Tversky , Simonson : Context-dependent Preferences

1. Tversky, Simonson: Context-dependentPreferences 21st January, 2014 Emilia Long k90361 Mirjamaria Petäjäniemi 241047 Iiro Vaniala

2. Research Objective A new model is proposed to cope with the empirical inconsistencies with a traditional model of value maximization. The standard theory of choice is based on value maximization. The independence of irrelevant alternatives is equivalent to the assumption that the DM has a complete preference order of all options and selections the one that is the highest in that order. Value maximization Context-dependency Empirical findings exist that are inconsistent with value maximization. As a result, Tversky and Simonson propose a context-dependent model that expresses value of each option as an additive combination of certain components.

3. Hypotheses Two hypotheses are introduced that give rise to context effects, which violate value maximization. 1. Tradeoff contrast Tendency to prefer x over y is enhanced if DM encounters other choices, in which improvement in quality is associated with a larger difference in price. Disadvantages loom larger than the corresponding gains. Hence, options with extreme values within an offered set are less attractive than options with mid values. Note: Similarity to loss aversion, in which losses loom larger than corresponding gains. 2. Extremeness aversion

4. Tradeoff Contrast: Background and Local Context The tradeoff contrast applies to both the background and local context. Background context The previous options encountered in the past affect the current choices. Example: Depending on the background options, the choices of tires different in the groups. It is defined as the offered set. The “market share” of x can be increased by adding a third alternative z that is clearly inferior to x but not to y. Example: The preference for a pen 1 as gift increased in relation to pure cash when an inferior pen 2 was introduced as a third choice. Local context

5. Extremeness Aversion: the Effects The extremeness aversion gives rise to the following effects. Compromise A middle option y has small advantages and disadvantages with respect to x and y. The middle option y is a compromise between the two extremes. It’s a symmetric form of extreme aversion. Polarization As opposed to compromise, it describes extreme aversion in relation to one attribute only.

6. Theory: componential context model xxx Contingent weighting model describes the effect of the background as a global change in the relative weight of the attributes. This change may be viewed as an updating process in which the decision maker adjusts the weights in light of the tradeoffs implied by the background context Additivity across attributes The second component describes the effect of the local context. It can be interpreted as a tournament in which x is matched against each of the other options in S, and its overall score is the sum of the results of these matches Additivity across options

7. Explaining Context Effects: Background Tradeoff Background Tradeoff A shiftfrombackground B’ to B’’ produces a correspondingshift in preferencefrom x to y.

8. Explaining Context Effects: Tradeoff Contrast In the binary case DM is indifferent between x and y. In trinary case y is preferred over x because the relative advantage of y over x exceeds that of x over z. Tradeoff Contrast

9. Explaining Context Effects: Extremeness Aversion According to value maximization, options x, y and z are equivalent in trinary choice. However, the model implies that the middle option y is the most attractive in trinary choice. The reason is that the relative advantage component favours the middle option over the extremes. Extremeness Aversion

10. Discussion The contribution of this study is to provide a mathematical model that explains how people's preferences are affected by the alternatives under consideration. Implications and applications Variety of choices affected by irrelevant addition or deletion of options: for example, the choices among job candidates, products, job offers, public policies and spouses! The model remains as an incomplete framework as it does not address the heuristics of choice and editing operations. However, the model is a good starting point for more realistic models. It incorporates the lack of individual global preference model, which leads to usage of context to identify the best option Criticism to the model