The Disparity Between Willingness-to-Pay Versus Willingness-to-Accept as a Framing Effect

Abstract

A number of studies (see, e.g., Kahneman & Tversky, 1984; Thaler, 1985; and Tversky & Kahneman, 1981) have demonstrated that the way an individual frames or represents a choice problem can have important effects on the choices made. Machina (1987) argues that such framing effects remain one of the major unsolved problems of choice under uncertainty. A dramatic illustration of a framing effect was presented by Knetsch and Sinden (1984); they showed in a series of experiments that the amount people were willing to accept (WTA) to sell back lottery tickets exceeded the amount they were willing to pay (WTP) for purchase of lottery tickets by a factor of about two to one. The underlying choice problem is the same, either (a) to have a certain amount of money and no lottery ticket or (b) to hold a lottery ticket but to forgo a certain amount of money. The difference in behavior is apparently due to whether the choice is framed as buying (WTP) or selling (WTA).1 KeywordsProspect TheoryInsurance PolicyExpect Utility TheoryLottery TicketVickrey AuctionThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.