The incorporation of subjective risks into choice experiments to test scenario adjustment

In choice experiment (CE) applications, subjects are typically assumed to fully accept information given in the status quo (SQ) alternative, however, subjects might adjust such information on the basis of their subjective beliefs. This phenomenon is known as scenario adjustment. By using a CE field survey, we investigate whether subjects adjust risks portrayed in the SQ using their subjective estimates via a two-stage approach. In the first stage, subjective risks are elicited using the exchangeability method. In the second stage, two treatment groups are designed. In the first group, each subject is presented with a SQ which incorporates her/his own subjective risk estimate, and, hence, no adjustment is required. In the second group, each subject faces a SQ where the presented risk is not consistent with her/his own estimate, and, hence, a mental adjustment to the scenario might take place. Our modeling results suggest that subjects who are provided with a SQ in which the risk is lower than their own subjective estimates have a higher maximum willingness to pay (WTP) for a risk reduction than subjects provided with a SQ where the risk is consistent with their perceptions. Hence, in this case the scenario adjustment takes place. In contrast, subjects who are presented with a SQ where the risk is higher than their subjective estimates, overreact to the risk information, and have a higher WTP for the risk reduction than subjects who face a SQ where the presented risk is consistent with their perceived risks. Hence, in this case they appear to go along with the information in the SQ and abandon their subjective estimate

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Conference Paper/ Presentation
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JEL Codes:
C83; C93; D81; Q18

 Record created 2017-04-01, last modified 2017-08-27

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