Professional Documents
Culture Documents
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/
info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content
in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
For more information about JSTOR, please contact support@jstor.org.
American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic
Review.
http://www.jstor.org
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
by definition of $(A)
by definition of $(B)
(5) $(A)
>
$(B)
by positive "utility value" of wealth
623
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
624
/ $0
SEPTEMBER 1979
$0
$ 16
B
$-Bet
A
P-Bet
FIGURE
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
TABLE 1-COEXISTING
Economic
1.
Misspecified
2.
Income
3.
Indifference
Theoretical
Criticism
and/or
Explanation
625
Lichtenstein
& Slovic
(1973)
Slovic
(1975)
Experiment
1 2 3 4
Lindman
(1971)
This
Study
Experiment
1
2
Theory
Incentives
Effects
NI
Psychological
4.
Strategic
5.
Probabilities
6.
Elimination
Responses
by Aspect
N
N
7.
Lexicographic
8.
Information
Processing:
Decision
Costs
9.
Information
Processing:
Response
Mode, Easy
Justification
Semiorder
Experimental
Methods
10.
Confusion
and
Misunderstanding
11.
Frequency
12.
Unsophisticated
13.
Experimenters
Psychologists
Low
Subjects
Were
I = The experiment
is
irrelevant
to
N = The experimental
results
cannot
E = The experimental
results
are
? = Data
economics
be
because
explained
consistent
with
by
the
of
this
the
reason
or
reason
reason
or
or
theory.
theory.
theory.
insufficient.
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
626
SEPTEMBER 1979
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
1/2,
then P(x, z)
min
627
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
628
SEPTEMBER 1979
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
TABLE
EXPERIMENT
629
1: PAIRS OF GAMBLES
Pairs
Type
Probability
of Winning
Amount
if Win
Amount
if Lose
Expected
Value
P
$
P
$
P
$
P
$
P
$
P
$
35/36
11/36
29/36
7/36
34/36
18/36
32/36
4/36
34/36
14/36
33/36
18/36
$ 4.00
$16.00
$ 2.00
$ 9.00
$ 3.00
$ 6.50
$ 4.00
$40.00
$ 2.50
$ 8.50
$ 2.00
$ 5.00
-$1.00
-$1.50
-$1.00
-$ .50
-$2.00
-$1.00
-$ .50
-$1.00
-$ .50
-$1.50
-$2.00
-$1.50
3.86
3.85
1.42
1.35
2.72
2.75
3.50
3.56
2.33
2.39
1.67
1.75
2
3
4
5
6
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
630
TABLE
3-EXPERIMENT
Group 1
Parts No Monetary Incentives
1
2
3
Group 2
Monetary Incentives
to be paid. These are included in the Appendix. Throughout the experiments all instructions and other materials handed out were
read aloud. The instructions included a
sample gamble (not used in the actual experiment): lose $1 if the number on the ball
drawn is less than or equal to 12 and win $8 if
the number is greater than 12. The way the
gambles worked was demonstrated.
Two different monetary incentive systems
were used which together control for Theory 1
and allow Theory 8 to be assessed. In one
room (group 1) subjects were told that they
would be asked to make a series of decisions
concerning various gambles, and that when
they were finished they would be paid $7. In
the other room (group 2) subjects were told
that at the end of the experiments one of their
decisions would be chosen at random (using a
bingo cage to determine which one) and their
payment would depend upon which gamble
they chose and upon the outcome of that
particular gamble. It was explained that they
had a credit of $7 and whatever they won or
lost would be added to or substracted from
that amount. Finally, it was stated that the
most they could lose on any of the gambles
was $2 so that $5 was the minimum possible
payment.3
The use of a randomizing device to pick
which decision "counted" was intended to
reduce the problem of income effects
discussed as Theory 2. Strictly speaking, even
this procedure does not completely eliminate
the possibility of some income effects, but it
should reduce their magnitude substantially.
Here there is little opportunity to have a
'This was the only difference in the instructions
between the two rooms. In the other room also, a decision
was to be chosen randomly at the end of the experiment.
However, it was stated that this was just for fun as people
often wish to know how much they would have won.
SEPTEMBER 1979
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
conformed to those used in many other experiments and the problems raised by Theory 1
were avoided.
In order to be sure that all subjects fully
understood how payments were to be determined, the instructions to part 2 were rather
elaborate. The details, which can be found in
the Appendix, include the following: an explanation about why it was in the subjects' best
interest to reveal their true reservation prices;
a practice gamble; a demonstration of the
procedures; and a written test. The correct
answers to the test were discussed and
subjects' questions were answered. These
procedures were designed to anticipate the
problems raised by Theory 10. Subjects were
allowed to work at part 2 at their own pace
and were allowed to determine selling prices
in whatever order they pleased.
Part 3 was identical to part 1 except that
the remaining three pairs of bets were
presented as shown on Table 3. Again, for
each pair, subjects were asked to indicate a
preference for bet A, bet B, or indifference.
This procedure controls for a possible order
effect implicit in the "cost of decision
making" arguments of Theory 8. Once the
subject has "invested" in a rule which yields a
precise dollar value, then he/she would tend
to use it repeatedly when the opportunity
arises. Thus, we might expect greater consistency between decisions of parts 2 and 3 than
between those of parts 1 and 2. After completing this part of the experiment, the subjects
were paid as described.
B. Procedures: Experiment 2
The purpose of this experiment was to test
the strategic behavior theory described as
Theory 4. The structure of the experiment
was identical to that of experiment 1 with two
major exceptions. First, section 2 of the experiment was replaced at points by a section in
which "limit prices" were extracted without
references to market-type behavior. Second,
subjects were not partitioned according to the
method of payment. All subjects were paid
with the same procedure as group 2 in experiment 1.
The organization of experiment 2 is shown
631
2
TABLE4-EXPERIMENT
Parts
1
2
3
4
Group 2
Group 1
Monetary Incentives
Preferences for Pairs (1), (2), (3)
Dollar Equivalents,
Selling Prices,
All Twelve Gambles
All Twelve Gambles
Preferences for Pairs (4), (5), (6)
Dollar Equivalents,
Selling Prices,
All Twelve Gambles
All Twelve Gambles
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
SEPTEMBER 1979
632
TABLE
5-FREQUENCIES
OF REVERSALS,
EXPERIMENT
1 (No INCENTIVES)
Reservation Prices
Total
Indifferent
Before Giving
Prices
After Giving
Prices
Bet
Choices
Consistent
Inconsistent
Equal
P
$
127
130
7
73
56
54
74
49
111
71
14
7
5
30
48
19
63
39
5
32
9
4
3
3
2
P
$
P
$
n = 44
FREQUENCIES
OF REVERSALS,
levels) and also a greater proportion of reversals on P bets (just clears the bar at .05).
We calculated a variety of summary statistics on the prices. The prices for $ bets tend to
be higher than the prices for the corresponding P bets and were above their expected
values. The distributions are apparently
different for the two types of bets. In all
twelve cases the mean, median, and estimated
standard deviations were greater for the $ bet
than for the corresponding P bet. There does
not seem to be any systematic difference
between the prices quoted in the two rooms.
For each of the twelve bets the hypothesis of
equal means was rejected only once (the P bet
in pair number 2), and the t-statistic was just
significant at a .05 level. From Table 7 one
can see that not only were the preference
reversals frequent, but also large. The magnitude of the reversals is generally greater for
the predicted reversals than for the unpredicted reversals and also tends to be someEXPERIMENT
1 (WITH
INCENTIVES)
Reservation Prices
Total
Indifferent
Before Giving
Prices
After Giving
Prices
Bet
Choices
Consistent
Inconsistent
Equal
P
$
99
174
3
49
87
50
87
26
145
69
22
4
7
15
70
11
75
31
12
38
10
3
5
1
2
P
$
P
$
n = 46
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
TABLE
1: MEAN
7-EXPERIMENT
633
VALUES OF REVERSALS
(In Dollars)
Predicted
Unpredicted
Bet
Incentives
No Incentives
Incentives
No Incentives
1
2
3
4
5
6
1.71
1.45
1.48
3.31
1.52
.92
2.49
2.64
1.29
5.59
1.79
1.18
.40
.51
1.00
3.00
.38
.33
.79
.90
.25
1.83
1.29
.31
Total
Indifferent
Preferences
before Prices
Indifferent
Preferences
after Prices
Indifferent
Total
Indifferent
n = 20
8-EXPERIMENT
GROUP
SELLING
Bet
Choices
Consistent
P
$
44
72
4
20
39
1
24
33
3
8
54
P
$
P
$
P
$
44
72
4
PRICES
ONE
Inconsistent
Equal
Selling Prices
30
15
6
3
5
24
12
12
3
3
3
30
18
3
3
0
4
59
Equivalents
34
11
6
2
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
634
GROUP
Total
Indifferent
Preferences
before
Equivalents
Preferences
after
Equivalents
Total
2:
Two
EXPERIMENT
SEPTEMBER 1979
EQuIVALENTS
Bet
Choices
Consistent
P
$
16
54
P
$
44
64
0
22
32
8
27
14
4
0
1
P
$
22
32
8
27
13
5
1
0
P
$
44
64
19
51
Selling Prices
22
10
3
3
Inconsistent
Equal
Equivalents
27
9
1
1
n = 18
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
36
LOSE
$ 1.00
9
WIN
$8.00
12
18
FIGURE 2
LOSE
36
$ .00
$16.00
27
WIN
$4.00
LOSE
$150
27
18
27
36
635
18
Bet A
Bet B
FIGURE
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
636
36
27
LOSE
27
WIN
$ 4.00
18
LOSE
$ 75
WIN
$1.50
SEPTEMBER 1979
FIGURE
36
32
VUI|N
$40 00"'$5
27
18
FIGURE
LOS
$50
27
LOSE
$1 00
9
WI N
$ 4 00
Bet A
Bet B
FIGURE
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
VOL. 69 NO. 4
1.00
-2.00
FIGURE
637
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions
638
SEPTEMBER 1979
, "Elimination
by Aspects: A Theory
This content downloaded from 14.139.171.194 on Sun, 10 Jan 2016 16:06:01 UTC
All use subject to JSTOR Terms and Conditions