1. A Study of Preferences Under Constraint
Jayson Shi Jia
Kunal Patel

2. 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

3. 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

4. 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)

5. 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’

6. 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

7. 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

8. 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

9. 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

12. 12

13. 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

14. 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

15. 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

16. 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

17. Thanks for listening!