmental improvements in selling modes than they do in buying modes. A significant difference in preference due to elicitation mode is commonly termed a "preference reversal." The four experiments presented here establish this new preference reversal and examine the reasons for it. The results from these studies provide information about the nature of preference reversals, the valuation process as a whole, and the unique problem of valuing complex and risky items such as environmental changes.     

When mixed options are preferred in multiple‐trial decisions

We report three studies showing that in prospective multiple‐trial decisions people often select a mix of sure and risky options over pure bundles of either option. Such a preference is not ‘rational’ because a mixed option cannot be the EV‐maximizing choice. Experiment 1 confirmed a mixed‐option preference for gains but not for losses. Showing a graph of the multiple‐trial outcome distribution reduced but did not eliminate this effect, suggesting that it is not due purely to a failure to aggregate correctly over the multiple trials. Experiment 2 replicated the mixed option preference using a wider range of problems. Experiment 3 compared choices in the trinary choice conditions used in Experiments 1 and 2 with binary choices between pairs of the multiple‐trial sure, mixed, and risky options. In the binary choice condition the mixed option was no longer the modal choice, suggesting that the strong mixed option preference found in the trinary choice conditions is mainly due to a compromise effect. However, the binary choice probabilities did show violations of strong stochastic transitivity in a pattern that suggested a slight bias toward the mixed option. Copyright © 2006 John Wiley & Sons, Ltd.     

Building trust to increase purchase intentions: The signaling impact of low pricing policies

We examine the differential signaling impact of two low pricing policies, Price Matching Guarantees and Everyday Low Prices, on consumers' trusting beliefs and purchase intentions. We demonstrate that both PMG and EDLP pricing policies signal stores' ability to offer lower prices. However, whether these sellers were perceived as benevolent, and—consequently—consumers' purchase intentions, varied critically depending upon price uncertainty. Perceived benevolence and purchase intentions were significantly higher [lower] for sellers offering PMG than EDLP when price dispersion was high [low]. Our findings offer insights into whether and under what conditions firms should adopt these low pricing policies.