Can ranking techniques elicit robust values?

This paper reports two experiments which examine the use of ranking methods to elicit ‘certainty equivalent’ values. It investigates whether such methods are able to eliminate the disparities between choice and value which constitute the ‘preference reversal phenomenon’ and which thereby pose serious problems for both theory and policy application. The results show that ranking methods are vulnerable to distorting effects of their own, but that when such effects are controlled for, the preference reversal phenomenon, previously so strong and striking, is very considerably attenuated.

Evidence of a new violation of the independence axiom

During the past 40 years there has been an accumulation of experimental evidence suggesting that most of the axioms of expected utility theory are liable to be systematically violated by substantial numbers of individuals. Much of this evidence has focused on failures of the independence axiom and has stimulated a number of alternative models that try to explain that evidence in various ways. This article presents a fresh experiment that looks at a different kind of violation—one that does not appear to be easily accommodated by several of the more prominent alternative models as they are currently formulated.The experimental work reported in this article was funded by Economic and Social Research Council Award No. B 00 23 2163.     

Observing different orders of risk aversion

A decision maker's attitude towards risk is said to be of orderi, i=1, 2, if for every given riskē with expected value zero, the risk premium the decision maker is willing to pay to avoid the risktē goes witht to zero at the same order ast ⁱ. This article presents an experiment testing the order of decision makers' attitudes toward risk. Its major result is that both attitudes exist, each in significant proportions. Moreover, two classes of first-order behavior are defined. The rank-dependent model (Quiggin, 1982) belongs to one, the disappointment aversion model (Gul, 1991) to the other. We show that only the first of these two classes appears among our subjects.     

Taste uncertainty and status quo effects in consumer choice

We use reference-dependent expected utility theory to develop a model of status quo effects in consumer choice. We hypothesise that, when making their decisions, individuals are uncertain about the utility that will be yielded by their consumption experiences in different ‘taste states’ of the world. If individuals have asymmetric attitudes to gains and losses of utility, the model entails acyclic reference-dependent preferences over consumption bundles. The model explains why status quo effects may vary substantially from one decision context to another and why some such effects may decay as individuals gain market experience.     

A Microeconometric Test of Alternative Stochastic Theories of Risky Choice

The random preference, Fechner (or white noise), and constant error (or tremble) models of stochastic choice under risk are compared. Various combinations of these approaches are used with expected utility and rank-dependent theory. The resulting models are estimated in a random effects framework using experimental data from two samples of 46 subjects who each faced 90 pairwise choice problems. The best fitting model uses the random preference approach with a tremble mechanism, in conjunction with rank-dependent theory. As subjects gain experience, trembles become less frequent and there is less deviation from behaviour consistent with expected utility theory.     

Imprecise preferences and the WTP-WTA disparity

This article reports the results of a study designed to elicit willingness to pay (WTP) and willingness to accept (WTA) values for changes in the risk of nonfatal road injuries. We examine the possibility that individuals' preferences over combinations of wealth, risk, and safety are imprecise, and that this imprecision might result in the observed disparity between WTP and WTA measures of value. The results confirm that individuals' preferences for safety are significantly imprecise, but that this alone is insufficient to explain more than part of the disparity. Indeed, respondents' estimates of the minimum that they would be prepared to accept for a risk increase frequently exceed the maximum that they would be prepared to pay for an equivalent risk reduction.     

Public Perceptions of Risk and Preference-Based Values of Safety

This article reports the results of two studies aimed at estimating preference-based values of safety in three contexts—namely rail, domestic fires and fires in public places—relative to the corresponding value for roads using matching (or equivalence) questions. In addition, both studies included a variety of questions intended to shed light on respondents' perceptions of risk and attitudes to safety in the various contexts. While the two studies were, to all intents and purposes, identical in the procedure that they employed, the essential difference between them was that the first study took place in late 1998, whereas the second study was carried out in early 2000 in the aftermath of a major rail accident at Ladbroke Grove near London's Paddington station which occurred in October 1999 and in which 29 passengers and 2 train drivers died. In addition, the second study sample was deliberately weighted to contain an above-average proportion of regular rail users. These studies demonstrated how certain factors which have been shown to affect people's perception of risk (see Slovic, P. (1992). In S. Krimsky and D. Golding (eds.), Social Theories of Risk, Westport, CT: Praeger, pp. 117–152) also affected our respondents' priorities over safety programs. The results also showed however, that the impact of these perceptions upon the trade-offs between preventing deaths in different hazard contexts was a good deal less pronounced than has been suggested by the value differentials that are currently implicit—and in some cases, explicit—in public policy making.     

(How) Can we value health, safety and the environment?

The assumptions that underpin the conventional economic model of ‘rational agents’ tend to be substantially violated by data from surveys that try to elicit people’s values for health, safety and environmental goods. Psychological research suggests that there may be a large affective component in people’s responses to such surveys, with the result that those data are not amenable to the ‘logic’ of economic rationality. This raises questions both about the way we model human judgment and decision processes, and also about the use of survey data to guide public policy in these and other areas.