A Study of Preferences Under Constraint Jayson Shi Jia Kunal Patel

Research Question Will the existence of a consumption constraint result in higher consumption at some point? How does the modification of a consumption constraint change an agent’s consumption pattern? Inspired by the “Yale College Law School Run” - of yore Expect loss aversion and information effect with budget constraints

Why use an experiment? Can try to solve different FOC’s and Lagrangians for different constraints Hard to conjecture what people will do because we are interested in a behavioral effect Needed at least a survey instrument Used the experiment and Excel to try some other things, like looking at information effects Harder for subjects to ‘screw up’ when we design things on excel as opposed to pencil and paper

Loss Aversion in Riskless Choice: A Reference Dependence Model (1991) Gains and losses relative to reference level Loss Aversion Losses loom larger than gains Diminishing Sensitivity The marginal value of both gains and losses decreases with their size Losses Value Gains Reference Point x -x V(x) V(-x)

Mental Accounting (Thaler 1985, 1990, 1999) Framing: How a person subjectively frames a transaction in their mind will determine the utility they receive/expect Expenditures grouped into a number of non-fungible accounts Frequency with which accounts are evaluated and ‘choice bracketing’

What we initially wanted… Scenario 0: buffet – tell people to ‘eat’ as much as they would normally like– don’t tell people how much they paid – see how much they would like to consume – use this to calculate x Scenario 1: buffet where people are told they paid $x Scenario 2: impose a constraint on consumption at $x, for which you pay $x Scenario 3: pay $x for a constraint y, where y<x Scenario 4: pay $x for a constraint z, where z>x Try to capture effects of loss aversion: scenario 0 is reference point, scenario 3 is loss, scenario 4 is gain

Menu Experiment (1) Choose Items on a Menu (too easy?) In each question, you have essentially solved a maximization problem and told us what amount of food maximizes your utility

Menu Experiment (2) Gain and Loss treatments Control: all you can eat with no price - measure natural reference point Give new reference points with new budget constraints: Buffet, Buffet with market value price tags, +$2 budget, +$4 budget, -10% budget, -20% budget

Menu Experiment (3) Information treatment Reveal Percentage spending of others – people see how efficient others are Reveal Absolute spending – people realize base values are very different

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Results – Part 1 Scenario Consumption ($) Consumption relative to price/ budget (%) Ideal World 12.80 n/a Buffet - No Price 21.73 1.82 Buffet - Price 22.35 1.85 Retail x+$0 12.65 0.99 Retail x+$2 14.55 Retail x+$4 16.65 Retail x-10% 9.93 0.97 Retail x-20% 7.45

Results – Part 2 Total Consumption ($) Scenario Situation 2: Revealed Percentage Spending Situation 3: Revealed Absolute Spending Retail x+$0 12.70 12.72 Retail x+$2 14.67 14.68 Retail x+$4 16.47 Retail x-10% 10.02 9.98 Retail x-20% 7.45 7.42

Criticism Small sample size (trading games didn’t have this problem because bids were individual data points) – not much we can say now Experiment design: diversity seeking bias with a big menu Overly involved sample population – sabotage, trying to open hidden pages, too much talking, context and group effects

Future Improvements Larger sample size to allow for statistical analysis Focus on one commodity, e.g. cell phone minutes, emission credits Ask people to rate satisfaction for different gains and losses – this is to measure the value function No PhD students in sample

Thanks for listening!