Controlling for Compromise Effects Debiases Estimates of Preference Parameters
79 Pages Posted: 13 Jan 2016
Date Written: October 1, 2015
The compromise effect - a tendency to choose options close to the “middle” of a choice - has been shown to confound measurement of preferences. In an experiment with 550 participants, we study risk preferences elicited with Multiple Price Lists. Following prior work, we manipulate the compromise effect by varying the middle options of each Multiple Price List and find that measured risk-preference estimates are sensitive to this change in the choice set. To eliminate this bias, we incorporate context effects directly into a structural econometric model. We show that this method generates robust estimates of preference parameters.
Keywords: compromise effect, cumulative prospect theory, loss aversion, risk preferences
JEL Classification: B49, D03, D14, D83, G11
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