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

2. 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.

3. 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

4. “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 ()

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

7. 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)

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

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

10. 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)

11. 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)

12. 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)

13. 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

14. 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

15. 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)

16. 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)

17. 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)

18. 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)

19. 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)

20. 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)

21. 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