Tom Sawyer and The Construction Value

Decision Making
Tom Sawyer and the Construction of Value

Dan Ariely, George Lowenstein and Drazen Prelec
Review: Federal Reserve Bank of Boston N 05-10 (July 2005) Research Center for Behavioral Economics and Decision-Making
Ferederal Reserve Bank

Abstract
This paper present three experiments in which
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the authors try to show some cases people do not even have preexisting sense of whether an experience is good or bad, even when they have experienced a sample of it. then
Economic agents really know their tastes?

Situation of Tom Sawyer

In a famous passage of Mark Twains novel (The Adventures of Tom Sawyer)
Decision Making
His aunt Polly forces him (Tom) to whitewash the fence while his friends play and enjoy watching him perform the task. Tom on the other hand has the task as something wonderful, not allowing anyone to help. Then finally, her friends are even willing to pay to let them paint the fence
The Adventures of Tom Sawyer is a novel of the author Mark Twain published
by 1876, at present is consider a masterpiece of the literature Ferederal Reserve Bank

Which is the Tom Sawyer effect?
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In Twains Words, Tom has discovered a great law of human

action, without knowing it-namely,that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain
The human reaction faced a infomation or datum, is in function at the information previously provided.

Previous Studies I
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In a previous work that the same authors presented in 2003, named "Coherent arbitrariness...
...which showed that valuations of goods and experiences have a large arbitrary component ("arbitrariness"). once one valuation has been made, people provide subsequent that are scaled appropriately relative to the first ("Coherence")
COHERENT ARBITRARINESS: STABLE DEMAND CURVES WITHOUT STABLE PREFERENCES [Dan Ariely, George Lowenstein and Drazen Prelec (2003)] http://qje.oxfordjournals.org/content/118/1/73.full.pdf Ferederal Reserve Bank

Previous Studies II
An experiment of the study...proposed that...
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subjects were offeredwillingness to accept compensation in exchange for listening to avresive sounds delivered to subjects through headphones. They told that were about to hear an unpleasant sound played over headphones and asked to consider, whether they would be willing to listen to the sound for 300 seconds in exchange for amount that they composed from the last three digits of SSN (for example: 2872.87$). After hearing the sound and making the choice... They asked subjects to indicate the smallest amount of money they would accept to actually hear the sound for 100,300 and 600 seconds.
COHERENT ARBITRARINESS: STABLE DEMAND CURVES WITHOUT STABLE PREFERENCES [Dan Ariely, George Lowenstein and Drazen Prelec (2003)] http://qje.oxfordjournals.org/content/118/1/73.full.pdf Ferederal Reserve Bank

Previous Studies II (Results)
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Subjects demanded about one and a half past times as much to hear 300 seconds sound as to hear the 100 seconds sound, and half again more to hear the 600 seconds sound.
Coherence
But
Subjects with lower ending SSN demanded much less compesation than those with higher numbers.
Coherent arbitrariness

Key Question
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Do people even have a pre-existing sense of whether an experience is good or bad?

Not according to Tom's Law The exact same experience can be desired or avoided, depending on context and presentation
In the three experiments presented

shown that individuals can be made to exogenously classify some experiences as either positive or negative, depending on whether the preceding question asked them if they would pay or needed to be paid for the experience in question.

Experiment I
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Experiment I
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The study was conducted with 146 undergrated students (enrolled in a marketing class or signature) Divided to two groups (N=75 one each)
Accept Group Pay Group
Their professor (Ariely), read a poem for 15 minutes

Walt Whitmans Leaves of Grass
Each group was asked:

Accept Group
Would you attend the recital for 2$?
Pay Group
Would you pay 2$ to attend the recital?

Experiment I
After answering
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They were told that the poetry reading programmed for next week would be free
The objetive was

test whether the initial question affected whether respondents viewed the experiences as positive (in this case, they would like to attend if it was free) or negative (in this case, they would prefer not to attend if it was free) .

Experiment I (Results)
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Accept Group
Would you attend the recital for 2$? Would you attend the recital for free? 59% say yes 8% say yes
Pay Group
Would you pay 2$ to attend the recital? Would you attend the recital for free?
3% say yes 35% say yes

Experiment I (Tom Sawyer effect)
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Tom Sawyer effect
After Accept Group Charging 59% Free
Before 8%
Pay Group
Paying
3%
Free
35%

Experiment I (Tom Sawyer effect)

What happened?
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The initials questions performed at both groups has conditioned the results, appearing the Tom Sawyer effect. Both groups have a too different concept of the lecture, because... Accept Group: going to receive money to attend free (now worth less for them)
Low Value
Pay Group: pass from having to pay to attend free (now worth more to them)
Increase Value
Finally, the reality is that the reading has come to have the same value for all (is FREE!!). But that is not reflected in the results

Experiment II
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Experiment II
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Experiment II was designed to replicate Experiment I Conducted with a large undergraduate class at MIT (N=91+73)
Half of the respondents (N=91) were first asked whether...
The would be willing to pay 10$ to listen to Professor Ariely recite poetry for 10 minutes, followed by a request to indicate their monetary valuations for 1,3 and 6 minutes of poetry reading.
Group Pay
The other half (N=73) were first asked whether
The would be willing to accept 10$ to listen to Professor Ariely recite poetry for 10 minutes, followed by a request to indicate the minimun they would willing accept for 1,3 and 6 minutes of poetry reading.
Group Accept

Experiment II
After indicated their prices
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Objetive: Try to bring consistency to the study of human behavior we are studying
Respondents were asked similar questions about their willingness to participate in a study of decision-making
Group Accept (first part of the experiment II):
Subjects were asked in this part of experiment about their willingness to pay 10$ for a 10 minutes participation in such a study, followed by a request to indicate their monetary valuations for 1,3 and 6 minutes for participating in such a study.
Group Pay (first part of the experiment II):
Now "Group accept" becomes "Group pay"
Subjects were asked in this part of the experiment about their willingness to accept 10$ for a 10 minutes participation in such a study, followed by a request to indicate the minimun they would willing accept for 1,3 and 6 minutes for participating in such a study. Now "Group pay"
becomes "Group accept" Ferederal Reserve Bank

Experiment II (Results)
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Valuations were strongly influenced by the initial question (in the two cases). Respondents consistenly indicated higher sums of money for longer durations (Coherence).
The result is a similar behavior of groups in different cases with identical questions

Experiment III
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Experiment III
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The professor announced that carry out the reading of a poem (Whitman's "Leaves of Grass"), for a minute, that only read a few verses. After reading the teacher demonstration to be towards those who are interested in attending the full reading.
15 minutes duration and number of seats limited.

Experiment III
Decision Making
The experiment is performed using a schema (two-sides), which requested the following information in the front side:
Indicate the last digit of their SSN Depending on whether the number was odd or even, had two sets of questions (two questions each)
If the number was odd
Would you attend the poetry reading for a payment of __$ (indicate quantity and respond with a yes or no) They also answered the same question with the dollar value increased or decreased by 50c.
If the number was even

Would you pay __$ in order to attend the poetry reading (indicate quantity and respond with a yes or no) They also answered the same question with the dollar value increased or decreased by 50c.

Experiment III
Decision Making
Finally, in the back side the format was identical for both groups.
Subjects indicated whether
Would attend the recital if paid 10$, 9$,8$,1$. Would attend the recital if it was for free. Would pay 1$,2$,3$...10$ to attend for the recital.

Experiment III (Results)

Odd SSN Digit (hypothetical question about being paid to attent) (N=46)
% Willing to attend for $=SSN Would attend for free Mean valuation (st.error) 63% 9% -4,46$ (.51)
Decision Making
Even SSN Digit (hypothetical question about playing to attent) (N=35)

% Willing to pay for $=SSN to attend Would attend for free Mean valuation (st.error) 20% 49% -1,13$ (.59)
Only 9% (Odd SSN) were willing to attend for free (response strongly influenced by the previous question), in contrast 49% (Even SSN). The mean value was negative for both groups (is coherent), but much more for Odd SSN Group (because they have higher perceived loss of value )
In this study the actual digit of the SSN has no effect on valuations nor on willingness to attend for free, after controlling for whether the digit was odd or even.

In resume...the result of experiments was...

Experiment 1
Demostrates the basic effect of Toms Law.
Decision Making
Experiment 2
Show that after one such arbitrary response is given (positive or negative), other responses follow in a seemingly coherent fashion.
Experiment 3
Desmostrates that Toms Law holds even when the random assigment of individuals to either the pay or be paid conditions was made transparent (the assignment was set by the last digit of their SSN, and both possibilities were presented on the elicitation form).

Discussion
Economists
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The apparent orderliness in these choices, their stability for a given individual, are the generally correct directional response to changing incentives encourage the belief that choices are firmly rooted in personal likes and dislikes in fundamental values

Discussion
The authors suggest...
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The correct directional responses to changing incentives do not provide strong support for fundamental valuation. If earlier choices are recalled, the next time a similar choices situation arises, decision markers will attempt to behave in a fashion that doesnt violate obvious rules of consistency. For example:
If one was willing to pay X$ for company Ys stock yesterday, then todays announcement of an unexpectedly profitable quarter should make one willing to pay more than X$.

Discussion
Decision Making
Economis generally assumes that all economic decisions are choices between alternatives.
Thus, choosing whether or not to eat out at a restaurant tonight is implicity a choice between eating at the restaurant versus spending the money in other ways.
However, the phenomenon of coherent arbitrariness suggest that whether these choices are implicit or explicit may make a difference

Applications (Real life)
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Before presenting their final results, the firms that participate in Market Values and plans to worse results than the previous period, perform a downward valuation of them.
Less favorable results will actually happen
In presenting their results, in this case, you typically use the phrase "better than expected" to define for a bad result previously described it as worse than it really was.
It has a better result than it really is
Which is the Objective chasing this firms?

The result is considered positive and increase the value of their shares, previously announcing an "expected outcome" after below that advertised as "final outcome". Is a way of bringing investors to the optimism, leading to a rise in values rather than a decrease.

Conclusions
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The valuation we make of a same information, varies according to the expectations that had previously. Our reactions are different according to what we expected. The concept of good or bad could be full of arbitrariness.

Resources
The authors:
Dan Ariely
http://danariely.com/
Decision Making
George Lowenstein
http://sds.hss.cmu.edu/src/faculty/loewenstein.php
Drazen Prelec
http://econ-www.mit.edu/faculty/dprelec
Article: Tom Sawyer and the Construction Value:

http://www.bos.frb.org/economic/wp/index.htm

Decision Making

Thank you very much for your attention!!!

Review: Federal Reserve Bank of Boston N 05-10 (July 2005) Research Center for Behavioral Economics and Decision-Making


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Decision Making

Tom Sawyer and the Construction of Value

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Economic agents really know their tastes?

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Situation of Tom Sawyer

Tom Sawyer and the Construction of Value

Which is the Tom Sawyer effect?

In Twains Words, Tom has discovered a great law of human

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Tom Sawyer and the Construction of Value

Tom Sawyer and the Construction of Value

Previous Studies II (Results)

Tom Sawyer and the Construction of Value

Do people even have a pre-existing sense of whether an experience is good or bad?

In the three experiments presented

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Their professor (Ariely), read a poem for 15 minutes

Each group was asked:

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

The objetive was

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

3% say yes 35% say yes

Tom Sawyer and the Construction of Value

Experiment I (Tom Sawyer effect)

Tom Sawyer effect

After Accept Group Charging 59% Free

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Tom Sawyer and the Construction of Value

Experiment I (Tom Sawyer effect)

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Tom Sawyer and the Construction of Value

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

Tom Sawyer and the Construction of Value

Group Pay (first part of the experiment II):

Now "Group accept" becomes "Group pay"

Tom Sawyer and the Construction of Value

Tom Sawyer and the Construction of Value

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Tom Sawyer and the Construction of Value

Ferederal Reserve Bank

Tom Sawyer and the Construction of Value

If the number was even

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Tom Sawyer and the Construction of Value

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Tom Sawyer and the Construction of Value

Experiment III (Results)

Even SSN Digit (hypothetical question about playing to attent) (N=35)

Tom Sawyer and the Construction of Value

In resume...the result of experiments was...

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Tom Sawyer and the Construction of Value