Buying/Selling Price Preference Reversals: Preference for Environmental Changes in Buying Versus Selling Modes

Abstract

Many studies have shown that the most people are willing to pay to obtain an object often is significantly less than the least they will accept to relinquish the object (i.e., selling prices tend to be higher than buying prices). Most tests of the buying/selling price discrepancy have elicited values either for everyday market items (e.g., mugs, candy bars) or for environmental changes (e.g., a decrease in air quality, a landfill clean-up). The literature indicates a possible interaction between buying/selling prices and commodity type; buying/selling price differences seem greater for environmental improvements than for market items. In other words, people show more relative preference for environmental improvements in selling modes than they do in buying modes. A significant difference in preference due to elicitation mode is commonly termed a ''preference reversal.'' The four experiments presented here establish this new preference reversal and examine the reasons for it. The results from these studies provide information about the nature of preference reversals, the valuation process as a whole, and the unique problem of valuing complex and risky items such as environmental changes.

Keywords: behavioral economics, loss aversion, context effects, decision making, environues, prospect theory

JEL Classification: C91, D12