the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

reference dependent ambiguity abstract motivated by experimental and empirical evidence i study a framework where reference points such as a status quo endowment or default option can distort the way an individual responds to ambiguity i characterize a model of reference dependent maxmin expected utility and provide behavioral foundations for comparing reference dependent ambiguity attitudes i also illustrate some implications of reference dependent ambiguity for trade in an asset market including underdiversification no trade and the potential for a market collapse

the behavior of foreign exchange rates the analysis of the distribution of foreign exchange rate changes provides a description of the behavior of foreign exchange rates and its determining underlying process the application of empirical methodologies or further theoretical developments is limited by the nature of this distribution in this paper the empirical analysis of major currencies during the flexible exchange rate period suggests that there is no unique distribution representing the behavior of the foreign exchange rate this however is determined both by foreign exchange management policies and the fundamental economic forces

does the preference reversal phenomenon necessarily contradict the independence axiom one of the most puzzling paradoxes in decision theory is the preference reversal phenomenon this phenomenon seems to contradict the transitivity axiom for a long time one of the cornerstones of utility theory this paradox is established whenever a decision maker prefers lottery x to lottery y but is willing to put a lower selling price on x than on y such experiments first reported by harold lindman 1971 and sarah lichtenstein and paul slovic 1971 were repeated by david grether and charles plott 1979 werner pommerehne et al 1982 and robert reilly 1982 although the later researchers improved the mechanism through which the selling price emerges they all found systematic reversals a new approach to this problem was developed by charles holt 1986 and edi karni and zvi safra 1987 from two different starting points these authors showed that the preference reversal phenomenon does not necessarily prove a violation of the transitivity axiom as it may contradict the independence axiom this implies that people do not maximize expected utility but in that case the preference reversal phenomenon becomes just another evidence against expected utility theory but not against the transitivity axiom these results have their own disadvantages although the independence axiom is not as fundamental as transitivity it is nevertheless very appealing on normative grounds of course the preference reversal phenomenon necessarily contradicts at least one of the assumptions of expected utility theory but empirical evidence shows that despite its normative appeal violations of the reduction of compound lotteries axiom may happen see for example joshua ronen 1971 and doug snowball and clif brown 1979 in this paper i therefore suggest a decision mechanism for the preference reversals lotteries which is transitive and satisfies the independence axiom but not the reduction axiom

preference reversals and the independence axiom of all of the paradoxical patterns of behavior reported in laboratory experiments one of the most perplexing for decision theorists is the preference reversal phenomenon a subject in a preference reversal experiment is typically given a choice between a lottery with a high probability of winning a modest amount of money a p bet and a lottery with a low probability of winning a large amount of money a bet the lowest amount of money for which the subject would willingly sell either of these lotteries is also elicited the most common reversal is for a subject to choose the p bet over the bet but to put a higher selling price on the bet preference reversals were first reported by harold lindman 1971 and sarah lichtenstein and paul slovic 1971 in discussing the psychologists discovery of such reversals david grether and charles plott remark the inconsistency is deeper than mere lack of transitivity or even stochastic transitivity it suggests that no optimization principles of any sort lie behind even the simplest of human choices 1979 p 623 this paper offers a simple alternative explanation of documented preference reversals an explanation that does not require the abandonment of the transitivity assumption

choice by sequential procedures article history we propose a rule of decision making the sequential procedure guided by routes and show that three influential boundedly rational choice models can be equivalently understood as special cases of this rule in addition the sequential procedure guided by routes is instrumental in showing that the three models are intimately related we show that choice with a status quo bias is a refinement of rationalizability by game trees which in turn is also a refinement of sequential rationalizability thus we provide a sharp taxonomy of these choice models and show that they all can be understood as choice by sequential procedures

supply and social cost estimates for biomass from crop residues in the united states the components of social costsincluded in the supply analysis are cashoutlays and opportunity costs associated withharvest and alternative residue uses potentialenvironmental damage that is avoided byexcluding unsuitable land and costs in movingresidues from farms to processing plants regional estimates account for the growingconditions and crops of the main agriculturalareas of the united states estimates includethe main u s field crops with potential forresidue harvest corn wheat sorghum oats barley rice and cane sugar the potentialcontribution of residues to u s energy needsis discussed

lagged beliefs and reference dependent utility abstract models of expectation based reference dependent preferences proposes that the reference point to which consumption outcomes are compared is endogenously determined as a function of lagged probabilistic beliefs this paper presents an experiment designed to test some predictions of expectation based reference dependence models the design induces a stochastic reference point via a lottery and then measures valuations for a commodity the experimental results find no effect of the first stage lottery on commodity valuation

independence of irrelevant alternatives and revealed group preferences it is shown that a pareto optimal and continuous single valued choice function defined on the compact convex subsets of the positive orthant of the n dimensional euclidean space maximizes a real valued function if and only if it satisfies the independence of irrelevant alternatives condition if n 2 and the strong axiom of revealed preference otherwise the results can be applied to consumer demand theory to deal with nonlinear budget sets and to bargaining game theory to generalize the nash bargaining solution

is status quo bias consistent with downward sloping demand by now there is a large experimental literature showing some kind of status quo bias 1 if the subject is given a coffee mug candy bar and later given the possibility of trading it for a candy bar coffee mug of equal value the subject is likely to stick with the original allocation knetsch 1989 here we ask whether status quo bias can be made consistent with downward sloping demand curves this paper thus differs in intent from a large body of research that incorporates a different notion of status quo bias into a more general formulation of revealed preference e g masatlioglu and ok 2005 sagi 2006 such research demonstrates that there are different sets of primitives that lead to different axioms of revealed preference in this paper we do not care which set of primitives holds or whether such results can be incorporated into the neoclassical model of consumer behavior as munro and sugden 2003 have done 2 instead we undertake a strict behavioralist approach individuals display status quo bias and downward sloping demand curves whether such behavior can be derived from a consistent set of assumptions is irrelevant to our purpose indeed we do not require the existence of a preference relation that rationalizes choices at all all that is required is choice behavior what we want to find out is the implications of such observed behavior in particular we want to determine whether status quo bias and downward sloping demand curves are consistent with each other the short answer is yes but the consumer will display addictive behavior 3 the remainder of the paper will be devoted to demonstrating this result we will make the following set of assumptions ai there are two goods x candy and y wine which are continuously divisible a2 prices and incomes are exogenously determined that is the person has a budget line and budget set a3 the individual chooses a point on the budget line a4 strictly downward sloping demand if the person chooses x sub t y sub t for a given budget set b sub t and then the person is faced with a different budget set b sub t l that goes through x sub t y sub t but where the relative price of x has gone down up then x sub t 1 x sub t and y sub t 1 y sub t 4 i an intuitive example before proceeding with the formal exposition it is useful to consider the intuition behind the argument to make the logic as accessible as possible in the intuitive example i will assume that individuals have indifference curves and that these indifference curves are homothetic before the subjects come to the experiment they made choices based on their individual budget sets and preferences the budget sets of these various individuals have the same slope the market prices facing the individuals are the same but the richer individuals have budget sets that are farther out if individuals have status quo bias then each individual s choice is based on his her budget set and his her unique set of indifference curves which in turn are based on the reference point established by the individual s experiences and history while we can use any time period for the analysis let us suppose here that the time period of analysis is daily so that before and after the experiment individuals decide each day how much candy and wine to choose the experimenter divides the subjects into three groups in the first group the experimenter gives the subjects 10 and then each subject gets to choose either candy or wine or some combination in between knetsch actually did this with candy and coffee cups and found that the subjects split evenly between the two choices in the second group the subjects are given 10 worth of candy and then later are allowed to trade in some or all of the candy for the equivalent value of wine

the distribution of foreign exchange price changes trading day effects and risk measurement this study investigates the nature of price changes in a variety of major and minor foreign exchange markets the results suggest that the log of price changes over one trading day intervals seems to follow a non normal stable distribution function different measures of location and to lesser extent scale are present for different days of the week dollar denominated price changes are high on mondays and wednesdays and low on thursdays and fridays for all currencies the wednesday thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar the friday monday result is consistent with an increase in demand for the dollar prior to the weekend this study offers some previously unavailable results on the nature of price changes in a certain set of speculative markets in particular this is a study of the distributional characteristics of daily and weekly price changes for a number of major and minor foreign exchange markets the results document the existence of non normal stable distributions for price changes in foreign exchange markets these price change distributions differ by day of the week in ways that are only partly attributable to the institutional structure of the market the results of the study are interpreted within the context of understanding how foreign exchange markets operate and within the context of prior studies of stock market data concerned with summarizing the probability distribution of price changes for different intervals including days of the week since bachelier s 1 original treatise that contained the proposition that speculative market prices follow a process that could be described by a normal distribution there have been numerous alternative attempts to describe the stochastic processes which characterize speculative market prices these studies have not resulted in any generalized description of the probability distribution of price changes in such markets indeed the evidence suggests substantial differences in the process among various types of financial instruments the failure to achieve consensus can be traced to the lack of robustness in the statistical procedures employed to estimate processes and to differences in the underlying institutional or economic arrangements which are unique to that market the possibility of differences in the information set used to assess value or differences in technology for transmitting information makes it important to secure additional

status quo maintenance reconsidered changing or incomplete preferences after reviewing the evidence for status quo maintenance sqm i consider how to reconcile sqm with traditional consumer theory behavioural economists usually let agents preferences change as a function of their endowments treating the same person with different endowments as a set of distinct agents many properties of preferences then become immune to empirical test and it becomes impossible to judge whether an agent s decisions make the agent better or worse off this impedes prediction of when decision rules are likely to change sqm can alternatively be explained with unchanging preferences if preferences are incomplete sqm is then consistent with self interest and there is no reason why it should not persist

farmers willingness to contract switchgrass as a cellulosic bioenergy crop in kansas farmers adoption of cellulosic biofuel feedstock enterprises plays an important role in the future of agriculture and the renewable fuels industry however no set markets currently exist for bioenergy feedstocks outside of very localized geographic locations and farmers may be reluctant to produce the feedstocks without contracts that help mitigate uncertainty and risk this study examines farmers willingness to grow switchgrass under contract using a stated choice approach data were collected using an enumerated survey of kansas farmers and analyzed using latent class logistic regression models farmers whose primary enterprise is livestock are less inclined to grow switchgrass shorter contracts greater harvest flexibility crop insurance and cost share assistance increase the likelihood that farmers will grow switchgrass for bioenergy production

consumer rationality and the status quo received microeconomic theory presumes rational consumers maximize utility over all commodity bundles recent analysis however suggests that a consumer s status quo may limit economic rationality bias consumer decisions and induce serious errors in survey based valuations of public and private goods using regression and choice theoretic frameworks we investigate the existence of status quo effects in the consumer valuation of a particular unpriced product the reliability of residential electrical service such valuations have become important in electric utility resource planning and rate making we find substantial status quo effects which must be addressed in welfare comparisons regarding electric service reliability

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

farm production decisions under cross and conservation compliance the success of soil conservation compliance cc hinges on participation in commodity programs using mixed integer programming the profitability of participation in commodity programs was examined on seventeen surveyed north carolina farms without cc cross compliance in commodity programs increased projected soil erosion by over 80 when participation increased from 30 to nearly 90 with cc erosion fell by two thirds at the high participation level but decreased by only 1 with low participation individual farm acreage base and crop yield strongly affected the profitability of cc compliance is increasingly profitable on farms with more base acreage and higher yields

preference reversals without the independence axiom the preference reversal phenomenon was believed to be inconsistent with the transitivity axiom of decision theory however recent theoretical papers have demonstrated that the preference reversals that were observed in earlier experiments could be explained by subject violations of the independence axiom or the compound lottery axiom therefore those preference reversals are not known to be inconsistent with generalization of expected utility theory that replace the independence axiom the present paper reports the results of experiments in which a substantial proportion of subject responses violate the asymmetry axiom these results are inconsistent with expected utility theory and its generalizations copyright 1989 by american economic association

decision time consideration time and status quo bias economists increasingly appreciate the value of studying the time taken to make decisions in order to provide insights into decision makers choices this article shows that studying how time is allocated among individual options is also valuable in helping researchers to understand the impact default options have on decision makers attention allocation as approximated by how the time is allocated the study of this impact generates new insights into the well known choice phenomenon of status quo bias which typically refers to decision makers tendency to stick to a default option by designing a series of novel experiments i find that this bias arises even when the choice is among prizes of fixed monetary value expressed in arithmetic form i also find asymmetric attention i e more time devoted to default options and strikingly asymmetric choice errors specifically decision makers fail to select an alternative better than the default 28 of the time while they incorrectly select an alternative worse than the default only 11 of the time and provide evidence supporting a causal relationship between asymmetric attention and asymmetric errors jel d03 d12 d83

the behavior of foreign exchange rates comment the distributors of foreign exchange rates are important for model building and empirical analysis for example many studies have examined foreign exchange market efficiency and currency portfolio management under the assumption that foreign exchange rates are normally distributed the statistical tests in these studies and thus their conclusions may not be reliable if the foreign exchange rates follow non normal distributions realizing the importance of the distribution of exchange rates professors calderon rossell and ben horim 1982 hereafter c b have conducted a study analyzing these distributions based on the skewness of the distribution c b have classified foreign currencies into three groups in the first group the skewness statistic was not significantly different from zero for all currencies and subperiods in the second group the distribution of changes in the foreign exchange rates was close to symmetric except for at least one subperiod in the third group the skewness statistic suggests strongly that all the distributions were asymmetric their results reveal that

probabilistic dominance and status quo bias abstract decision makers have a strong tendency to retain the current state of affairs this well documented phenomenon is termed status quo bias we present the probabilistic dominance approach to status quo bias an alternative is considered acceptable to replace the status quo only if the chances of a subjectively severe loss relative to the status quo are not too high probabilistic dominance is applied and behaviorally characterized in a choice model that allows for a range of status quo biases general enough to accommodate unanimity but also standard expected utility maximization we present a comparative notion of revealing more bias towards the status quo and study its implications to the probabilistic dominance model of choice lastly the model is applied to the endowment effect phenomenon and to a problem of international portfolio choice when investors are home biased

the behavior of foreign exchange rates reply in the preceding comment on our jibs paper 1 three basic claims are made the results in 1 are contrary to those reported elsewhere the contradiction may be due to certain weakness in the methodology employed by us based on a direct approach three currencies out of the fourteen we analyzed are regrouped two the australian dollar and japanese yen from group iii into group i currencies with a symmetric distribution and one the italian lira from group iii into group ii currencies close to have a symmetric distribution except for at least 1 subperiod andthat the arguments presented by us concerning the effects of foreign exchange management policy on exchange rates are no longer supported by the data 1986 jibs journal of international business studies 1986 17 177 180

observing violations of transitivity by experimental methods the preference reversal phenomenon is usually interpreted as evidence of nontransitivity of preference but has also been explained as the result of the difference between individuals responses to choice and valuation problems the devices used by experimenters to elicit valuations and the random lottery selection incentive system this paper reports an experiment designed so that none of these factors could generate systematic nontransitivities yet systematic violations of transitivity were still found the pattern of violation was analogous with that found in previous preference reversal experiments and is consistent with regret theory copyright 1991 by the econometric society

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

biomass production from the u s forest and agriculture sectors in support of a renewable electricity standard production of renewable energy from biomass has been promoted as means to improve greenhouse gas balance in energy production improve energy security and provide jobs and income however uncertainties remain as to how the agriculture and forest sectors might jointly respond to increased demand for bioelectricity feedstocks and the potential environmental consequences of increased biomass production we use an economic model to examine how the agriculture and forest sectors might combine to respond to increased demands for bioelectricity under simulated future nationallevel renewable electricity standards both sectors are projected to contribute biomass although energy crops like switchgrass produced on agriculture land are projected to be the primary feedstocks at the highest targets for bioelectricity production we project increased conversion of forest to agriculture land in support of agriculture biomass production although land conversion takes place in response to renewable electricity mandates we project only minor increases in forest and agriculture emissions similarly crop prices were projected to generally be stable in the face of increased bioelectricity demand and displacement of traditional agriculture crops

indifference or indecisiveness choice theoretic foundations of incomplete preferences abstract a commonly held belief in economics is that an individual s preferences that are revealed by her choices must be complete this paper takes issue with this position by showing that one may be able to distinguish between indifference and indecisiveness of an agent upon observing her choice behavior we relax the standard weak axiom of revealed preferences warp and show that a potent theory of individual choice with and without risk can be founded on this weaker axiom when it is coupled with some other standard postulates the most notable features here are that an agent is allowed to be indifferent between certain alternatives and indecisive about others moreover an outside observer can identify which of these actually occur upon examining the observable choice behavior of the decision maker as an application we also show how our theory may be able to cope with the classical preference reversal phenomenon

choice and individual welfare we propose an abstract method of systematically assigning a rational ranking to non rationalizable choice data our main idea is that any method of ascribing welfare to an individual as a function of choice is subjective and depends on the economist undertaking the analysis we provide a simple example of the type of exercise we propose namely we define an individual welfare functional as a mapping from stochastic choice functions into weak orders a stochastic choice function or choice distribution gives the empirical frequency of choices for any possible opportunity set framing factors may also be incorporated into the model we require that for any two alternatives x and y if our individual welfare functional recommends x over y given two distinct choice distributions then it also recommends x over y for any mixture of the two choice distributions together with some mild technical requirements such an individual welfare functional must weight every opportunity set and assign a utility to each alternative x which is the sum across all opportunity sets of the weighted probability of x being chosen from the set it therefore requires us to have a prior view about how important or representative a choice of x at a given situation is

on the theory of reference dependent preferences a theory is proposed in which preferences are conditional on reference points it is related to tversky and kahneman s reference dependent preference theory but is simpler and deviates less from conventional consumer theory preferences conditional on any given reference point satisfy conventional assumptions apart from a continuity condition the only additional restriction is to rule out cycles of pairwise choice the theory is consistent with observations of status quo bias and related effects reference points are treated as subject to change during the course of trade the implications of endogeneity of reference points for behaviour in markets are investigated

indifference and incompleteness distinguished by rational trade abstract we use an agent s strict preferences to define indifference and incompleteness relations that identify the sequences of trades that are rational to undertake if an agent makes sequences of trades of options labeled indifferent the agent will never be led to an inferior outcome but trades of options where no preference judgments obtain can lead to diminished welfare for one shot choices in contrast there can be no behavioral distinction between indifference and incompleteness applications include an isomorphism for incomplete preferences that indicates when weak and strict preferences contain interchangeable information a characterization of the possibly incomplete preference relations consistent with a one shot choice function and an equivalent definition of incompleteness that relies on the philosophical theory of incommensurability

depreciation patterns for agricultural machinery a flexible functional form model is used to estimate remaining value equations for eleven major types of farm machinery data used in estimation were obtained from ten years of machinery auctions remaining values were found to be influenced by machinery condition use manufacturer and age macroeconomic variables were significant explanatory variables for most types of machinery estimated depreciation patterns varied by machinery type demonstrating the need for updated machinery specific remaining value equations reduced form equations are presented for use in applied economic analysis

modeling government program participation decisions at the farm level changes in the u s farm economy during the 1980s have caused many farmers to give careful consideration to participation in the government farm program analytical techniques to identify optimal participation and resulting crop mix strategies at a whole farm level can aid farmers faced with these decisions this paper presents a mathematical programming approach adaptable to farm level decision analysis an empirical example involving a texas farm suggests that resource levels base acreage endowments limited cross compliance and returns outside the program can influence participation decisions government program participation decisions heavily influence the crop mix decision on many farms in the united states features such as base acreage limited cross com

a canonical model of choice with initial endowments we use the revealed preference method to derive a model of individual decision making when the endowment of an agent provides a reference point that may influence her choices this model generalizes the classical rational choice model which views choice as a consequence of utility maximization instead our model sees choice as arising from psychologically constrained utility maximization where the constraints are induced by one s initial endowment in particular this model produces status quo bias as a natural consequence but not necessarily the endowment effect a range of economic applications identify the predictive and explanatory strength of the model in particular we demonstrate that the status quo bias phenomenon reduces the size of the substitution effect in problems of consumption choice