The Impact of Prior Decisions on Subsequent Valuations in a Costly Contemplation Model

  • Authors:

  • Elie Ofek;Muhamet Yildiz;Ernan Haruvy

  • Affiliations:

  • Harvard Business School, Harvard University, Boston, Massachusetts 02163;Department of Economics, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142;School of Management, University of Texas at Dallas, Richardson, Texas 75083

  • Venue:
  • Management Science
  • Year:
  • 2007

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Abstract

This paper develops and tests a model of how recall of information from past decisions affects subsequent related decisions. A boundedly rational individual has to determine her willingness to pay for a good that she previously considered purchasing at a given price, or provide valuations for a set of goods that she previously ranked in order of preference. The individual is ex ante uncertain about her utility from consumption of the goods and can exert costly cognitive effort to reduce this uncertainty. We show that incorporating information from a prior decision has three primary effects: (a) Valuations are expected to exhibit higher variance---in particular, the spread of valuations between the most and least preferred alternatives increases; (b) decision makers will, in expectation, exert more effort during the valuation phase; and (c) the relative impact of prior decisions on valuation spread increases, the more each attribute contributes to overall utility. The model predictions are then tested in a series of controlled lab experiments.