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P U B L I C A T I O N
behavioral economics:
Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers. Ziv Carmon Dan Ariely 2000 by JOURNAL OF CONSUMER RESEARCH, Inc.
We propose that buying- and selling-price estimates reflect a focus on what the consumer forgoes in the potential exchange and that this notion offers insight into the well-known difference between those two types of value assessment. Buyers and sellers differ not simply in their valuation of the same item but also in how they assess the value. Buyers tend to focus on their sentiment toward what they forgo (typically, the expenditure), and buying prices are thus heavily influenced by variables such as salient reference prices. By the same token, sellers tend to focus on their sentiment toward surrendering the item, and selling prices are hence more heavily influenced by variables such as benefits of possessing the item. Four studies examining buying- and selling-price estimates of tickets for National Collegiate Athletic Association basketball games offer consistent support for these ideas. The studies show that naturally occurring differences among respondents in attitudes relating to the tickets that sellers forgo (e.g., significance of the game) corresponded more closely to variation in selling prices than in buying prices. Conversely, measures relating to the expenditure (e.g., respondents’ concern with money) corresponded more closely to buying prices than to selling prices. Using controlled manipulations we then showed that changes in aspects relating to the game (e.g., expected climate in the stadium) affected selling prices more than buying prices, but changes relating to the expenditure (e.g., list price of the ticket)influenced buying prices more than selling prices. We also showed that drawing attention to the benefits of possessing a ticket before asking for the price estimates influenced buying prices more than selling prices, supporting our claim that otherwise these benefits are naturally more salient to sellers than buyers. Similarly, drawing attention to alternative uses of money before asking for price estimates
influenced selling prices more than buying prices. (PDF)
 
“Coherehnt Arbitrariness”: Stable Demand Curves Without Stable Preferences. Dan Ariely, George Loewenstein, Drazen Prelec The Quarterly Journal of Economics, February 2003
In six experiments we show that initial valuations of familiar products and simple hedonic experiences are strongly in?uenced by arbitrary “anchors” (sometimes derived from a person’s social security number). Because subsequent valuations are also coherent with respect to salient differences in perceived quality or quantity of these products and experiences, the entire pattern of valuations can easily create an illusion of order, as if it is being generated by stable underlying preferences. The experiments show that this combinationof coherent arbitrariness(1) cannot be interpreted as a rational response to information, (2) does not decrease as a result of experience with a good, (3) is not necessarily reduced by market forces, and (4) is not unique to cash prices. The results imply that demand curves estimated from market data need not reveal true consumer preferences, in any normatively signi?cant sense of the term.(PDF)
 
Goal-based Construction of Preferences: Task Goals and the Prominence Effect. Gregory W. Fischer • Ziv Carmon • Dan Ariely • Gal Zauberman Management Science/Vol. 45, No. 8, August 1999
Preferences inferred from choice are more likely to favor the alternative that is superior with
respect to the prominent (most important or salient) attribute than are preferences inferred from matching (direct tradeoff) judgments. This prominence effect violates standard models of rational choice and complicates the task of measuring preferences. In this article, we propose a new task-goal hypothesis regarding the prominence effect: The prominent attribute receives more weight in tasks whose goal is to differentiate among options than in tasks whose goal is to equate options. We use this hypothesis to generalize the prominence effect beyond choice and matching to several additional tasks, including the choice-based matching and difference comparison methods that are widely employed in decision analysis. The results of three studies provide strong support for the task-goal account of the prominence effect and cast doubt on competing explanations. We discuss the implications of these findings for descriptive decision theory and for preference measurement in decision analysis, public policy, and marketing.(Multiattribute Utility; Preference Assessment; Preference Reversals; Prominence Effect; Task Goals). (PDF)
 
Sequential Choice in Group Settings: Taking the Road Less Traveled and Less Enjoyed. Dan Ariely
Jonathan Levav. JOURNAL OF CONSUMER RESEARCH, Inc. Vol. 27 c December 2000
Many individual decisions take place in a group context wherein group members voice their choices sequentially. In this article we examine the impact of this dynamic decision process on individuals’ choices and satisfaction with their outcomes. We propose that choices reflect a balancing of two classes of goals: goals that are strictly individual and goals that are triggered by the existence of the group. The latter sometimes results in choices that undermine personal satisfaction and
increase regret. We find support for goal balancing in three studies in which we tracked consumers’ orders of dishes and drinks. In the Lunch study we found that real groups (tables) choose more varied dishes than would be expected by random sampling of the population of all individual choices across all tables. The Beer study demonstrates that this group-level variety seeking is attributable to the interaction—implicit or explicit—among group members, and can be dissipated when the group is forced to “disband” and its members make strictly individual choices. Finally, the Wine study demonstrated that individual choices in a group context are also aimed at satisfying goals of information gathering and self-presentation in the form of uniqueness.(PDF)
 
Constructing Stable Preferences: A Look into Dimensions of Experience and their Impact on Preference Stability. Steve Hoeffler& Dan Ariely.
There are two polar schools of thought regarding the existence of preferences. The “economics” tradition is based on the assumption of existing preferences. The emerging “constructive” processing approach assumes preferences are constructed based on the task and context factors present during choice or preference elicitation. Most researchers believe in a middle ground where consumers construct their preferences when they are new to a category and eventually develop more stable preferences with experience in a domain. This research is designed to bridge the gap between these two schools of thought by understanding the process by which preferences are learned and developed over time. Specifically, we investigated the impact of several dimensions of experience (effort, choice, and experience) on preference stability. Results revealed that the type of experience and its corresponding effort had a large impact on the process of preference development. Study 1 demonstrated that by exposing subjects to the tradeoffs in their environment, their preferences developed and stabilized most rapidly. In addition, the act of making a choice (Study 2) and repeated choices (Study 3) both led to increased preference stability, as indicated by measures of objective and subjective preference stability. (PDF)
 
electronic commerce:
Agents to the Rescue?Patricia Maes, Dan Ariely, Steve Bellman, Eric Bradlow, Joel Huber, Eric Johnson, Barbara Kahn, John Little, David Schkade. 1999 Kluwer Academic Publishers.
The advent of electronic environments is bound to have profound effects on consumer decision making. While the exact nature of these in¯uences is only partially known it is clear that consumers could bene®t from properly designed electronic agents that know individual users' preferences and can act on their behalf. An examination of the various roles agents perform is presented as a framework for thinking about the design of electronic agents. In addition, a set of goals is established that include both outcome-based measures, such as improving decision quality, as well as process measures like increasing satisfaction and developing trust. (PDF)
 
Learning by Collaborative and Individual-Based Recommendation Agents. Dan Ariely, John G. Lynch Jr., Manuel Aparicio IV.
Intelligent recommendation systems can be based on two basic principles: collaborative filters and individual-based agents. In this work we examine the learning function that results from these two
general types of learning smart agents. There has been significant work on the predictive properties of each type, but no work has examined the patterns in their learning from feedback over repeated trials. Using simulations, we create clusters of “consumers” with heterogeneous utility functions and errorful reservation utility thresholds. The consumers go shopping with one of the designated smart agents – receive recommendations from the agents, and purchase products they like and reject ones they do not. Based on the purchase / no purchase behavior of the consumers, agents learn about the consumers and potentially improve the quality of their recommendations. We characterize learning curves by modified exponential functions with an intercept for percent of recommendations accepted at trial 0, an asymptotic rate of recommendation acceptance, and a rate at which learning moves from intercept to asymptote. We compare the learning of a baseline random recommendation agent, an individual-based logistic-regression agent, and two types of collaborative filters that rely on K-mean clustering (popular in most commercial applications) and nearest-neighbor algorithms. (PDF)
 
Buying, Bidding, Playing, or Competing? Value Assessment and Decision Dynamics in Online Auctions.Dan Ariely, Itamar Simonson. JOURNAL OF CONSUMER PSYCHOLOGY, 13(1&2), 113–123. 2003
We propose an analytical framework for studying bidding behavior in online auctions. The framework focuses on three key dimensions: the multi-stage process, the types of value-signals employed at each phase, and the dynamics of bidding behavior whereby early choices impact subsequent bidding decisions. We outline a series of propositions relating to the auction entry decision, bidding decisions during the auction, and bidding behavior at the end of an auction. In addition, we present the results of three preliminary field studies that investigate factors that influence consumers’ value assessments and bidding decisions. In particular, (a) due to a focus on the narrow auction context, consumers under-search and, consequently, overpay for widely available commodities (CDs, DVDs) and (b) auction starting prices lead to higher winning bids, but only when comparable items are not available in the immediate context. We discuss the implications of this research with respect to our understanding of the key determinants of consumer behavior in this increasingly important arena of purchase decisions. (PDF)
 
Controlling the Information Flow: Effects on Consumers’ Decision Making and Preferences. Dan Ariely. JOURNAL OF CONSUMER RESEARCH, Inc. c Vol. 27 c September 2000

One of the main objectives facing marketers is to present consumers with information on which to base their decisions. In doing so, marketers have to select the type of information system they want to utilize in order to deliver the most appropriate information to their consumers. One of the most interesting and distinguishing dimensions of such information systems is the level of control the consumer has over the information system. The current work presents and tests a general model for understanding the advantages and disadvantages of information control on consumers’ decision quality, memory, knowledge, and confidence. The results show that controlling the information flow can help consumers better match their preferences, have better memory and knowledge about the domain they are examining, and be more confident in their judgments. However, it is also shown that controlling the information flow creates demands on processing resources and therefore under some circumstances can have detrimental effects on consumers’ ability to utilize information. The article concludes with a summary of the findings, discussion of their application for electronic commerce, and suggestions for future research avenues. (PDF)
 
Wine Online: Search Costs Affect Competition on Price, Quality, and Distribution. John G. Lynch, Jr., Dan Ariely. Marketing Science 2000 INFORMS Vol. 19, No. 1, Winter 2000, pp. 83–103
A fundamental dilemma confronts retailers with stand-alone sites on the World Wide Web and those attempting to build electronic malls for delivery via the Internet, online services, or interactive television (Alba et al. 1997). For consumers, the main potential advantage of electronic shopping over other channels is a reduction in search costs for products and product-related information. Retailers, however, fear that such lowering of consumers’ search costs will intensify competition
and lower margins by expanding the scope of competition from local to national and international. Some retailers’ electronic offerings have been constructed to thwart comparison shopping and to ward off price competition, dimming the appeal of many initial electronic shopping services. Ceteris paribus, if electronic shopping lowers the cost of acquiring price information, it should increase price sensitivity, just as is the case for price advertising. In a similar vein, though, electronic shopping can lower the cost of search for quality information. Most analyses ignore the offsetting
potential of the latter effect to lower price sensitivity in the current period. They also ignore the potential of maximally transparent shopping systems to produce welfare gains that give consumers a long-term reason to give repeat business to electronic merchants (cf. Alba et al. 1997, Bakos 1997). We test conditions under which lowered search costs should increase or decrease price sensitivity. We conducted an experiment in which we varied independently three different search costs via electronic shopping: search cost for price information, search cost for quality information within a given store, and search cost for comparing across two competing electronic wine stores. Consumers spent their own money purchasing wines from two competing electronic merchants selling some overlapping and some unique wines. We show four primary empirical results. First, for differentiated products like wines, lowering the cost of search for quality information reduced price sensitivity. Second, price sensitivity for wines common to both stores increased when cross-store comparison was made easy, as many analysts have assumed. However, easy cross-store comparison had no effect on price sensitivity for unique wines. Third, making information environments more transparent by lowering all three search costs produced welfare gains for consumers. They liked the shopping experience more, selected wines they liked more in subsequent tasting, and their retention
probability was higher when they were contacted two months later and invited to continue using the electronic shopping service from home. Fourth, we examined the implications of these results for manufacturers and examined how market shares of wines sold by two stores or one were affected by search costs. When store comparison was difficult, results showed that the market share of common wines was proportional to share of distribution; but when store comparison was made easy, the market share returns to distribution decreased significantly. All these results suggest incentives for retailers carrying differentiated goods to make information environments maximally transparent, but
to avoid price competition by carrying more unique merchandise. (PDF)
 
hedonic calculus:
Differential partitioning of extended experiencesq. Dan Ariely and Gal Zauberman. Organizational Behavior and Human Decision Processes 91 (2003) 128–139
This article focuses on the effect of the perceived cohesiveness of experiences, whether composed of single or multiple parts, on their overall hedonic evaluations. Four experiments demonstrate the effects of partitioning on decision makers evaluation of extended experiences. First, patterns (i.e., improving vs. deteriorating trends) strongly influence how experiences are evaluated. Second, increased partitioning of an experience reduces the effect of the overall trend and results in more equal weighting of its parts. Third, breaking experiences at strategic points (i.e., local maxima and minima) influences the overall evaluation of experiences as well as the prediction of their future levels. These results suggest that components of sequences are evaluated similarly to the way
whole sequences are evaluated and that experiences composed of multiple components are evaluated relatively more on the basis of their individual intensity and less based on their overall pattern. (PDF)
 
On the Making of an Experience: The Effects of Breaking and Combining Experiences on their Overall Evaluation. Dan Ariely and Gal Zauberman. Journal of Behavioral Decision Making (2000)
How do people create overall evaluations for experiences that change in intensity over time? What `rules' do they use for combining such di?erent intensities into single overall evaluations? And what factors in¯uence these integration rules? This paper starts by examining the relationship between the patterns of experiences over time and their overall evaluations. Within this framework, we propose and test the idea that the rules for combining such experiences depend on whether the experiences are perceived to be composed of single or multiple parts (i.e. continuous or discrete). In two experiments we demonstrate that an experience's level of cohesiveness moderates the relationship between its pattern and overall evaluation. The results show that breaking up experiences substantially reduces the impact of patterns on overall evaluations. In addition, we demonstrate that continuously measuring momentary intensities produces a similar e?ect on this
relationship, causing us to speculate that providing continuous intensity responses causes subjects to self-segment the experience. (PDF)
 
Combining Experiences Over Time: The Effects of Duration, Intensity Changes & On-Line Measurements on Retrospective Pain Evaluations. Dan Ariely
Two experiments were conducted to examine the effects of various factors on retrospective pain
evaluation. The factors examined in Experiment 1 were the rate and pattern of change, the intensity (particularly the final intensity), and the duration of the painful experience. Experiment 2 manipulated these factors and, in addition, examined the effect of continuous (on-line) ratings
on the overall retrospective evaluation. The two experiments utilized different pain modalities,
heat in the first and mechanical pressure in the second. In addition, all subjects in Experiment 1
experienced stimuli with the same physical magnitude, while in Experiment 2 stimuli were individually tailored to make them subjectively equivalent. In both experiments, subjects were
presented with a series of painful stimuli and evaluated the intensity of each stimulus
immediately upon its termination. The stimuli themselves were composed of multiple intensity
levels that differentially changed over time (Intensity-Patterns). Subjects' on-line ratings in
Experiment 2 closely mirrored the physical patterns of the intensities. The main conclusion from
both experiments is that the retrospective evaluations of painful experiences are influenced
primarily by a combination of the final pain intensity and the intensity trend during the latter half of the experience. In addition, results indicated that duration has little impact on retrospective evaluations for stimuli of relatively constant intensity. However, when the stimulus intensity changes over time, duration does play a role. Finally, the task of continuously reporting the stimulus intensity had a moderating impact on the retrospective evaluations. (PDF)
 
Gestalt Characteristics of Experiences: The Defining Features of Summarized Events. Dan Ariely and Ziv Carmon. Journal of Behavioral Decision Making (2000)
In this paper we take stock of recent research on how people summarize and evaluate extended experiences. Summary assessments do not simply integrate all the components of the evaluated events, but tend to focus on only a few features (gestalt characteristics). Examples of these defining features include the rate at which the transient state components of the experience become more or
less pleasant over its duration, and the intensity of the state at key instances, in particular the most intense (peak) and the final (end ) moments. It is not yet sufciently clear which specific gestalt characteristics dominate summary assessments of experiences, nor how this difers across types of experiences or measurement approaches. To address some of these issues, we describe new research in this area, discuss potential methodological dificulties, and suggest directions for
future research. (PDF)