Wednesday, January 2, 2008

 

Part-Whole Bias--The Embedding Effect. ``Contingent valuation'' is a survey technique used in cost-benefit analysis for public goods. These goods are not traded in the market, so market prices cannot be used to value them. Instead, the analyst asks a sample of people how much they are willing to pay for the public good, which is often some environmental good such as wildlife preservation. Surveys are notoriously bad at eliciting true valuations, and the contingent valuation method has been much criticized. Diamond \& Hausman (1994) survey some of these criticisms, including that of ``part-whole bias'', or ``the embedding effect''. The clearest example is from a study by Desvouges, Johnson, Dunford, Hudson, Wilson \& Boyle (1993) which asked some people how much they would pay to stop the killing of 2,000 birds, some people 20,000, and some people 200, 000. The answers were all roughly the same, even though presumably it is worth spending more to save 200,000 birds than to save 2,000. Diamond and Hausman suggest that respondents were not really saying how much they valued birds, but were giving themselves a good feeling by donating, even if only in the abstract, a sum towards wildlife preservation (the ``warm glow effect'' of Andreoni (1989)). People do not view saving 200,000 birds as the addition of one-hundred 2000-bird projects. Similarly, Kemp \& Maxwell (1993) asked one group of people how much they would pay to reduce the risk of oil spills off the coast of Alaska, and found an average valuation of \$85. They asked a different group how much they would pay for a broad range of government programs, and then asked that group to divide and subdivide their willingness to pay for the various items in the package. By the time they broke it down to reducing the risk of oil spills off the coast of Alaska, the value was down to \$0.29. Asking about the oil spills separately gives it a much higher value; the whole is worth more than the sum of the parts. (For a a wide variety of other contingent valuation studies see Frederick \& Fischhoff (1998)). Surveys have their own special problems, but the embedding effect can arise in real decisionmaking too, as Bateman, Munro, Rhodes, Starmer \& Sugden (1997) found in experiments in which subjects traded restaurant vouchers. This should not be surprising. Many people devote considerable effort to budgeting their spending, and such effort would be unnecessary if we were endowed with enough brainpower to costlessly link every consumption decision to every other actual and potential one. Naturally, if we are reminded of other items we could buy-- or told of options that are entirely new to us-- that affects our decisions.

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