When Willingness-to-Pay Seems Irrational: The Role of Perceived Market Price

Abstract

One of the most prominent areas of research in psychology concerns understanding people’s preferences. In this paper, we critically examine one of the most used preference elicitation procedures: willingness-to-pay (WTP). Contrary to assumptions that WTP captures personal preferences (i.e., liking) for goods, we argue and empirically demonstrate that WTP is often primarily driven by respondents’ beliefs about the market value (i.e., price) of goods. The understanding that WTP primarily reflects respondents’ beliefs about the market value of goods can explain various preference anomalies, such as (a) previously documented “preference reversals” between WTP and other measures of preference that do not reflect perceived market price (e.g., choice), and (b) people who have personal utility for a product provide similar valuations relative to people who do not have personal utility for it. To this end, we advance an intervention, which we call the “WTP Zero” task, that can shift WTP closer to personal preferences. We find the WTP Zero task helps: (1) attenuate or eliminate preference reversals between WTP and choice, and (2) differentiate between people for whom products carry personal utility versus people for whom they do not. Finally, we find that this simple and cost-effective WTP Zero task provides valuations comparable to incentivized procedures even when hypothetical valuations are elicited.

Keywords: valuation, willingness-to-pay, preference reversal, market value, scale compatibility