Controlling for Compromise Effects Debiases Estimates of Preference Parameters

79 Pages Posted: 13 Jan 2016

See all articles by Jonathan Beauchamp

Jonathan Beauchamp

McKinsey Consulting Group

Daniel J. Benjamin

USC, Center for Economic and Social Research (CESR); National Bureau of Economic Research (NBER)

Christopher F. Chabris

Harvard University - Department of Psychology

David Laibson

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: October 1, 2015

Abstract

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

Suggested Citation

Beauchamp, Jonathan and Benjamin, Daniel J. and Chabris, Christopher F. and Laibson, David I., Controlling for Compromise Effects Debiases Estimates of Preference Parameters (October 1, 2015). CESR-Schaeffer Working Paper No. 2016-001. Available at SSRN: https://ssrn.com/abstract=2714181 or http://dx.doi.org/10.2139/ssrn.2714181

Jonathan Beauchamp

McKinsey Consulting Group

Washington, DC
United States

Daniel J. Benjamin (Contact Author)

USC, Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher F. Chabris

Harvard University - Department of Psychology ( email )

33 Kirkland Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.wjh.harvard.edu/~cfc

David I. Laibson

Harvard University - Department of Economics ( email )

Littauer Center
Room M-14
Cambridge, MA 02138
United States
617-496-3402 (Phone)
617-495-8570 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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