Agents' Evaluations and the Disparity in Measures of Economic Loss (Journal of Economic Behavior and Organization, 1986)
Citation: James D. Marshall, Jack L. Knetsch, J. A. Sinden (1986) Agents' Evaluations and the Disparity in Measures of Economic Loss (Journal of Economic Behavior and Organization, 1986). Journal of Economic Behavior and Organization (Volume 7) (RSS)
Economic theory describes two different measures of value: willingness to pay (WTP), which is how much money a person would give up to receive an economic good; and willingness to accept a loss (WTA), which is the amount of money a person would need to be traded to compensate him or her for giving up the good. Theory also says that these two values should be nearly equivalent. However, recent work has shown that they are often very different from one another. The authors provide further evidence of the difference between WTP and WTA. They also show that this disparity does not show up in situations where an external adviser chooses an outcome for another person, and they present experiments comparing real money exchanges with hypothetical exchanges.
The authors provide the results of five tests. In the first, students were asked to choose between a one dollar payment and a lottery ticket for various prizes. The proportion of students willing to give up the ticket for one dollar, versus those who needed to pay one dollar to receive the ticket, was significantly different (fewer were willing to pay). The same choices were presented to another group, except that the group was asked to choose for a friend; in this case the results were not significantly different. In a second and third test, both modeled on the first, the authors replicated the above results.
The fourth test was a similar experiment, this time using real money exchanges to contrast the hypothetical exchanges presented above. The results of this experiment were consistent with those above, suggesting that hypothetical results are representative of those that would occur in real money situations. A fifth test further supported the difference in decisions for people acting for themselves or as agents for others.
Through these tests the authors observed significant differences in decisions people made when acting for themselves, and insignificant differences in decisions people made when acting on behalf of others. Also notable was the consistency between the hypothetical and real exchange exercises. The authors' results also further demonstrated the disparity between how people evaluate gains or losses with respect to a reference point.
Theoretical and practical relevance:
Results showing significant differences between decisions people make for themselves, and those that agents make, have significant real-world implications. Managers of firms, investment managers, governments, and family members all make decisions on behalf of third parties. If people systematically evaluate preferences for themselves and others differently, there is a chance for errors in judgment that will adversely affect human welfare.