Valuation Techniques for Social Cost-Benefit Analysis: - HM Treasury

Preference reversals have also been found in risk-free experiments. Hsee (2000) finds that
preferences can be reversed by changing from whether the good is evaluated on its own to
whether it is evaluated jointly against another similar good. For example, Hsee‘s Dictionary Study
asked students to state their WTP values for the following two music dictionaries:
Respondents were assigned to three different groups: i) subjects who were shown both
dictionary descriptions and asked to state their WTP for each (joint evaluation mode); ii) subjects
who were shown dictionary A only and asked to state their WTP for that dictionary (separate
evaluation mode); and iii) subjects who were shown dictionary B only and asked to state their
WTP for that dictionary (separate evaluation mode).The mean WTP values for the two
dictionaries are shown in the table below.
Preference reversals in joint and separate evaluations
Source: Hsee (2000).
Under joint evaluation, people state a higher value for dictionary B. However, under separate
valuation, dictionary A attracts the highest stated value. These joint evaluation– separate
evaluation preference reversals can be explained by some simple heuristics. In separate
evaluation people focus on the categorical attributes of the good, in this case ‗whether the
dictionary has any defects’. In joint evaluation, attention is focused on the incremental aspects
or differences in the goods, in this case ‗the number of additional entries’.
The study of preference reversals has not been limited to the field of psychology. For example,
two economists, Grether and Plott (1979), criticised the previous work by psychologists and
replicated the experiments introducing improved incentive compatibility, a wider and more
varied range of participants and more information for participants. However, the preference
reversal phenomenon did not disappear. Preference reversals have also been found in contingent
valuation surveys for environmental goods and amenities (Brown, 1984; Gregory et al., 1993;
Irwin et al., 1993).
The anchoring and preference reversal phenomena described above involve people stating or
placing monetary valuations on goods. There is some evidence to suggest that part of the
problem may be arising when people try to convert a feeling or concept of value into a
monetary scale. In this interpretation people could have strong and well-defined preferences,
beliefs and feelings for many of the things that are not sold through markets, but these beliefs
are not represented monetarily (Gregory et al., 1993). Amir et al. (2008) find a disparity between
people‘s WTP and their predicted experience or utility of goods like music concerts. Kahneman
et al (1998) found that in a juror award experiment in which people studied a number of
corporate malpractice cases and were asked to rate the defendant‘s (the corporation) actions on
a scales of ‗outrage‘ and ‗degree of punishment justified.‘ There were strong correlations
between the level of outrage and punishment across the different jurors, but the dollar awards
had very little correlation. This is supported by a study by Malouff and Schutte (1989) who find
that juror awards are highly susceptible to the anchoring effect of the plaintiff‘s initial level of
compensatory demand.
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