Tom Sawyer and the Construction Value

7/28/2019 Tom Sawyer and the Construction Value

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DecisionMaking

FerederalReserve Bank

TomSawyer andtheConstructionofValue

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

TomSawyer andtheConstructionof Value



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Abstract

This paper present three experiments in which

the authors try to show some cases people do not even have pre-existing sense of whether an experience is good or bad, even whenthey have experienced a sample of it.

then

Economic agentsreally know their tastes?


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Situation of Tom Sawyer

In a famous passage of Mark Twains novel

(The Adventures of Tom Sawyer) 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, notallowing anyone to help.

Then finally, her friends are even willing to pay to let them paint thefence

The Adventures of Tom Sawyeris a novel of the author Mark Twain publishedby 1876, at present is consider a masterpiece of the literature


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Which is the Tom Sawyer effect?

In Twains Words, Tom has discovereda great lawof human

action, without knowingit-namely,that in order tomakea manoraboy covet a thing, it isonlynecessarytomakethethingdifficult toattain

The human reaction faced a infomation or datum,

is in function at the informationpreviously provided.


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Previous Studies I

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 scaledappropriately 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


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Previous Studies II

An experiment of the study...proposed that...

subjects were offeredwillingness to accept compensation in exchange forlistening 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 listento the sound for 300 seconds in exchange for amount that they composedfrom 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 wouldaccept 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


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Previous Studies II (Results)

Subjects demanded about one and a half past times as

much to hear 300 seconds sound as to hear the 100seconds sound, and half again more to hear the 600seconds sound.

But Subjects with lower ending SSN demanded much less compesation than

those with higher numbers.

Coherence

Coherent arbitrariness


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Key Question

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 paidfor the experience in question.


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Experiment I


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Experiment I

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?


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Experiment I

After answering

They were told that the poetry reading programmed for next weekwould 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 itwas free) or negative (in this case, they would prefer not to attend if itwas free) .


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Experiment I (Results)

35% say yesWould you attend the recital for free?

3% say yesWould you pay 2$ to attend the recital?

Pay Group

8% say yesWould you attend the recital for free?

59% say yesWould you attend the recital for 2$?

Accept Group


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Experiment I (Tom Sawyer effect)

Tom Sawyer effect

BeforeAfter

Paying

Charging

Free

Free

3%

59%

35%

8%Accept Group

Pay Group


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Experiment I (Tom Sawyer effect)

What happened?

The initials questions performed at both groups has conditioned theresults, 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)

Pay Group: pass from having to pay to attend free (now worth more to them)

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

Low Value

Increase Value


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Experiment II


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Experiment II

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 10minutes, followed by a request to indicate their monetary valuations for 1,3 and6 minutes of poetry reading.

The other half (N=73) were first asked whether

The would be willing to accept 10$ to listen to Professor Ariely recite poetry for10 minutes, followed by a request to indicate the minimun they would willingaccept for 1,3 and 6 minutes of poetry reading.

Group Accept

Group Pay


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Experiment II

After indicated their prices

Objetive: Try to bring consistency to the study of human behavior weare studying

Respondents were asked similar questions about theirwillingness 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 indicatetheir monetary valuations for 1,3 and 6 minutes for participating in such a study.

Group Pay (first part of the experiment II):

Subjects were asked in this part of the experiment about their willingness toaccept 10$ for a 10 minutes participation in such a study, followed by a requestto indicate the minimun they would willing accept for 1,3 and 6 minutes forparticipating in such a study.

Now "Group accept"becomes "Group pay"

Now "Group pay"becomes "Group accept"


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Experiment II (Results)

The result is a similar behavior of groups in different cases with identicalquestions

Valuations were strongly influenced by the initial question(in the two cases).

Respondents consistenly indicated higher sums of money forlonger durations (Coherence).


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Experiment III


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Experiment III

The professor announced that carry out the reading of a

poem (Whitman's "Leaves of Grass"), for a minute, thatonly read a few verses.

After reading the teacher demonstration to be towardsthose who are interested in attending the full reading.

15 minutes duration and number of seats limited.


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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 by50c.

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


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Experiment III

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.


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Experiment III (Results)

-1,13$ (.59)Mean valuation (st.error)

49%Would attend for free

20%% Willing to pay for $=SSN to attend

Even SSN Digit (hypothetical question aboutplaying to attent)

(N=35)

-4,46$ (.51)Mean valuation (st.error)

9%Would attend for free

63%% Willing to attend for $=SSN

Odd SSN Digit (hypothetical question aboutbeing paid to attent)

(N=46)

Only 9% (Odd SSN) werewilling to attend for free

(response strongly influenced bythe previous question), incontrast 49% (Even SSN).

The mean value was negativefor both groups (is coherent),but much more for Odd SSN

Group (because they havehigher perceived loss of value )

In this study the actual digit of the SSN has no effect on valuations noron willingness to attend for free, after controlling for whether the digitwas odd or even.


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

Experiment 1

Demostrates the basic effect of Toms Law.

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 conditionswas made transparent (the assignment was set by the last digit of their

SSN, and both possibilities were presented on the elicitation form).


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Discussion

Economists

The apparent orderliness in these choices, their stability for a given

individual, are the generally correct directional response to changingincentives encourage the belief that choices are firmly rooted in personal

likes and dislikes in fundamental values


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Discussion

The authors suggest...

The correct directional responses to changing incentives do not providestrong support for fundamental valuation.

If earlier choices are recalled, the next time a similar choices situationarises, 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 todaysannouncement of an unexpectedly profitable quarter should make one willing to

pay more than X$.


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Discussion

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 arbitrarinesssuggest that whether these choices are implicit or explicitmay make a difference


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Applications (Real life)

Before presenting their final results, the firms that participate inMarket Values and plans to worse results than the previous period,

perform a downward valuation of them.

In presenting their results, in this case, you typically use the phrase"better than expected" to define for a bad result previously describedit as worse than it really was.

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 "finaloutcome".

Is a way of bringing investors to the optimism, leading to a rise in valuesratherthan a decrease.

Less favorable results will actually happen

It has a better result than it really is


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Conclusions

The valuation we make of a same information, varies

according to the expectations that had previously.

Our reactions are different according to what weexpected.

The concept of good or bad could be full of arbitrariness.


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Resources

The authors:

Dan Ariely http://danariely.com/

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


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TomSawyer andtheConstructionof Value


Thank you very muchfor your attention!!!

Review: Federal Reserve Bank of Boston N 05-10 (July 2005)

Research Center for Behavioral Economics and Decision-Making

Documents

Tom Sawyer and the Construction Value