The triumph of hope over disappointment: A note on the utility value of good health expectations

In this paper, we present and test the empirical implications of competing theories about how expectations of outcomes affect utility. In the first utility formulation, which is consistent with particular interpretations of disappointment, prospect theory and regret theory, individuals receive negative utility from outcomes that were worse than expected. This directly implies that expectations themselves enter utility negatively. The second utility formulation incorporates anticipatory savoring, where positive expectations about the future directly lead to more utility today. We test which of these formulations best explains actual connections between health and welfare over time, using data from the Household Income and Labour Dynamics in Australia survey. Estimated coefficients from fixed-effects ordered logit models support a strong positive utility impact of positive expectations: expecting good health in the future increases happiness now. Our results are one argument for benevolent health care providers to allow individuals to maintain unrealistically positive expectations about the future.     

Non-expected utility maximizers behave as if expected utility maximizers: An experimental test

We investigate the behaviors of subjects who either do or do not adhere to the expected utility theory using the Becker–DeGroot–Marschak (BDM) method. We directly examine the validity of the expected utility theory in order to distinguish subjects into two groups: those who adhere to the expected utility theory (expected utility maximizers) and those who do not adhere to it (non-expected utility maximizers), and then execute the BDM experiment in the both groups. We find that the differences in the stated prices between the expected and non-expected utility maximizers are not significant. This result implies practical usefulness for the BDM method.     

Taxpayer attitudes toward tax audit risk

Theoretical analyses on tax evasion usually assume that the taxpayer's behavior conforms to the Von Neumann-Morgenstern axioms for behavior under uncertainty, namely that the taxpayer is generally risk averse. This study found that the taxpayers' attitudes toward risk could be affected by (1) whether taxpayers perceive a tax payment as reduced income or as a loss; and (2) the magnitude of the tax savings and penalty structure. The findings, in general, agree more with the prospect theory than with the classical expected utility theory.     

Behavior in the loss domain: An experiment using the probability trade-off consistency condition

In gambles with two or more outcomes, the two versions of prospect theory, i.e., original prospect theory and cumulative prospect theory, make use of different composition rules and therefore yield different valuations of gambles. We test these composition rules in the loss domain using the probability trade-off consistency condition. The probability trade-off consistency condition offers a convenient and efficient way to compare gambles under risk and decision makers’ behavior. Experimental findings suggest that the rank dependent version of prospect theory, or cumulative prospect theory, cannot be rejected in the loss domain while original prospect theory is clearly rejected when a certainty effect is taken into account.     

A DYNAMIC EXPLANATION OF THE WILLINGNESS TO PAY AND WILLINGNESS TO ACCEPT DISPARITY

Recent evidence from laboratory experiments suggests that important disparities exist between willingness to pay (WTP) and compensation demanded for the same good. Because a fundamental postulate in neoclassical theory is that with small income effects and many available substitutes, the willingness to accept (WTA) and WTP measures of value for a commodity should be roughly equivalent, this finding has vast implications in both a positive and normative sense. This study advances, and experimentally tests, a new explanation of the WTP/WTA disparity—a dynamic theory based on the presence of commitment costs. Although to date neoclassical models have not explained the observed data patterns well, we find that the commitment cost theory combined with a simple behavioral anomaly is able to lend insights into the causes and severity of the WTA/WTP disparity. Furthermore, we find that market experience attenuates the behavioral anomaly, consistent with the notion that no value disparity exists for agents with sufficient market experience. (JEL Q21, Q26)     

A reverse sunk cost effect in risky decision making: Sometimes we have too much invested to gamble

The sunk cost effect refers to the empirical finding that people tend to let their decisions be influenced by costs made at an earlier time in such a way that they are more risk seeking than they would be had they not made these costs. This finding seems to be in conflict with economic theory which implies that only incremental costs and benefits should affect decisions. The effect is often explained in terms of prospect theory of (Kahneman, D., Tversky, A., 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263–291), suggesting that sunk costs may induce a ‘loss frame,’ consequently causing risk seeking behavior. We argue that sunk costs may also result in risk aversion. In the present study we investigated the effect of time and effort investments (Behavioral Sunk Costs) on risky decision making in gain and loss situations. The results show that, in agreement with prospect theory, participants were more risk averse in gain situations than in loss situations. Moreover, incurring Behavioral Sunk Costs appeared to increase risk aversive choices, i.e., a reverse sunk cost effect. Furthermore, the results suggest that, in loss situations, Behavioral Sunk Costs mainly lead to risk aversive behavior if opting for the ‘safe’ alternative is not accompanied by an increased possibility to regret the decision.     

On fatalistic long-term health behavior

Many adults have an overly pessimistic view of old age because they fail to correctly predict their ability to hedonically adapt to old-age health related problems. A standard utility model where the marginal utility of health is higher at a lower level of health predicts that this overly pessimist view raises the incentive for healthy behavior. But this is at odds with empirical research that indicates that people with more negative aging stereotypes tend to adopt less healthy practices, transforming this negative view into a self-fulfilling prophecy. The aim of this note is to show that this fatalistic behavior can be explained through prospect theory by modelling this overly pessimistic view of old age as a failure to predict the change in the reference point due to hedonic adaptation. Given the diminishing sensitivity in the loss domain, people undervalue the future marginal value of health investment and may therefore underinvest in health as long as loss aversion is not too strong.     

Risk attitudes and risky behavior

In economic theory, risk aversion is a characteristic of the typical utility function of money. Observations of how people deal with risks in real life have cast some doubts on the prevalence of risk aversion. People buy insurance, but they also gamble and take investment risks. Many of the conclusions in the discussions of utility derive from experiments employing some kind of lottery choices. While the experiments have given interesting ideas for theory, there has been little testing of the extent to which the obtained measures of risk attitudes correlate with actual behavior. Data from the VSB panel were used to answer three questions: (1) Can hypothetical risky choice questions be meaningfully answered by ordinary survey respondents? (2) What are the relationships between different measures of risk attitudes and actual portfolio choices of risky assets? (3) What is the relationship between risk attitude and playing in lotteries, lotto, etc.?     

Life stress, anger and anxiety, and delinquency: an empirical test of general strain theory

General strain theory (Agnew 1992) departs from traditional strain theories by emphasizing the role of the individual's affective responses to negative life experiences in fostering deviant behavior. In this analysis, we examine the central hypotheses of general strain theory using data from a three-wave panel study of high school youths in the Boston metropolitan area (N = 939). Covariance structure models reveal that anger and hostility in response to negative life events do play a causal role in fostering more aggressive forms of delinquency, but are not significantly related to either nonaggressive delinquency or marijuana use. Furthermore, the conditional effects predicted by general strain theory, in which the impact of strain on delinquency varies by youths' personal and social resources, are inconsistent. Discussion centers on the prospect of increasing the utility of general strain theory by further imbuing it with concepts and perspectives from the sociology of mental illness.     

Strategy-proof allocation mechanisms for economies with an indivisible good

We consider economies with a single indivisible good and money. We characterize the set of mechanisms that satisfy strategy-proofness, individual rationality, equal compensation, and demand monotonicity. There are three types of mechanisms which have the following properties: (i) they determine the allocation of monetary compensation depending on who receives the indivisible good; (ii) they allocate the indivisible good to one of the pre-specified (one or two) agent(s); and (iii) they disregard preferences of agents other than the pre-specified agent(s). This result implies that the presence of an indivisible good induces serious asymmetry in mechanisms. Received: 26 March 1996 / Accepted: 23 September 1997     

Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

Attenuating focalism in affective forecasts of the commuting experience: Implications for economic decisions and policy making

Focalism is a cognitive bias that overweights the contribution of certain attributes to the consumption experience. This paper proposes that focalism afflicts choice of transport mode for commuting. A field study and two experiments provide evidence that commuting by bus is estimated to be less enjoyable than it is experienced to be and that driving to work is estimated to be more enjoyable than it is experienced to be. To the extent that commuting behavior is informed by subjective expected utility, commuters will inflict unanticipated costs on themselves and on society. Transport mode choice has external and dynamic consequences. Focalism in this domain implies welfare distortions that are worthy of policymakers’ attention. This paper develops a novel debiasing technique, Affective Averaging, that reveals and attenuates focalism in affective forecasts of commuting.     

A test of equilibrium theory: Effects of topic intimacy and proximity on verbal and nonverbal behavior in pairs of friends and strangers

This experiment examined verbal and nonverbal behavior by pairs of female friends and strangers as they discussed either intimate or nonintimate topics at face-to-face distances of approximately 2.5 or 4.5 feet. On the basis of equilibrium theory and Altman and Taylor's (1973) theory about interpersonal exchange, strangers were expected to react to intimate topics or close proximity or both with discomfort and decreased affiliative behavior (facial regard, gesturing, speech). Friends were expected to show increased affiliative behavior. Results indicated that both strangers and friends showed signs of discomfort and low levels of affiliative behavior while discussing intimate topics, i.e.compensation. Discomfort with intimate topics and compensation decreased over time, indicatingadaptation. This finding suggests that compensation for intimate topics may occur only during the initial phases of an encounter.     

The Development and Validation of the FACES-IV-SF

The Family Adaptability and Cohesion Scale IV (FACES-IV) was developed to capture the balanced and unbalanced levels of cohesion and flexibility in families. Although this measure has been shown to be valid and reliable, its length at 62 items limits utility and uptake in clinical and research settings. This paper details the development of a shorter form of the FACES-IV (the FACES-IV Short Form) using two studies. In the first study, three item-level analyses were used to identify 24 items that provided the best measurement of each of the scales of the FACES-IV. In the second study, the reliability, and convergent and divergent validity of the short form was tested. Results suggest that the FACES-IV-SF is a valid and reliable measure that adheres to the theory underlying the original FACES-IV but may be better utilized in clinical and research settings due to its brevity.     

Development and Validation of the Poverty Attributions Survey

This article describes the process of developing and testing the Poverty Attribution Survey (PAS), a measure of poverty attributions. The PAS is theory based and includes original items as well as items from previously tested poverty attribution instruments. The PAS was electronically administered to a sample of state-licensed professional social workers. The three scales of the PAS—individual, cultural, and structural—demonstrated strong internal consistency reliability. We conducted exploratory factor analyses and forced three-factor analyses and retained items with factor loadings at or above .50. The items on each scale loaded as predicted with few exceptions. The PAS is a new tool for standardizing poverty attribution research. We discuss implications for social work education, research, and practice.     

AN EVALUATION OF A COGNITIVE THEORY OF RESPONSE-ORDER EFFECTS IN SURVEY MEASUREMENT

Previous research has documented effects of the order in whichresponse choices are offered to respondents using closed-endedsurvey items, but no theory of the psychological sources ofthese effects has yet been proposed. This paper offers sucha theory drawn from a variety of psychological research. Usingdata from a split-ballot experiment in the 1984 General SocialSurvey involving a variant of Kohn's parental values measure,we test some predictions made by the theory about what kindof response order effect would be expected (a primacy effect)and among which respondents it should be strongest (those lowin cognitive sophistication). These predictions are confirmed.We also test the "form-resistant correlation" hypothesis. Althoughcorrelations between items are altered by changes m responseorder, the presence and nature of the latent value dimensionunderlying these responses is essentially unaffected.     

WHAT DOES REPUTATION REALLY ASSURE? THE RELATIONSHIP OF TRADEMARKS TO EXPECTATIONS AND LEGAL REMEDIES

Theoretical and empirical considerations suggest that trademarks guarantee more than just quality: they assure specific performance, that is, fulfillment of the specific terms of the contract. The specific performance hypothesis implies that a firm's investment in trademark capital varies directly with the damages that its customers expect to bear from a breach and the legal difficulties of obtaining compensation. The hypothesis also helps to explain why competitors of firms whose products are recalled lose wealth, why some damages allowed by law intentionally provide less than full compensation, and why firms who sell only to other firms also invest in trademarks.     

Theory and method in treatment evaluation

We outline a conceptual model of evaluation research that has both guided and flowed from our research on the process and outcome of treatment for alcohol abuse and for depression. The conceptual model encompasses three basic processes: the process of treatment selection, the process of treatment, and the process underlying the onset and course of the disorder or problem being treated. A theory guiding a program evaluation can focus on one or more of these processes, and findings from evaluations can contribute to the development of better theories of these processes. We discuss how theories can guide both experimental and naturalistic evaluations, as well as aid in the estimation of treatment effects with either type of design. We then consider the role of theory and method in exploring patient-treatment matching. Finally, we discuss the implications of theory-guidance for the utility of evaluations—particularly the utility for evaluation researchers.     

Inequality, new directions: full ethical foundation and consequences

Deriving comparisons and measures of inequality from full ethical foundations was a main innovation of the 1960s and pursuing it is still a most fruitful direction. This implies using “equal equivalents” and some principles particularly rich in meanings. Multidimensional inequalities can be measured and compared thanks to the “equal-equivalent manifolds”. The “equal-equivalent utility function” defines individual “welfare” cleaned of differences in sui generis individual tastes and hedonic capacities deemed irrelevant for “macrojustice”. Then, equal allocation is a deeper end-value than equal welfare but has to be complemented by free choice for freedom, Pareto efficiency and a demanded partial self-ownership. The result is the richly multi-meaning “equal-labour income equalization”.