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Coherent Arbitrariness: Stable Demand Curves Without Stable Preferences

Publication Type:

Journal Article

Source:

Quarterly Journal of Economics, p.118- (2003)

URL:

http://scholar.google.com/scholar?as_q=Bounding+Rationality+to+the+World&as_authors=Todd

Abstract:

<p>Economic theory assumes that prices derive from fundamental values. However, it is rarely possible to measure fundamental values directly, so empirical tests examine necessary but not sufficient conditions for fundamental valuation - e.g., whether labor supply responds appropriately to transitory fluctuations in wages. We show that relative valuations can appear to be sensible, as if supported by fundamental values, even when they are quite arbitrary. In four studies, subjects stated willingness to accept (WTA) values for listening to annoying sounds of varying durations. At the onset of each session, subjects listened to a sample of the sound and were asked to state whether, hypothetically, they would be willing to listen to the sound again for either a large or small payment. Suggestive of coherence, prices were systematically related to noise duration. But, suggestive of arbitrariness, prices were powerfully influenced by the arbitrary high/low anchor accompanying the hypothetical question. We show that this pattern of "coherent arbitrariness" is consistent with a model that posits that preferences are initially malleable but become "imprinted" - i.e., precisely defined and largely invariant - after the individual makes an initial choice. The first experiment documents coherent arbitrariness at the individual level, the second in experimental markets, the third with random initial anchors and high payoffs, and the fourth tests the prediction of the imprinting model that prices will be disproportionately influenced by the first of multiple anchors.</p>