Chapter 3. Intertemporal choices for hedonic and utilitarian goods

Transcription

1 Chapter 3 Intertemporal choices for hedonic and utilitarian goods Summary * Future outcomes are generally valued less than immediate ones. The normative DUmodel as well as the standard descriptive hyperbolic discounting model imply that this devaluation depends on the present utility of the reward, delay time and a delay gradient, a personal measure of impatience. In this chapter it is argued that only certain types of consumption, viz. hedonic consumption instead of utilitarian consumption, are associated with impulsive behavior. People, we assume, behave myopically when buying fancy clothes or alcohol, but only rarely when purchasing gasoline or washing machines. We present three experiments that show that people are more impatient to receive hedonic goods than utilitarian goods, even in cases where utilitarian goods are valued more highly. According to the framing theory introduced in Chapter 2 this effect is stronger in choices about which good to receive sooner than when adequate compensation charges have to be determined. In fact, we do not observe differences between hedonic and utilitarian goods for such compensation charges. * This chapter benefited from discussions with and comments from Laurie Hendrickx, George Loewenstein, and Drazen Prelec. Marcel van Assen, Alinda van Bruggen and Renee van der Hulst helped to formulate the Dutch scenarios. None of them is responsible for any remaining errors. An earlier version of this chapter has been presented at the ICS Forum Day in 1998.

2 54 Chapter Introduction People generally have a preference to receive positive rewards as soon as possible. Delay of an outcome leads to a devaluation of the outcome's absolute value, i.e., it is discounted. As demonstrated by empirical research (e.g., Loewenstein & Elster 1992) this discounting of future outcomes is most appropriately modeled by a hyperbolic discount function: U ( V 0) U ( Vt) =, (1) (1 + αt) (V 0 ) being the immediate value of an outcome, U(V t ) its value at time delay t, α being a constant determining the steepness of the discount function 44, and t the number of time periods the reward is being delayed. This model implies that time delays close to immediacy lead to stronger discounting of an object's absolute value than identical time delays occurring later. People thus are relatively eager to receive rewards now instead of one day later but they care little whether they receive the same reward in 65 or in 66 days. The hyperbolic function describes preference for immediate rewards as well as impulsive or timeinconsistent behavior: people having the choice between a small reward available after some time and a later but larger reward initially may prefer the later reward. Their preference may, however, reverse, if both rewards become less delayed and the smaller reward is available immediately. In the hyperbolic discounting model discounting depends on the present utility of the reward, the delay time and discount factor α, which is usually interpreted as a personal measure of impatience. Hence, discount rates should be identical between objects of identical present utility. Hoch and Loewenstein (1991) and Loewenstein (1996) have pointed out two shortcomings of the hyperbolic discounting perspective. First, generally only certain types of consumption are associated with impulsivity. Common sense readily acknowledges impulsivity when drugs, alcohol or sweets are to be consumed, but only rarely are purchases of gasoline or kitchen facilities considered to be impulsive (for empirical evidence on good-specific discount rates see Chapman and Elstein 1995 and Dittmar, Beattie & Friese 1996; for evidence concerning impulse buying see Bellenger 1978). Casual inspection also suggests that people are quite sensitive to even small longterm consequences when considering which bank offer to accept in order to pay back their mortgage for the following twenty years. Second, hyperbolic discounting can also not explain why certain situational variables, e.g., direct contact with the object, sometimes raise impatience. If people discount the utility of delayed rewards hyperbolically, they would apply one and the same discount function regardless of situational or good-specific characteristics. 45 If different goods would be discounted at different rates, this could result in preference reversals. That is, in a choice between two 44 In addition, α indicates whether a subject prefers immediate to future outcomes, if α > 0, future outcomes over immediate ones, α < 0, or is indifferent between receiving present or future outcomes, α = 0. See chapter 1 for an extensive discussion of hyperbolic discounting models. 45 Of course, in addition the utility the consumption of a good provides may be time-dependent. That is, my evaluation of a bottle of water may well depend on whether I am thirsty or not. But this is not a situationspecific influence of my discounting of the utility a bottle of water provides. Such a situation-specific influence would be, e.g., a vivid description of this water bottle (see chapter 4) leaving its utility from future consumption unaffected.

3 Intertemporal choices for hedonic and utilitarian goods 55 goods available immediately good A is preferred, while B might be preferred when both goods are being delayed the same amount of time. This chapter extends the standard hyperbolic discounting perspective by proposing that discount rates vary between hedonic and utilitarian goods. Hedonic goods are goods associated with fun and pleasure whose consumption provides direct utility. Utilitarian goods are instrumental goods that serve as means to reach higher utility levels. Because delaying goods means an immediate loss (one has to forego immediate use of the product) and due to the greater ease with which hedonic usage of goods can be imagined, we expect loss aversion and consequently impatience to be greater for hedonic goods Theory Hoch and Loewenstein (1991) suggested that impulsivity is caused by shifts in the consumer s reference point. When acting impulsively, consumers adapt to the reference state of owning a good. The actual non-possession of this good then creates deprivation, which is enhanced if the good is proximate, temporally or physically. Impulse buying consequently is more likely for proximate goods, because consumers want to end the experienced deprivation and buy the product. Likewise, Loewenstein (1988) and Shelley (1993) argue that delay charges, the standard measure for discount rates, reflect the decision maker s adaptation to owning an object: telling a person that he will receive a certain object encourages him to adopt the reference state of owning this object. Asking to delay the receipt of a benefit to which he has partly or fully adjusted yields an immediate loss. This loss is compensated by the future discounted gain plus the delay charge. 46 Hoch and Loewenstein model intertemporal choice as follows: D = a(p - r) + b(r-0), (2) a being the slope of the consumer's value function in the positive region, b its slope in the negative region, 47 and r is the level of adaptation between purchase (P) and non-purchase (0). For example, consumers being able to imagine the possession of a good very well, adapt more strongly to its possession and are more likely to buy the product. Desire D represents the consumer s motivation to purchase a product. Recently, Dhar and Wertenbroch (2000) investigated preferences for hedonic and utilitarian goods. They define hedonic goods as being characterized by an affective experience of sensual or aesthetic pleasure, fantasy, and fun. Utilitarian goods are those whose consumption is more cognitively driven, reasoned, and goal-oriented. They are thus more of an instrumental and functional nature. Although this distinction might seem somewhat vague, consumer goods have been successfully classified along these dimensions (Mano & Oliver 1993). In this book hedonic and utilitarian goods will be distinguished according to whether consumption of these goods provides direct utility as is the case for hedonic goods, or whether their consumption serves as means to derive 46 Note, that Hoch and Loewenstein s argument refers to deprivation while the latter two deal with delay charges, i.e. monetary discount rates. 47 Hoch and Loewenstein assume linear utility functions for gains and losses. However, one could easily generalize the model to incorporate also S-shaped utility functions.

4 56 Chapter 3 utility from other goods as is the case for utilitarian goods. 48 To give an example for the latter, for most people the use of a vacuum cleaner provides little utility in itself but instead is used to derive utility from a clean room. Dhar and Wertenbroch (2000) demonstrated that loss aversion is stronger for hedonic than for utilitarian goods. That is, people are less willing to forego hedonic goods instead of utilitarian goods of equal value. Stronger loss aversion for hedonic than for utilitarian goods implies that the slope of the value function in the negative region differs for hedonic and utilitarian goods: b h > b u. Hence, decision makers should feel more deprived when having to delay hedonic instead of utilitarian goods: D h = a(p - r) + b h (r-0) > D u = a(p - r) + b u (r-0), (2) Because deprivation is stronger for hedonic than for utilitarian goods we hypothesize: H 1 : People prefer to receive hedonic goods sooner than utilitarian goods Method Experiments used scenarios where subjects were told that they had won some reward in a lottery and had to delay receipt of this reward. Such lottery scenarios, introduced by Thaler (1981), were used in several previous experiments as well as in surveys and evolved into some standard paradigm for measuring discount rates. However, we did not investigate monetary discount rates as is usually done within this paradigm, but instead asked subjects which of two goods they would like to receive sooner when given the possibility. Subjects Subjects were 80 students at the university of Groningen from various disciplines recruited via and by flyers. They were confronted with decision scenarios presented on a computer screen and partly with decision scenarios and questions concerning their personal background presented on paper. Since the decision scenarios were varied between subjects, only part of the sample received the choice problems presented below and the number of subjects varies between problems. Mean age was 22 years, 42% were males and 58% females, average monthly income was ƒ1100 ($500), and the main fields of study were psychology (30%), management science (11%), languages (8.5%), sociology (8.5%), law (7%), economics/econometrics (8.5%) and natural sciences (7%). Method Subjects gathered in groups ranging from 6 to 15. They were assigned to a computer where the program concerning the experimental tasks described in chapter 7 had been installed and instructed about the context in which the research took place and that there were no wrong or right answers. In between these experimental tasks were regular breaks where subjects turned to the decision scenarios presented in this chapter as well as to the questionnaire. Decision scenarios varied between subjects to prevent order effects, hence not all subjects were confronted with all scenarios. The experimenter was present during the whole experiment in order to answer questions concerning the tasks. 48 This distinction was suggested to me by Alinda van Bruggen.

5 Intertemporal choices for hedonic and utilitarian goods 57 Completing the whole experiment took between 50 and 110 minutes, most people needed between 80 and 90 minutes. Subjects were paid ƒ25 for their participation Experiments and results Experiment 1: design In the first experiment (n = 41) we tested whether there is indeed a stronger propensity to want hedonic goods sooner than utilitarian goods. We investigated preference for gift certificates for CD s and computer diskettes. Both goods are comparable insofar as they both provide streams of utility and we expected subjects to be familiar with them. Gift certificates for CD's were considered hedonic, for computer diskettes they were considered to be utilitarian. After completion of the experiments part of the sample (n = 39) was asked to classify the consumer goods used in all three experiments as either type A: hedonic, type B: utilitarian, type C: both or type D: neither. 49 Subjects were told they had won two gift certificates in a lottery (each worth 20 guilders - approximately $9) and then asked which of the two certificates they would like to receive sooner. Forty-one subjects answered the following questions (in Dutch): Imagine: you participated in a lottery. You could not only win monetary prizes, but also consumer goods. You were so fortunate to win a gift certificate for CD s and a gift certificate for computer diskettes. Both gift certificates are worth 20 guilders. What is the minimal amount for which you would sell the gift certificate for CD s immediately? ƒ What is the minimal amount for which you would sell the gift certificate for computer diskettes immediately? ƒ Unfortunately there is a temporary shortage in prizes. Thus, not every winner can receive his or her prizes immediately. The organization of the lottery therefore asks you to wait for your prizes. You have two possibilities (circle what you prefer): A: You get the CD certificate immediately and the certificate for computer disks in four weeks. B: You get the certificate for computer diskettes immediately and the certificate for CD s in four weeks. Order of presentation was varied. Half of the subjects stated selling prices for the computer diskettes certificate first and made their choice from an option set where Option A offered this certificate sooner. Eliciting selling prices is necessary to control for the trivial fact that subjects should wish to receive a higher valued object sooner. 49 The exact wording was: Some people distinguish between goods. Some goods are pleasant and fun, give pleasure and appeal to your senses, e.g., perfume (type A). Some goods are useful, practical, functional, something that helps you to achieve a goal, e.g., a vacuum cleaner (type B). Could you indicate for each of the following goods whether they are type A, type B, both, or none. Circle.

6 58 Chapter 3 Experiment 1: results CD's were classified as primarily hedonic by 87%, as both hedonic and utilitarian by 7.7%, and as primarily utilitarian by 5.3% (χ 2 = 35.89; p <.001). Computer diskettes were classified as primarily hedonic by 7.7%, as both hedonic and utilitarian by 7.7%, as primarily utilitarian by 82.6% and as none by 2% (χ 2 = 31.54; p <.0001). Hence, the manipulation hedonic versus utilitarian appeared to have worked. Subjects on average valued a gift certificate for CD s higher than certificates for computer diskettes (mean selling prices ƒ20 vs. ƒ18, t: 4.35; p <.001). Of the total sample 98% chose to receive the gift certificate for the CD sooner (χ 2 : 37.1; p <.0001). Note that for people valuing certificates for CD s more than certificates for computer diskettes the choice between the two certificates resembles a choice whether to receive a smaller or a larger reward sooner. Since in such a choice situation the larger reward should be preferred sooner, it is more sensible to restrict the analysis to the part of the sample which values both goods equally. As it turned out for these subjects there is a clear preference to receive the certificate for CD s sooner: twenty-four out of twenty-five subjects chose the CD certificate sooner (χ 2 : 21.6; p <.0001). Hence, we have a clear preference to receive hedonic goods sooner. 50 Experiment 2: design Since in experiment 1 the hedonic good on average was valued higher than the utilitarian good the result may partly be due to some unmeasured differences in value. For example, subjects may think that, despite greater preference for gift certificates for CD s, they should be compensated with the nominal value of the certificate. Hence, we replicated experiment 1 with two other durable consumer goods (n = 66). This time we chose a sandwich toaster worth ƒ40 and a cassette with cutlery also worth ƒ 40. It was hypothesized that the sandwich toaster would be considered hedonic and the cassette with cutlery would be considered utilitarian. Subjects were given the same text as above but with other goods. Again, order of presentation was varied. Half of the sample received a question where the hedonic good was presented first, the other half answered a question where the utilitarian good was presented first. Experiment 2: results The sandwich toaster was rated by 56% as primarily hedonic, by 23% as both and by 23% as primarily utilitarian (t: 2.49; p <.05). The cassette with cutlery was rated as primarily utilitarian by 66.5%, by 20.5% as primarily hedonic, by 5% as both and by 7.7% as none (t: 4.24; p <.001). Consequently, in line with expectation, the sandwich toaster was rated as more hedonic than cassette met cutlery (t: 6.27; p <.001). 50 A pretest was done with 51 subjects who voluntarily answered an identical question. The answers were almost identical: gift certificates for CD s were valued slightly more than for computer diskettes (mean selling prices ƒ18 vs. ƒ15; t: 3.18; p <.001). The number of subjects who preferred the certificate for computer diskettes sooner was slightly higher than in the experiment reported above (5 out of 51). Subjects valuing one certificate more than the other always preferred to receive this certificate sooner. Restricting the analysis to subjects who value both certificates equally again reveals strong preference (20 out of 21 subjects) to receive the hedonic good sooner (χ 2 : 17.19; p <.001).

7 Intertemporal choices for hedonic and utilitarian goods 59 Mean selling prices (sandwich toaster: ƒ35, cassette met cutlery: ƒ34) are equal (t:.61; n.s.). In a direct choice which of these two goods to receive immediately, 66% of the subjects preferred to receive the hedonic good sooner (χ 2 : 6.06; p <.05). Restricting the sample to the number of subjects who stated identical selling prices for both goods (n = 30) led to an identical distribution (2/3 chose to receive the sandwich toaster sooner) but reduced significance (one-tailed test, χ 2 : 3.33; p <.05). Experiment 3: design Experiment 1 and 2 demonstrated that there is a greater tendency to prefer hedonic goods sooner than utilitarian goods. We conducted a final experiment (n = 76) with respect to whether there is a greater propensity to want hedonic goods sooner than utilitarian goods. This time we selected goods such that the utilitarian good was valued slightly higher. This was done in order to test whether the greater immediate attractiveness of hedonic goods could even outweigh differences in utility. In addition, we chose somewhat more expensive goods. We chose an exclusive coffee machine with which you can also make espresso (ƒ300) and a complete coffee and tea service (ƒ350). The coffee machine was considered to be hedonic and the service was considered to be utilitarian. Subjects were given the same text as above but with other goods. Experiment 3: results The exclusive coffee machine was rated as primarily hedonic by 59%, by 23% as both, by 15.4% as primarily utilitarian and none by 2.6%. Hence, for the coffee machine the manipulation worked (one-sample t-test: t: 2.49, p <.05). The coffee and tea service was rated as primarily utilitarian by 38.5%, by 33.5% as primarily hedonic, by 18% as both and by 10% as none. Therefore the coffee and tea service was not clearly rated as utilitarian (one-sample t-test: t: 1.53; p =.133). Because, as intended, the coffee machine was rated as more hedonic than the coffee and tea service (one sample t-test: t: 4.3; p <.001) the goods were used nevertheless. As expected, mean selling prices were higher for the tea service than for the coffee machine: ƒ264 vs. ƒ246 (t: 2.5; p <.05). In a direct choice which of these two goods to receive immediately nevertheless 71% preferred to receive the more hedonic good sooner (χ 2 : 13.47; p <.001) Conclusion There is clear evidence for a greater preference to receive hedonic goods sooner than utilitarian goods. In three comparisons between goods, subjects preferred the more hedonic one immediately. Given that in such pairwise comparisons generally there is a strong tendency to be more impatient for goods which are valued more, it is especially striking that in experiment 3 subjects actually preferred to receive a lower valued hedonic good sooner than a higher valued utilitarian good.

8 60 Chapter The influence of measurement on framing According to the Discounted-Utility model different measures of time preference should yield identical discount rates. However, already Loewenstein (1988) demonstrated that temporal discount rates differ between choices that are framed as speeding-up and choices framed as delaying the receipt of a good (see chapter 1 for an extensive discussion). Framing theory, as presented in chapter 1, in addition predicts greater impatience for hedonic over utilitarian goods to depend on the measurement of impatience. More specifically, a stronger preference is expected for hedonic goods under measures that stress their hedonic aspects and a stronger preference is expected for utilitarian goods under measures that underline the utilitarian features. Generally, measures to elicit preferences that are 'scale compatible' with one of the options' attributes raise the salience of this attribute (Tversky, Kahneman & Slovic 1988). Asking subjects which good they would like to receive sooner may make hedonic considerations more salient, because this elicitation method focuses on the usage of the good and subjects can more easily imagine using hedonic goods. Asking subjects to specify monetary amounts as compensation charges for delay may underline the utilitarian features of an option, especially when larger amounts are involved. People might consider alternative utilization of the money when thinking about the correct trade-off between waiting time and compensation. Further, asking for compensation charges may provoke considerations as 'appropriateness' of the charge or considerations about the monetary costs of delaying an object. When subjects are forced to make a choice, the attributes attached to the options will influence framing (see Chapter 2). This has consequences for the way impatience can be measured. When the measurement does not itself introduce a frame, it will reflect the effect of the given attributes (here: hedonic and utilitarian ). If, however, the measurement itself introduces prominent attributes or makes existing attributes more salient, it will interfere with the framing effect and thus not measure what it is supposed to measure. In order to demonstrate this effect, we added a replication of experiments 2 and 3 in which (im)patience is measured by the subjects willingness to accept financial compensation. We argue that being forced to think in terms of the monetary value of their feeling of impatience leads subjects to adopt an utilitarian frame on the choice task and which will eradicate the difference between hedonic and utilitarian goods. Experiment 4: design In the previous experiments subjects always had to choose to receive hedonic or utilitarian goods sooner. We therefore replicated experiment 2 and 3 but told subjects that they had won one good in a lottery and the lottery organizer subsequently asks them to delay receipt of this good for four weeks. Subjects in turn are offered to receive some financial compensation and then state whether they accept the compensation and are willing to wait or whether they would like to receive the good immediately. Thus, subjects again make binary choices, but this time are forced to think in terms of appropriate monetary compensation. If subjects are more eager to receive hedonic goods sooner, they should be less willing to accept the financial compensation offered for weeks delay. Subjects in group 1 were confronted with the following text, subjects in group 2 answered the same question for a cassette with cutlery (both in Dutch):

9 Intertemporal choices for hedonic and utilitarian goods 61 'Imagine: you participated in a lottery. You could not only win monetary prizes, but also consumer goods. You were so fortunate to win a nice sandwich toaster (official price: ƒ 40). What is the minimal amount for which you would sell the sandwich toaster immediately? ƒ Unfortunately, there is a temporary shortage in prizes. Thus, not every winner can receive his or her prize immediately. The organization of the lottery therefore asks you to wait four weeks for your prize. You have two possibilities (circle what you prefer): A: You get the sandwich toaster immediately. B: You get the sandwich toaster in four weeks plus ƒ15 in compensation for waiting.' Subsequently subjects in group 1 answered the same question for 'a complete coffee and tea set (official price: ƒ350)' and a financial compensation of ƒ40 for a four weeks delay. Subjects in group 2 answered the same question for 'an luxurious coffee machine with which you can also make espresso (official price: ƒ300)' and also a compensation of ƒ40 for a four weeks delay. Therefore subjects in both groups made choice for hedonic and utilitarian goods. Again order of presentation was varied within groups. Experiment 4: results Mean selling prices in this experiment did not differ from experiments 2 and 3 (sandwich toaster: ƒ32, cassette with cutlery: ƒ34, luxurious coffee machine: ƒ237, and complete tea set: ƒ ). For all goods there is a strong tendency to wait for the receipt and receive the respective compensation instead of receiving the respective good immediately: 84% of the subjects preferred to wait for the cassette with cutlery (n = 26) as well as for the sandwich toaster (n = 19). For the coffee machine 90.6% preferred the later option (n = 53) and all subjects preferred to wait for the tea set and receive financial compensation (n = 29, t: 2.33; p <.05). As expected, combining answers for all four goods reveals no difference between hedonic and utilitarian goods (t:.75; n.s.) when offering financial compensation. Financial compensation seems to raise the salience of the utilitarian frame and can even, as in this case, lead to a frame switch. It is not an alternative way to measure impatience, even though it is often used in experiments to do just that. This point is so important that we conducted a second experiment where financial compensation is involved, but this time we decided to use an experiment with real payoffs. 51 The latter value appears to be much smaller than in experiment 3 (subjects then stated ƒ264), because of the reduced sample. Comparing the part of the sample who stated selling prices in both questions reveals no difference (t:.54; n.s).

10 62 Chapter 3 Experiment 5: design Absence of greater impatience for hedonic goods in the previous experiment might be due to the relatively large compensation offered for a four weeks delay. The offered amounts may have been so high that the compensation outweighed any potential differences between hedonic and utilitarian goods. In fact, between 84% and 100% chose to wait for the good and receive financial compensation. To rule out this possibility we conducted a final experiment. Since up to now all experiments involved hypothetical questions, we this time also investigated intertemporal preferences for hedonic and utilitarian goods in a setting that potentially affects payoffs. Subjects Subjects were 89 students at the university of Groningen from various disciplines recruited via and by flyers. Since the decision scenarios were varied between subjects, only part of the sample participated in the experiment presented below. Mean age was 22 years, 44% were males and 56% females, average monthly income was ƒ1057 ($500), and the main fields of study were psychology (21%), management science (20%), natural science (11%), sociology (10%), educational science (11%), and economics/econometrics (6%). One subject had to be removed from all analyses, because he did not understand several of the decision tasks. Method Subjects gathered in groups ranging from 2 to 23 persons to participate in the experiment. They were each provided with a booklet containing the experimental tasks and a questionnaire concerning the personal background of subjects. Experimental tasks comprised the choice problems described below, some other choice problems on intertemporal choices, presented partly in chapters 3 and 4, as well as several unrelated decision scenarios. The questionnaire items are described in more detail in chapter 5. A version of such a complete booklet is given in overall Appendix A at the end of this book. Since the decision scenarios were varied between subjects, only part of the sample received the choice problems presented below and n generally is smaller than 89. Subjects were told about the context in which the research took place and that there were no wrong or right answers. The experimenter was present during the whole experiment to answer questions concerning the questionnaire items or the questionnaire. Filling in the booklet took between 40 and 75 minutes, most people needed between 50 and 60 minutes. Subjects were paid ƒf10 (then approximately $4.00) and had an additional opportunity to win a gift certificate worth between ƒf15 and ƒ25 depending on their choices in this experiment. Again subjects chose between gift certificates for Compact disks and computer diskettes, but this time they had to specify appropriate intertemporal trade-offs. Subjects were told that they had won a gift certificate in a lottery. Subsequently they made a series of choices where they could exchange this original gift certificate for a larger but later certificate. One group won a certificate for CD's worth ƒ20, the other group had a certificate for computer disks also worth ƒ20. When handing out the booklets subjects were told that they had a 5% chance that one of their choices in this experiment would actually be paid to them. In addition, it was also stated in the text that choices in this experiment could affect actual payoffs. Subjects were also asked to rate the two goods according to their hedonicness by the same question as in experiments 1-3. Since experiment 1 demonstrated a clear preference to receive gift certificates for CD s sooner than gift certificates for computer diskettes, we expected that, if both measures for

11 Intertemporal choices for hedonic and utilitarian goods 63 impatience yield identical results, the initial certificate for CDs should be kept and the certificate for computer diskettes should be exchanged for a later but larger one. Subjects were confronted with the following text (in Dutch): 52 Suppose you have won a gift certificate for CD s (worth 20 guilders) in a lottery. What follows is a series of choices. Each choice offers you the possibility between keeping your initial gift certificate you will get in one week or to exchange it for a different certificate at a different point in time. For each choice, circle the option you prefer. That is, circle either A or B. For example, suppose on choice number 4 you chose A instead of B. Hence, you prefer your initial certificate of f20 in one week over a certificate of f25 in 19 days. When everyone has completed their form one person is picked randomly. This person will actually get paid his or her gift certificate. It is randomly determined who wins, the choices of the winner determine the prize. 1. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 10 days (B) 2. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 13 days (B) 3. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 16 days (B) 4. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 19 days(b) 5. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 22 days(b) 6. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 25 days(b) 7. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 28 days(b) 8. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 31 days (B) 9. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 34 days (B) 10. A gift certificate for f 20 in one week (A) or a gift certificate of f 25 in 37 days (B) Experiment 5: results Subjects on average were willing to change their gift certificate for the CD for a larger certificate after 28 days or less (mean choice: 7; n = 33), while they were willing to wait approximately 25 days or less (mean choice: 5.8; n = 25) for a larger certificate for computer diskettes. However, this difference is not significant (t: 1.22; n.s.). Hence, when subjects make trade-offs we did not find higher discount rates, i.e. shorter delays, for hedonic goods, even though choices potentially affect real payoffs. These results may also be due to value differences. Suppose a ƒ20 gift certificate for CD s is more valuable than a ƒ20 gift certificate for computer diskettes as it turned out in experiment 1. Assuming decreasing marginal utility exchanging the initial certificate adds more utility in case of the certificate for computer diskettes. Thus, subjects are more willing to wait for a smaller increase in utility in case of the certificate for the CD. In this experimental session we also conducted two other experiments where subjects had to state appropriate compensation charges for delaying hedonic and utilitarian goods. In experiment A subjects again had to delay expensive television sets and washing machines (both worth ƒ2400). In experiment B subjects stated compensation charges for the delay of a television set and a vacuum cleaner (both worth ƒ600). In both experiments subjects had to delay goods either 5 weeks or 9 weeks and write down an 52 The experimental design was adapted from Loewenstein (1988).

12 64 Chapter 3 amount sufficient to compensate them. Again, in both experiments we found no differences in compensation charges between hedonic and utilitarian goods. Though washing machines were valued slightly higher than television sets (ƒ2129 vs. ƒ2026, t: 2.14, p <.05; n = 88), in experiment A delay charges were equal for the 5 weeks delay (t:.81; n.s.). In the 9 weeks delay compensation charges were slightly higher for washing machines (t: 1.75; p =.084). Comparing discount rates (compensation charges divided by selling price) for each good reveals no difference between goods for either delay (t: 1.32; n.s. for the 5 weeks delay and t: 1.33; n.s. for the 9 weeks delay). In experiment B likewise an ANOVA with selling price for the goods and time delay as covariates revealed no effect of type of good (hedonic or utilitarian) on absolute compensation charges (F: 2.37; n.s.) or discount rates (F: 2.3; n.s.) Overall conclusion and discussion In choices where subjects have to state whether they would like to receive rewards sooner or later we find clear preference to obtain hedonic goods sooner, even when the utilitarian good is valued higher. This runs counter to both the standard Discounted-Utility model and the hyperbolic discounting model. These results indicate that the distinction between hedonic and utilitarian goods is useful in intertemporal choice as far as deprivation and impulsive behavior is considered. We did not observe such differences in immediate preference for hedonic or utilitarian goods when subjects had to state monetary compensation charges independent of whether compensation charges were fixed or had to be stated by subjects. If at all subjects charge higher monetary compensation for the delay of utilitarian goods. These results suggest that the hedonic/utilitarian distinction is much less valuable when financial considerations play a role in decision making. These results are in accordance with framing theory, since they suggest a greater salience of hedonic attributes when hedonic usage of goods is more important, viz., in decisions which good to receive sooner, and a greater salience of utilitarian attributes when functional considerations are more important as when determining adequate financial compensation. As a consequence of these results intertemporal utility seems to be more complex than it has been treated up to now. First, there is the valuation of goods as measured by selling price in the experiments reported above. Second, there is an immediate preference for goods that might differ from the valuation of these goods and for which the distinction between hedonic and utilitarian goods is highly relevant. Finally, there is intertemporal utility as measured by monetary trade-offs that appears to be distinct from immediate preference. Here discounting is much less sensitive to the difference between hedonic and utilitarian goods. We suggest that this is due to a framing effect comparable to scale compatibility. Forcing subjects to think in terms of monetary compensation makes utilitarian considerations such as alternative usage of the money more important and lowers the prominence of hedonic characteristics. In a similar fashion Prelec and Loewenstein (1998) report effects of the payment structure on hedonic consumption experience. There, thinking about the payment reduced subjects' utility derived from the consumption of goods. However, more research with respect to these phenomena is clearly warranted. With respect to the fact that in choices which good to receive sooner, experienced deprivation is stronger for hedonic than for utilitarian goods the experiments reported here supplement previous research by Metcalfe and Mischel (1999) and Loewenstein (1996). Loewenstein (1996) argues that impulsive behavior often occurs when visceral

13 Intertemporal choices for hedonic and utilitarian goods 65 factors, e.g., cravings or hunger, are involved. Hedonic feelings involved in decisions whether to obtain goods now or later in some respects seem to play a similar role in intertemporal choice. Though hedonicness generally will have weaker effects than visceral factors, the former might become strong enough to produce similar results: one subject motivating a compensation charge of ƒ1500 for a five weeks delay of a television worth ƒ3000 to him argued: this is a very nice television and I want it immediately! It is a shame that the lottery promises such a nice thing and then does not deliver it immediately! Children being denied sweets at a supermarket also show reactions suggesting visceral factors instead of denial of hedonic consumption experience. Metcalfe and Mischel argued that in intertemporal choice the distinction between hot and cool aspects of a decision situation or presentation is relevant (Metcalfe & Mischel 1999). Hot decisions situations, e.g., presence of a reward, raise the need for immediate gratification, while cold aspects of a situation, e.g., abstract presentations of the reward, lower it. The hedonic/utilitarian distinction seems to be more precise than the hot/cool distinction, since goods can and have been rated consistently by a variety of subjects and a variety of goods, while Metcalfe and Mischel use their distinction to interpret three decades of Mischel's own research on children's willingness to delay gratification. However, the hot/cool distinction appears to be more generally applicable.

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