1willingness-to-pay (WTP) measure
maximum price a customer is willing to pay for a product or service.
2willingness-to-accept (WTA) measure
minimum monetary amount that а person is willing to accept to sell a good or service, or to bear a negative externality, such as pollution.
3rational preferences
WTP=WTA
4Endowment Effect
WTA>WTP people value something more when they have it (are endowed with it) than when they don’t have it
-creates reference-dependent utility, meaning utilityor some level of consumption is not an absolute, but is instead a function of our “reference point”
5Loss aversion
the negative effect on utility from
a loss is greater than the positive effect on utility
of a similar gain
Shortened: The bad of losses outweighs the good of gains
6Loss Aversion Example:
Pat and Sam, go for a walk. At the start of the walk, Pat has ten apples and Sam has zero apples. During the walk some scoundrel steals five apples from Pat. Also during the walk, Sam finds five apples.
U(X) = U(X)
U(x) = 2x
U(5) = 10
Both end the walk with five apples, so they should be equally happy using standard utility theory. They are
equally happy.
7Value function
If reference points are their start-of-
walk endowments (10 for Pat, 0 for Sam), at the
end of the walk Pat has v(-5) and Sam has v(5)
v(x) = x/2 for gains (x > 0)
v(x) = 2x for losses (x < 0)
• This means Pat has v = 2*-5 = -10 and Sam has v =
5/2 = 2.5. Sam is happier than Pat.
8anchor
people systematically
underestimate the amount of adjustment
needed to make accurate judgments.
For example, if you first see a T-shirt that costs $1,200 – then see a second one that costs $100 – you're prone to see the second shirt as cheap
9procedure invariance
Preferences/decisions don’t change due to changes in the method used to elicit them