Complexity and biases

Small Probabilistic Discounts Stimulate Spending: Pain of Paying in Price Promotions

AbstractWe find that small probabilistic price promotions effectively stimulate demand, even more so than comparable fixed price promotions (e.g., “1% chance it’s free” vs. “1% off,” respectively), because they more effectively reduce the pain of paying. In three field experiments at a grocer, we exogenously and endogenously manipulated the salience of pain of paying via elicitation timing (e.g., at entrance or checkout) and payment method (i.e., cash/debit cards or credit cards). This modulated the attractiveness of probabilistic discounts and their ability to stimulate spending. Shoppers paying with cash or debit cards, for example, spent 54% more if they received a 1% probabilistic discount than a 1% fixed discount (experiment 2). A fourth experiment showed that consumers’ sensitivity to pain of paying modulates the greater comparative efficacy of small probabilistic than fixed discounts. More broadly, the results elucidate a novel affective route through which price promotions stimulate demand––pain of paying.

Behavioural economics, consumer behaviour and consumer policy: state of the art

Counter to the traditional assumption of neoclassical economics that individuals are rational Homo oeconomici that always seek to maximize their utility and follow their ‘true’ preferences, research in behavioural economics has demonstrated that people's judgements and decisions are often subject to systematic biases and heuristics, and are strongly dependent on the context of the decision. In this article, we briefly review the transition of research from neoclassical economics to behavioural economics, and discuss how the latter has influenced research in consumer behaviour and consumer policy. In particular, we discuss the impacts of key principles such as status quo bias, the endowment effect, mental accounting and the sunk-cost effect, other heuristics and biases related to availability, salience, the anchoring effect and simplicity rules, as well as the effects of other supposedly irrelevant factors such as music, temperature and physical markers on consumers’ decisions. These principles not only add significantly to research on consumer behaviour – they also offer readily available practical implications for consumer policy to nudge behaviour in beneficial directions in consumption domains including financial decision making, product choice, healthy eating and sustainable consumption.

Characterizing the causes, dynamics, and consequences of choice deferral

The fact that people often avoid making decisions is well known, and past research has helped to identify some of the conditions and reasons for doing so. For instance, people may forgo choices between bad options because they prefer not to end up with one of those options. It is much less clear when and why people avoid choosing in cases where they eventually will have to make a given decision. To study such instances of choice deferral, we presented participants with a series of choices, and for each choice they were allowed to either choose immediately or defer the decision until later in the experiment. Across six experiments and three choice domains (choices among consumer goods, artwork, and political candidates), we find that the strongest predictor of choice deferral is the overall value of a given set of options, with relative value (i.e., how hard it is to identify the best option) counterintuitively playing a smaller role. We show that the influence of overall value on choice deferral can be accounted for by a dynamic decision model according to which participants appraise the option set relative to a criterion before deciding whether to choose or defer, comparing this to a previous model whereby participants make such a decision based on a predetermined decision time limit. We further reveal that the influence of overall value on choice deferral is determined by how congruent options are with a given choice goal (choose-best or choose-worst) rather than simply how bad those options are. Collectively, our findings shed new light on how people decide to put off the inevitable.

Choice Bracketing

When making many choices, a person can broadly bracket them by assessing the consequences of all of them taken together, or narrowly bracket them by making each choice in isolation. We integrate research conducted in a wide range of decision contexts which shows that choice bracketing is an important determinant of behavior. Because broad bracketing allows people to take into account all the consequences of their actions, it generally leads to choices that yield higher utility. The evidence that we review, however, shows that people often fail to bracket broadly when it would be feasible for them to do so. In addition to documenting the diverse effects of bracketing, we also discuss factors that determine whether people bracket narrowly or broadly. We conclude with a discussion of normative aspects of bracketing and argue that there are some situations in which narrower bracketing results in superior decision making.

Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing

Abstract This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.

Adult age differences in monetary decisions with real and hypothetical reward

Abstract Age differences in monetary decisions may emerge because younger and older adults perceive the value of outcomes differently. Yet, age‐differential effects of monetary rewards on decisions are not well understood. Most laboratory studies on aging and decision making have used scenarios in which rewards were merely hypothetical (decisions did not have any real consequences) or in which only small amounts of money were at stake. In the current study, we compared younger adults' (20–29 years) and older adults' (61–82 years) decisions in probabilistic choice problems with real or hypothetical rewards. Decision‐contingent rewards were in a typical range of previous studies (gains of up to ~4.25 USD) or substantially scaled up (gains of up to ~85 USD per participant). Reward type (real vs. hypothetical) affected decision quality, including value maximization, switching between options, and dominance violations (choices of an option that was inferior to another option in all respects). Decision quality was markedly better with real than hypothetical rewards in older adults and correlated with numeracy in both age groups. However, we found no evidence that reward type affected people's risk preferences. Overall, the findings portray a fairly positive picture regarding the use of hypothetical scenarios to assess preferences: With carefully prepared instructions, people from different age groups indicate preferences in hypothetical scenarios that match their decisions with real and much higher rewards. One advantage of using real rewards is that they help to reduce decision noise.

The Preference Survey Module: A Validated Instrument for Measuring Risk, Time, and Social Preferences

Incentivized choice experiments are a key approach to measuring preferences in economics but are also costly. Survey measures are a low-cost alternative but can suffer from additional forms of measurement error due to their hypothetical nature. This paper seeks to leverage the strengths of both approaches by proposing a new survey module on risk aversion, time discounting, trust, altruism, positive and negative reciprocity, in which survey items are selected based on ability to predict choices in corresponding, incentivized experiments. The methodology and results provided in the paper can also potentially provide a model for researchers who have specific requirements and want to design their own modules. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: The project received funding from the European Research Council under the European Union’s Seventh Framework Programme (FP7-2007-2013) [Grant 209214]. A. Falk and T. Dohmen acknowledge funding from the Deutsche Forschungsgemeinschaft (German Research Foundation) [Grant CRC TR 224 (Project A01)] and Germany’s Excellence Strategy [Grant EXC 2126/1-390838866]. Supplemental Material: Data and the online appendices are available at https://doi.org/10.1287/mnsc.2022.4455 .

People Reject Algorithms in Uncertain Decision Domains Because They Have Diminishing Sensitivity to Forecasting Error

Will people use self-driving cars, virtual doctors, and other algorithmic decision-makers if they outperform humans? The answer depends on the uncertainty inherent in the decision domain. We propose that people have diminishing sensitivity to forecasting error and that this preference results in people favoring riskier (and often worse-performing) decision-making methods, such as human judgment, in inherently uncertain domains. In nine studies ( N = 4,820), we found that (a) people have diminishing sensitivity to each marginal unit of error that a forecast produces, (b) people are less likely to use the best possible algorithm in decision domains that are more unpredictable, (c) people choose between decision-making methods on the basis of the perceived likelihood of those methods producing a near-perfect answer, and (d) people prefer methods that exhibit higher variance in performance (all else being equal). To the extent that investing, medical decision-making, and other domains are inherently uncertain, people may be unwilling to use even the best possible algorithm in those domains.

How Field Experiments in Economics Can Complement Psychological Research on Judgment Biases

This review summarizes results of field experiments examining individual behaviors across several market settings—from open-air markets to rideshare markets to tax-compliance markets—where people sort themselves into market roles wherein they make consequential decisions. Using three distinct examples from my own research on the endowment effect, left-digit bias, and omission bias, I showcase how field experiments can help researchers understand mediators, heterogeneity, and causal moderation involved in judgment biases in the field. In this manner, the review highlights that economic field experiments can serve an invaluable intellectual role alongside traditional laboratory research.

A Behavioral Model of Rational Choice

Abstract. Introduction, 99. — I. Some general features of rational choice, 100.— II. The essential simplifications, 103. — III. Existence and uniqueness of

Pain of Paying? — A Metaphor Gone Literal: Evidence from Neural and Behavioral Science

How do individuals consider the price of a good when making purchase decisions? Standard economic theories assume an analytical process: Individuals consider th

In-Store Spending Dynamics: How Budgets Invert Relative-Spending Patterns

Abstract The authors conduct four controlled lab experiments and one field study in a brick-and-mortar grocery store to demonstrate that relative spending—the price of the purchased item relative to the mean price of the product category—evolves nonlinearly and distinctly for budget and nonbudget shoppers. While the relative spending of budget shoppers evolves in a concave manner, the relative spending of nonbudget shoppers evolves inversely in a convex manner. Thus, budget (nonbudget) shoppers spend relatively more (less) in the middle than at the beginning and toward the end of their shopping trip. Mediation analyses confirm that the pain of paying experienced while shopping drives price salience, which then drives relative spending. Moreover, manipulating shoppers’ pain of paying, by altering the opportunity costs associated with their spending or drawing shoppers’ attention to their spending via real-time spending feedback, is shown to influence these spending patterns. The research offers theoretical contributions to the in-store decision-making, budgeting, and pain-of-paying literature and has important implications for marketing and promotion strategies in retail and mobile technology environments, as it suggests when a shopper may be more sensitive to price-related factors.

A Framework for Studying AI Agent Behavior: Evidence from Consumer Choice Experiments

Environments built for people are increasingly operated by a new class of economic actors: LLM-powered software agents making decisions on our behalf. These decisions range from our purchases to travel plans to medical treatment selection. Current evaluations of these agents largely focus on task competence, but we argue for a deeper assessment: how these agents choose when faced with realistic decisions. We introduce ABxLab, a framework for systematically probing agentic choice through controlled manipulations of option attributes and persuasive cues. We apply this to a realistic web-based shopping environment, where we vary prices, ratings, and psychological nudges, all of which are factors long known to shape human choice. We find that agent decisions shift predictably and substantially in response, revealing that agents are strongly biased choosers even without being subject to the cognitive constraints that shape human biases. This susceptibility reveals both risk and opportunity: risk, because agentic consumers may inherit and amplify human biases; opportunity, because consumer choice provides a powerful testbed for a behavioral science of AI agents, just as it has for the study of human behavior. We release our framework as an open benchmark for rigorous, scalable evaluation of agent decision-making.

Rational Inattention: A Review

We review the recent literature on rational inattention, identify the main theoretical mechanisms, and explain how it helps us understand a variety of phenomena across fields of economics. The theory of rational inattention assumes that agents cannot process all available information, but they can choose which exact pieces of information to attend to. Several important results in economics have been built around imperfect information. Nowadays, many more forms of information than ever before are available due to new technologies, and yet we are able to digest little of it. Which form of imperfect information we possess and act upon is thus largely determined by which information we choose to pay attention to. These choices are driven by current economic conditions and imply behavior that features numerous empirically supported departures from standard models. Combining these insights about human limitations with the optimizing approach of neoclassical economics yields a new, generally applicable model.

Buy wisely

Whenever I buy things I try to prioritize cost per use. Sometimes I consider other priorities such as cost per smile, cost per thrill, cost per externality, ...

Anticipation and Choice Heuristics in the Dynamic Consumption of Pain Relief

Humans frequently need to allocate resources across multiple time-steps. Economic theory proposes that subjects do so according to a stable set of intertemporal preferences, but the computational demands of such decisions encourage the use of formally less competent heuristics. Few empirical studies have examined dynamic resource allocation decisions systematically. Here we conducted an experiment involving the dynamic consumption over approximately 15 minutes of a limited budget of relief from moderately painful stimuli. We had previously elicited the participants’ time preferences for the same painful stimuli in one-off choices, allowing us to assess self-consistency. Participants exhibited three characteristic behaviors: saving relief until the end, spreading relief across time, and early spending, of which the last was markedly less prominent. The likelihood that behavior was heuristic rather than normative is suggested by the weak correspondence between one-off and dynamic choices. We show that the consumption choices are consistent with a combination of simple heuristics involving early-spending, spreading or saving of relief until the end, with subjects predominantly exhibiting the last two.