International Choice Modelling Conference, International Choice Modelling Conference 2015

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Are Preferences Inherent or Constructed? Examining the Degree of Context Sensitivity on Preference Heterogeneity
Elisabeth Huynh, Joffre Swait

Last modified: 11 May 2015

Abstract


Marketers and economists have traditionally explained differences in choice patterns across respondents as arising from differences in true preferences (e.g., there are “pro-quality” and “pro-price” people in a population). This characterization of consumer decisions assumes that i) each decision maker is self-aware of stable and coherent preferences1 and ii) that these preferences are insensitive to context. Under this set of assumptions, the purpose of valuation is to uncover the true and well-defined preferences generating observed patterns of choices [2]. However, this view of context insensitive preferences is challenged by constructionists in consumer behavioural theory, who have made demonstration of instances that are inconsistent with stable preferences [3-7] and provide credible evidence that context plays a critical role in decision making.


To date the development of choice model forms has principally continued to work under the assumption of stable preferences; the formulation of choice models that allow for the possibility of adaptive preferences has arguably lagged behind. We conjecture that one reason for this may be that the prospect that preferences are constructed is fundamentally unsettling to applied economics. For instance, the validity of welfare theory and its empirical application for policy analysis is vitally dependent on whether consumers are retrieving or adapting preferences when making choices. However, it is not clear to us that the issue presenting itself is that we must take a stance for or against the stability or full adaptability of preferences. Rather, we believe that the choice before is whether or not to adopt a more realistic view that is integrative, allowing for the possibility that both a measure of stability and of adaptability of preferences co-exist in actual decision making.


From this vantage point, the contribution of this paper is three-fold. First, it proposes a new context-sensitive conceptualisation of choice behaviour. If context sensitivity is represented via a reduced form utility based view, this leads to potentially biased welfare measures and inaccurate policy predictions [8]. Second, we advance choice modelling by developing a new model form on the basis of context sensitivity of choice. The findings from adopting this model will provide additional insights into preference adaptation and the degree to which they may context-sensitive, and contribute towards providing a richer and more comprehensive understanding and evidence for both economic and behavioral theory. Third, our research will add to the existing literature by showing the degree of context adjustment within a single choice. Quantitatively, the project will provide empirical investigations into context effects on people’s choice making in discrete choice experiments (DCEs). By investigating patterns of differences in choice data, we provide a basis to test and demonstrate whether preferences are context sensitive, and if so, the extent to which it is.


This research provides a behavioral framework to capture context sensitivity, in which the decision maker is conceptualized as a mixture of both adaptive and non-adaptive archetypes, with the mixture probability representing the tendency to adapt. The approach we propose can be conceptualized as a mechanism for filtering context sensitivity out of inferences about preferences; equivalently, it can be viewed as a means of describing actual behavior through the mixture of basic behavioral modalities. We present a corresponding operational discrete choice model based on the Generalized Extreme Value (GEV) models which draw upon Lancaster’s economic theory of value and random utility theory (RUT). Specifically, the choice model measures the degree preferences are influenced by context by examining how the tendency to adaptation affects the subsequent evaluative process of the decision maker.


This paper will investigate whether different contexts leads to bias in parameter and welfare measures. We will compare the sensitivity of parameter and welfare measures using three existing choice datasets that vary over one or more of the following factors [4]:  (1) the complexity of the task (such as the number of options to be considered; number of replications); (2) the characteristics of the options in the set (e.g., the similarity or dissimilarity of options considered); (3) elicitation task type (e.g., standard DCE versus best-worst); (4) how the choice set is framed (e.g., product category). The study will allow us to characterize how varying degrees of preference retrieval vs adaptation might capture potential biases introduced by assuming that preferences are always stable. The objective will be to test the proposed model and explore the degree of sensitivity to different mixtures of adaptations and assess whether it is reflected when degrees of adaptation is omitted in estimation. The findings will provide evidence and supplement knowledge for understanding the degree contextual sensitivities affect choices.


Key terms: Context sensitivity, choice model, random utility, economics, consumer behavior.


References
1.    West PM. Predicting preferences: An examination of agent learning. Journal of Consumer Research. 1996;23:68-80
2.    McFadden D. Conditional logit analysis of qualitative choice behavior. In: Zarembka P, ed. Frontiers in econometrics. New York: Academic Press; 1974:105-142.
3.    Loewenstein G, Issacharoff S. Source dependence in the valuation of objects. Journal of Behavioral Decision Making. 1994;7:157-168
4.    Bettman James R, Luce Mary F, Payne John W. Constructive consumer choice processes. Journal of Consumer Research. 1998;25:187-217
5.    Huber J, Payne JW, Puto C. Adding asymmetrically dominated alternatives: Violations of regularity and the similarity hypothesis. Journal of Consumer Research. 1982;9:90-98
6.    Kahneman D, Ritov I, Jacowitz KE, Grant P. Stated willingness to pay for public goods: A psychological perspective. Psychological Science. 1993;4:310-315
7.    Payne JW, Bettman JR, Coupey E, Johnson EJ. A constructive process view of decision making: Multiple strategies in judgment and choice. Acta Psychologica. 1992;80:107-141
8.    Lancaster K. A new approach to consumer theory. Journal of Political Economy. 1966;74:132-157


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