Endogenous Preferences Joan Walker, UC Berkeley with Akshay Vij and Feras El Zarwi December 2015 Daniel McFadden Honoris Causa Workshop @ Université de Cergy-Pontoise Preference Formation. Where do preferences come from?

Outline Introduction Demonstration of modeling endogenous preferences Modality Styles in Travel Demand Models Conclusion Two different processes that have their own mechanisms. Long-term modality style process governs what’s happening at the lower level. What happens at the lower level through variable E impacts Cutlural trends, modality style changes. Mode choice preferences change. Modality style change. Preference for mode choice behavior changes. Change over time bc (1) society/culture (2) modality (3) behavior (4) transportation system (capture through E). Some not explained by demographics.

Endogenous Preferences ?!? Neoclassical assumption Preferences (as indicated by taste parameters & choice sets) are characteristics of the decision-maker that are exogenous to the choice situation and stable over time. Alternatively, “The issue has never been whether or not tastes change. Rather the question is whether or not economists should concern themselves with such changes.” – Albert and Hahnel (1990) “… economic theory proceeds largely to take wants as fixed... The economist has little to say about the formation of wants; this is the province of the psychologist. … The legitimacy of any justification … must rest … on the light that is shed ….” – Friedman (1962) Neoclassical assumption is convenient, but is it correct? On the one hand, the assumption has allowed econometricians to forecast changes in observable behavior in response to changes in one or more variables that define the decision-making environment. Necessary abstraction. Parsimonious model. Straightforward to apply (e.g. for welfare analysis) Milton Friedman “Price Theory”. Friedman quote is from Albert and Weizsacker

“Where do preferences come from. Do they come from the sky “Where do preferences come from? Do they come from the sky?” – Albert and Hahnel (1990) “… we have to acknowledge and make use of the fact that preferences are partly the product of peoples’ environment.” – von Weizsacker (1971) “Economists have traditionally been suspicious of changing tastes, and a profession’s intellectual tastes change slowly.” – Pollak (1978) “… different methods of eliciting preference often give rise to systematically different ordering” – Tversky and Thaler (1990) “If advertising increases the utility consumers received from goods that are advertised, [how] should the effect on consumer welfare be measured…?” – Becker (1996) “If legal rules have inevitable effects on preferences, it is hard to see how a government might even attempt to take preferences ‘as given’” – Sunstein (1993) “The idea that values can change leads to thinking about how public policy might alter values and thereby change responses to public policies.” – Aaron (1994) “If preferences are affected by the policies or institutional arrangements we study, we can neither accurately predict nor coherently evaluate the likely consequences of new policies or institutions without taking account of preference endogeneity.” – Bowles (1998) “In short, preferences are endogenous to the environment, but formal frameworks for examining this interaction are scarce in modern economics.” Palacios-Huerta & Santos (2004) Albert and Hahnel – welfare economists Framing and preference reversal. Becker: welfare of civil rights legislation (racial integration)… habituation eventually changed preferences. Aaron (1994) is from Becker 96 Sunstein 1993 is from becker 96 “Where do preferences come from? Do they come from the sky? … They come from human nature filtered… through … social and cultural [and] … economic institutions... ” – Albert ()

Modality styles in travel demand modeling DEMONSTRATION OF MODELING ENDOGNEOUS PREFERENCES Modality styles in travel demand modeling

Models of Travel Behavior Traditional Models Trip-based decision Consider all transportation alternatives Evaluate time and cost (and other) Make rational decision Limited heterogeneity Modality style Model Higher-level decision Lifestyles built around particular travel modes Transport or getting somewhere is secondary in all of these pictures. Where they are, what they’re doing, what non-transport benefit they’re getting. Time and cost is not the focus of any! Connection with lifestyle: how you see yourself, how you want to be seen. freedom, relaxation, health Marketers know this! if we wish to persuade individuals to drive less then it’s imperative that travel demand models too recognize that the decision to use a particular travel mode involves a more fundamental choice between very different and divergent lifestyles. Vij, Carrel, Walker (2013)

Latent Modality Style Formulation Individual Characteristics (S) Transportation and Land Use Attributes (Z) Travel-Related Behaviors (B)

Latent Modality Style Formulation Individual Characteristics (S) Modality Style (m) Transportation and Land Use Attributes (Z) Travel-Related Behaviors (B)

Latent Modality Style Formulation Class-Membership Probability that the individual has modality style m conditional on characteristics of the individual S Individual Characteristics (S) Modality Style (m) Class-specific Choice Probability that individual chooses behaviors B conditional on alternative attributes Z and modality style of the individual m Transportation and Land Use Attributes (Z) Marginal Choice Probability unconditional on modality style m Travel-Related Behaviors (B)

Latent Modality Style Formulation Class-Membership Probability that the individual has modality style m conditional on characteristics of the individual S Individual Characteristics (S) Modality Style (m) Class-specific Choice Probability that individual chooses behaviors B conditional on alternative attributes Z and modality style of the individual m Transportation and Land Use Attributes (Z) Marginal Choice Probability unconditional on modality style m Travel-Related Behaviors (B)

Latent Modality Style Formulation Class-Membership Probability that the individual has modality style m conditional on characteristics of the individual S and expected benefit of each modality style E Individual Characteristics (S) Modality Style (m) Class-specific Choice Probability that individual chooses behaviors B conditional on alternative attributes Z and modality style of the individual m Expected benefit of each modal style (E) Transportation and Land Use Attributes (Z) Marginal Choice Probability unconditional on modality style m Travel-Related Behaviors (B) Vij and Walker (2014)

Latent Modality Style Formulation Latent Modality Style Segments; each segment (m=1, … , M) has its own people and behavior Set of transportation alternatives considered Willingness to pay and attitudes Demographic distributions Data mining of travel diary data determines Number of segments M Behavior of each segment for m=1, … , M Demographics of each segment

Example of Estimated Modality Style Segments (San Francisco Bay Area 2000 Travel and Activity Diary) 1. Inveterate Drivers 2. Car Commuters 3. Moms in Cars 13% Very low VOT, higher incomes, smaller households 8% Higher VOT, higher income, larger households (kids), employed men 31% multimodal but High VOT means mostly drive, women with kids 7% younger, single, low VOT 9% only class with bike 23% older, no kids in household, moderate VOT Vij (2013) 4. Transit Takers 5. Multimodals 6. Empty Nesters

Evidence of Changing Modality Styles (San Francisco Bay Area 2000 to 2012) Percentage of the Population 1: earlier in the lifecycle 2: later in the lifecycle 3: all drive for NON-WORK 4: all drive for WORK 5: low value of time 6: high value of time 7: captive transit riders (low income/employment) 8: bikers (high inc, single men) 9: walkers (younger, single) Vij, Gorripaty, Walker (2015)

Evidence of Changing Modality Styles (San Francisco Bay Area 2000 to 2012) Percentage of the Population 1: earlier in the lifecycle 2: later in the lifecycle 3: all drive for NON-WORK 4: all drive for WORK 5: low value of time 6: high value of time 7: captive transit riders (low income/employment) 8: bikers (high inc, single men) 9: walkers (younger, single) Vij, Gorripaty, Walker (2015)

Impact of Changing Modality Styles on Forecasts (San Francisco Bay Area to 2024) Scenarios to project beyond 2012 Modality trends revert back to 2000 levels by 2024 Modality style distribution remains constant at 2012 levels Modality trends observed from 2000 to 2012 continue, but at half the rate Vij, Gorripaty, Walker (2015)

Predicting Modality Trend via Integration with HMM (Santiago, Chile 2006-2008 Journey to Work Panel) Modality Styles Transit 1: Bus Transit 2: Bus/Metro Transit 3: Metro/Car The Drivers Percentage of the Population within each Modality Style Transantiago implemented in 2007 Introduction of Transantiago (shock) time = 0 months El Zarwi, Vij, Walker (2015)

Predicting Modality Trend via Integration with HMM (Santiago, Chile 2006-2008 Journey to Work Panel) Modality Styles Transit 1: Bus Transit 2: Bus/Metro Transit 3: Metro/Car The Drivers Percentage of the Population within each Modality Style 2007 Introduction of Transantiago (shock) time = 0 months El Zarwi, Vij, Walker (2015)

Predicting Modality Trend via Integration with HMM (Santiago, Chile 2006-2008 Journey to Work Panel) Modality Styles Transit 1: Bus Transit 2: Bus/Metro Transit 3: Metro/Car The Drivers Percentage of the Population within each Modality Style 2007 Introduction of Transantiago (shock) time = 0 months El Zarwi, Vij, Walker (2015)

Conclusion Philosophical Question Existence and importance of endogenous preferences? Methodological Question How to address in econometric models? Modality Style Demonstration Endogenous and dynamic preferences explicitly modeled Latent Class Choice Model with feedback of Expected Max Utility; Predict trends via integration with HMM Evidence of endogenous and dynamic preferences that are vital for application Why might preferences change? ***Cognitive dissonance Individuals may reduce dissonance by reducing the importance of any one of the dissonant elements ***Rationalization The tendency to make excuses to justify otherwise unacceptable behavior ***Habituation Decrease in response to a stimulus after repeated exposure ***Sensitization The opposite of habituation in that repeated exposure to a stimulus may lead to a progressive increase in response ***Taste acquisition An appreciation for things that are unlikely to be enjoyed upon initial exposure