Expectations and Preferences for Sequences of Health and Money

ORGANIZATIONAL BEHAVIOR AND HUMAN DECISION PROCESSES

Vol. 67, No. 1, July, pp. 59–75, 1996 ARTICLE NO. 0065

Expectations and Preferences for Sequences of Health and Money GRETCHEN B. CHAPMAN Departments of Medical Education and Psychology, University of Illinois at Chicago

checks, followed at retirement by a series of larger amounts of pension income. Understanding how people value such sequences is important because many everyday decisions involve sequences rather than single outcomes. As another example, a decision to exercise to improve future health does not involve a choice between one exercise session now or poorer health later, since a single exercise session has a negligible effect on long-term health. Instead, this decision involves a choice between a regular exercise regimen (a sequence of exercise sessions) and a series of potential health problems.

Three experiments demonstrated that preferences for sequences of money differed from preferences for sequences of health. Undergraduates gave preference ratings for graphs that illustrated how monetary income or health quality might change over time, with total amount of money or health held constant. In Experiment 1, subjects expected to experience health that decreased over a lifetime; they also preferred such a sequence. In contrast, they expected to experience increasing monetary income over their lifetimes and preferred such monetary sequences. Experiment 2 showed that these different preferences for sequences of health and money did not hold true for short, 1-year sequences, where subjects had similar expectations about health and money. Experiment 3 replicated Experiment 2 and showed that expectations mediate the effect on preference of decision domain (health or money) and sequence length. These results point to the importance of expectations in forming preferences for sequences. q 1996 Academic Press, Inc.

A PREFERENCE FOR IMPROVING SEQUENCES

Research on intertemporal choice, or decisions about outcomes occurring at different points in time, has shown that choices between sequences of outcomes often differ from those between individual outcomes. Time preferences for outcomes embedded in a series tend to be futureoriented, whereas given a choice between two single outcomes decision makers are usually impulsive or presentoriented. For example, Loewenstein and Prelec (1991) showed that 80% of their subjects preferred dinner at a French restaurant in 1 month to dinner at a French restaurant in 2 months, a present-oriented choice. When the outcomes were imbedded in a series, however, subjects were not so impulsive. While all preferred French food to Greek food, 57% preferred dinner at a Greek restaurant in 1 month and dinner at a French restaurant in 2 months over the reverse order. Subject no longer preferred to have the attractive French meal as soon as possible. Instead, they showed a slight preference for an improving sequence with the better outcome delayed until the end of the sequence. A preference for pleasant outcomes sooner rather than later is called a positive time preference; the reverse is a negative time preference. Choices between individual outcomes almost always display a positive time preference (e.g., Benzion, Rapoport, & Yagil, 1989; Chapman, 1996; Chapman & Elstein, 1995; Thaler, 1981). In contrast, when presented with a sequence, Loewenstein and Prelec’s (1991) subjects actually dem-

Imagine that you are deciding how much to save for retirement. You could have money withheld from each monthly paycheck and invested in an account that can be accessed after retirement. Saving has both shortterm and long-term consequences; present income is reduced but future income is increased. However, rather than a choice between a single short-term outcome and a long-term alternative, this decision involves a choice between sequences of outcomes. One could choose a series of paychecks of the usual size, followed at retirement by lower pension income. Alternatively, one could choose a series of smaller payThis research was supported by NSF Grant SBR-9510954. Portions of this paper were presented at the 1994 annual meeting of the Society for Medical Decision Making and the 1995 annual meeting of the Psychonomic Society. Thanks to Mei-ling Fu, Macy Ng, and Brian Novak for running subjects, and to Mei-ling Fu for coding sequence drawings. Jonathan Baron, Arthur Elstein, George Loewenstein, and two anonymous reviewers provided helpful comments. Address correspondence and reprint requests to Gretchen Chapman, University of Illinois at Chicago Department of Medical Education (M/C 591), 808 South Wood Street, Suite 986, Chicago, IL 60612-7309. E-mail: [email protected]. 59

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0749-5978/96 $18.00 Copyright q 1996 by Academic Press, Inc. All rights of reproduction in any form reserved.

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onstrated a negative time preference, preferring to postpone the more attractive event. In another experiment, Loewenstein and Sicherman (1991) showed that if workers could receive an income of $150,000 over 6 years, they preferred to receive it in a moderately increasing series, like a series of salary increases. This preference was slightly stronger when the income was described as wages earned rather than income from a rental property. The preference for an increasing sequence demonstrates a negative time preference because receiving more of the money in the first year would increase the present value of the income stream. With an appropriate investment plan, the workers could consume more in every year if they received more of the money up front. Frank (1992) found a similar result. Loewenstein and Sicherman explain this result by positing that decision makers adapt to their current level of consumption and are averse to decreases in that level. In addition, they lack self control and thus cannot separate their consumption stream from their income stream. If they received more money during the first year, they would find it difficult to invest it but would be tempted to spend it immediately. This explanation suggests that decision makers are simultaneously impulsive and prudent. They are impulsive enough to spend the money when they receive it, but are also prudent enough to desire the self control scheme offered by the increasing income stream. Ainslie (1986; 1991) similarly suggests that decision makers overcome their inherent impulsiveness by sticking to private rules that enforce self control. Loewenstein and Prelec (1993) also found a preference for improvement, although it was mitigated by a preference for outcomes spread evenly over time. In a similar examination of preferences for sequences, Stevenson (1993) presented students with college loan or work-study scenarios. When the scenarios involved a single outcome (e.g., college funding after a delay during which the student worked), subjects showed a positive time preference—delayed support was less valuable than more immediate support. When the scenarios involved sequences (e.g., variable financial support over 4 years), subjects displayed a zero time preference—support of the fourth year of college was just as valuable as support during the first year. Stevenson explained this neutral time preference by positing that all four years of support were equally important for earning a college degree. Another example of preferences for increasing series is the work by Kahneman and colleagues (Kahneman, Fredrickson, Schreibner, & Redelmeier, 1993; Varey & Kahneman, 1992) on experienced utility. These investi-

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gators found that people judge the overall utility of a sequence by the value of the peak and the end. Thus, ascending sequences were given higher utility ratings than descending sequences. Similarly, Ross and Simonson (1991) found a preference for sequences of events that ended with a good outcome. REFERENCE POINTS

Loewenstein and Sicherman (1991) account for a preference for improving sequences by positing that current consumption serves as a reference point. Future outcomes are evaluated as gains or losses relative to this reference point, with losses weighed more heavily than gains. Consequently, an improving sequence is framed as a series of gains and is therefore preferred to a declining sequence, which is framed as a series of losses. Other work by Loewenstein (1988) also indicates the importance of reference points in intertemporal choice. In that experiment, some subjects were told to imagine they had bought a VCR that they would receive in one year. They were asked how much they would pay to speed-up the delivery so that they would receive it today (the speed-up cost). Other subjects were told to imagine they had bought a VCR that they would receive today. They were asked how much they would demand to delay the delivery for 1 year (delay premium). The delay premium was larger than the speedup cost, and both were larger than the difference between the highest price paid for immediate versus delayed consumption. These time preferences suggest that subjects used different reference points in each decision. When setting a buying price for an immediate or delayed VCR, the reference point was no VCR, so both the immediate and delayed VCRs were viewed as gains. In contrast, Loewenstein hypothesized that subjects in the delay premium condition completely adjusted to ownership of the object that they expected to receive later that day. Because the reference point reflected possession of the object, the delay was framed as a loss. For the speed-up cost decision, the reference point reflected anticipation of a VCR to be received in one year. The value of this reference point was intermediate between no VCR and ownership of a VCR. It is of interest that, whereas Loewenstein and Sicherman (1991) posited that current consumption acts as a reference point, Loewenstein (1988) posited that anticipated consumption acts a reference point. A VCR to be received in one year alters the reference point used for current decisions. Such forward-looking reference points might also influence preferences for sequences. Expectations about how sequences are usu-

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ally experienced may provide a reference point used to evaluated entire sequences. Consequently, expectations may influence preferences for how one would like to experience sequences. Whereas previous reference point accounts have predicted a preference for improving sequences (Loewenstein & Sicherman, 1991), this extension of the reference point model could account for a preference for declining sequences. Specifically, someone who strongly expects to experience a declining sequence may also prefer such a sequence, contradicting the usual preference for improvement. One domain where most people likely expect a declining sequence is health over a lifetime. Most people are healthy when they are young and develop more health problems as they age. It seems unlikely that many people would prefer to reverse that sequence, even if they could, such that they would be sick in their youth and healthy in old age. In contrast to health, monetary income is a domain where most people likely expect an increasing sequence. For many people, annual salary increases with age (at least until retirement) as they gain promotions and seniority. Thus, Loewenstein and Sicherman’s (1991) results showing a preference for increasing incomes could be a function of expectations in addition to a general preference for improvement. If people usually experience sequences of money differently from sequences of health, time preferences for the two domains could differ. Specifically, if people prefer what they usually receive, they should prefer decreasing lifetime health profiles, but increasing lifetime monetary profiles. Such a result would indicate a difference between intertemporal choice for health and money. Previous research has found such differences (Cairns, 1992; Chapman, 1996; Chapman & Elstein, 1995); however those studies explored choices between individual outcomes rather than sequences. Preferences for sequences of health and money were explored in three studies. In Experiment 1, subjects gave preference (attractiveness) ratings for sequences of lifetime health and monetary income. Experiment 2 employed both lifetime and short, 1-year sequences. It was predicted that for lifetime sequences, expectations and preferences would differ for health and money. In contrast, subjects were expected to have fewer expectations about changes in health or income over a shorter 1-year interval. Consequently, preferences were expected to be similar for 1-year sequences of health and money. In Experiment 3 subjects gave both preference and expectation ratings of the sequences and the relation between expectations and preferences was examined. EXPERIMENT 1

Experiment 1 compared preferences for lifetime sequences of health and money. Subjects evaluated 16

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bar graphs depicting lifetime sequences of monetary income. The total income was held constant for all sequences, but the shape of the sequences varied. The same 16 bar graphs were also used to represent sequences of health outcomes. After subjects gave preference ratings for each sequence they drew a picture of the health and money sequences they would most like to experience and those that they expected to experience. Method Subjects. The subjects were 40 undergraduates at the University of Illinois at Chicago who participated for class credit. Procedure. Subjects were asked to complete a paper-and-pencil questionnaire with two parts, a money section and a health section. The order of these two sections was counterbalanced across subjects. Each section consisted of 16 sequences. Subjects were instructed to imagine that they were 20 years old and would live for 60 more years.1 The sequences described health or money outcomes from the age of 20 to the age of 80, in 5-year bins. For simplicity, it was assumed that health or income remained constant for five years at a time. In the money section, subjects considered annual after-tax incomes of $10,000 to $100,000. (They were instructed to assume no inflation). Each of 16 sequences was presented as a bar graph showing 12 bars, each indicating an annual income for a 5-year period. The heights of the 12 bars always summed to $660,000 (e.g., an average annual income of $55,000); however the shapes of the distributions differed. In the health section, subjects considered quality of health that ranged from 10 (perfect health, the best you could imagine) to 1 (very poor health, just barely better than death). They then rated the same 16 sequences used in the money section, except that the bar heights now represented quality of health. The heights of the bars always summed to 66 (average quality of health of 5.5), but the distributions differed. The 16 distributions used in both the money and health sections are illustrated in Fig. 1 and Table 1. The first 5 sequences showed income or health decreasing at constant rates that varied over the sequences. The 6th sequence showed constant income or health across all 12 bars. The 7th through 11th sequences showed income or health increasing at a constant rate, 1 Subjects were not asked for their actual age in Experiment 1. However, subjects in Experiment 2, who came from the same subject pool, had an average age of 19 (range 17 to 26).

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FIG. 1. The 16 health sequences used in Experiment 1 (16 money sequences had the same shapes, but showed annual income on the Y axes. Experiments 2 and 3 used sequences 1–5 and 7–11).

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FIG. 1—Continued

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TABLE 1 Sequences Used in Experiment 1 Age (in years) Sequence

20–24

25–29

30–34

35–39

40–44

45–49

50–54

55–59

60–64

65–69

70–74

75–79

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

10.00 9.00 8.00 7.00 6.00 5.50 5.00 4.00 3.00 2.00 1.00 10.00 7.50 2.75 2.75 6.87

9.18 8.36 7.55 6.73 5.91 5.50 5.09 4.27 3.45 2.64 1.82 10.00 7.35 4.00 4.00 6.73

8.36 7.73 7.09 6.45 5.82 5.50 5.18 4.55 3.91 3.27 2.64 10.00 7.20 4.71 4.50 6.60

7.55 7.09 6.64 6.18 5.73 5.50 5.27 4.82 4.36 3.91 3.45 10.00 7.06 5.43 5.00 6.47

6.73 6.45 6.18 5.91 5.64 5.50 5.36 5.09 4.82 4.55 4.27 10.00 6.92 6.14 5.50 6.34

5.91 5.82 5.73 5.64 5.55 5.50 5.45 5.36 5.27 5.18 5.09 10.00 6.23 6.86 6.00 6.21

5.09 5.18 5.27 5.36 5.45 5.50 5.55 5.64 5.73 5.82 5.91 1.00 5.60 7.57 6.50 6.09

4.27 4.55 4.82 5.09 5.36 5.50 5.64 5.91 6.18 6.45 6.73 1.00 5.04 8.29 7.00 5.96

3.45 3.91 4.36 4.82 5.27 5.50 5.73 6.18 6.64 7.09 7.55 1.00 4.54 9.00 7.50 5.85

2.64 3.27 3.91 4.55 5.18 5.50 5.82 6.45 7.09 7.73 8.36 1.00 3.83 3.75 5.75 4.68

1.82 2.64 3.45 4.27 5.09 5.50 5.91 6.73 7.55 8.36 9.18 1.00 2.87 3.75 5.75 2.81

1.00 2.00 3.00 4.00 5.00 5.50 6.00 7.00 8.00 9.00 10.00 1.00 1.86 3.75 5.75 1.40

Note. Subjects were shown 16 bar graphs depicting quality of health (on a 1 to 10 scale) or annual income for each age. Table columns show the bar heights for health quality. Bar heights for annual income were $10,000 times the values in table columns.

with the rate varying over the 5 sequences. The 12th sequence showed income or health at a maximum for the first 6 bars and at a minimum for the last 6 bars. In contrast to these 12 stylized sequences, the final four sequences were designed to be somewhat realistic representations of how one might expect to experience income or health. Sequences 13 and 16 decreased gradually during the early part of life, and more steeply in later life (descriptive of how health is often experienced). Sequences 14 and 15 increased steadily until age 65 (retirement) and then dropped to a lower and constant level (descriptive of how income is often experienced). Subjects were asked to rate each of the 16 sequences using a 0 to 100 scale. In both health and money sections, they were then asked to draw their ideal sequence (the one they would most prefer to experience), and to identify which of the 16 sequences was most similar to their ideal sequence. Finally, they were asked to draw a typical sequence—the sequence they expected to experience, and to identify which of the 16 sequences was most similar to their typical sequence. Results Data from one subject were discarded because 50% of his or her responses were outside the 0 to 100 rating scale. To determine whether the ratings of the 16 sequences differed in the health and money domains, se-

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TABLE 2 ANOVA Results from Experiment 1 Factor

df1

df2

F

MSe

First analysis Counterbalance condition Domain Question Domain∗question

1 1 15 15

37 37 555 555

2.42 9.29** 16.75*** 3.75***

3426 940 521 393

Second analysis Counterbalance condition Domain Direction Slope Domain∗direction Domain∗slope Direction∗slope Domain∗direction∗slope

1 1 1 4 1 4 4 4

37 37 37 148 37 148 148 148

2.56 5.06* 48.16*** 6.19*** 8.29** 2.32 14.52** 0.91

2455 6561 12700 932 4034 534 1017 343

Third analysis Counterbalance condition Domain Direction Question Domain∗direction Domain∗question Direction∗question Domain∗direction∗question

1 1 1 1 1 1 1 1

37 37 37 37 37 37 37 37

0.04 10.96** 20.25*** 0.75 16.68** 1.01 4.27* 0.07

1793 562 465 252 457 258 361 492

Note. Columns list the factors included in the ANOVA, the degrees of freedom for the numeration (df1) and denominator (df2) for the F ratio (F), and the mean-squared error (MSe). * P õ .05, **P õ .01, ***P õ .0001.

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quence ratings were used as the dependent variable in an ANOVA including the between-subjects factor of counterbalance condition and the within-subject factors of domain (health or money), question, and the interaction. ANOVA results are listed in Table 2 as the First Analysis. There was a significant interaction between domain and question, indicating that the ratings of the 16 sequences differed between domains. To examine this domain difference, I first examined the stylized, constant-rate increasing and decreasing sequences (1–5 and 6–11). Ratings were used as the dependent variable in an ANOVA containing the between-subjects factor of counterbalance condition and the within-subject factors of domain (health or money), direction of change over time (increasing or decreasing), and steepness of the slope of increase or decrease (5 levels). This ANOVA, listed as the Second Analysis in Table 2, showed a significant interaction between domain and direction, which is illustrated on the left side of Fig. 2. In the health domain, decreasing sequences were relatively strongly preferred to increasing sequences (mean ratings, 58 versus 34), whereas in the money domain, decreasing sequences were more weakly preferred (means 56 versus 44). Thus, these results indicate that the preference for decreasing sequences was stronger in the health domain, but nonetheless present in the monetary domain. This result stands in contrast to Loewenstein and Sicherman’s (1991) results which showed a preference for increasing monetary sequences.

FIG. 2. Mean preference ratings given in Experiment 1 as a function of domain (health or money) and direction (increasing or decreasing). The left side of the figure shows preference ratings for the constant rate sequences [1–5 and 7–11]. The right side shows ratings for the realistic sequences [13–16].

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TABLE 3 Percentage of Drawn Sequences in Experiment 1 That Were Decreasing Health

Money

McNemar’s x2

Experimenter codings Expected Preferred

82% 82%

10% 36%

28.00* 14.73*

Subject self-codings Expected Preferred

86% 95%

49% 13%

12.25* 31.00*

Note. The health and money columns show the percentage of drawn sequences that were coded as decreasing. Percentages are shown separately for expected (typical) and preferred (ideal) sequences and for codings by the experimenter and by the subjects. The final column shows the x2 comparing the health and money percentages. * P õ .01.

A third analysis examined only the realistic sequences (13–16). The independent variables used in this analysis were counterbalance condition, domain, direction of change over time, and question number. As shown in Table 2, there was a main effect of domain, indicating higher ratings for money, and also a main effect of direction, indicating an overall preference for decreasing sequences. Of most interest, there was an interaction between domain and direction, illustrated on the right side of Fig. 2. This interaction indicates that in health, decreasing sequences were preferred (means 56 versus 35), whereas in money, there was no preference (means 54 versus 53.) Thus, this analysis also shows that the preference for decreasing relative to increasing sequences is stronger in the health domain. A final set of analyses examined the preferred and expected sequences that subjects drew. These drawings were coded by the experimenter as depicting either a decreasing sequence or another type of sequence (e.g., increasing, peaked, uniform).2 Decreasing sequences were defined to include both strictly monotonically decreasing and roughly decreasing (one or two of the 12 bars not following the decreasing pattern). As shown in Table 3, 82% of the expected health sequence drawings were decreasing sequences, compared to only 10% of the expected money sequence drawings. For the preferred drawings, 82% of the health sequences were decreasing, compared to only 36% of the monetary sequences. Thus, decision domain (health or money) influences both expectations and preferences. Decreasing sequences are viewed as more typical and also more 2

The drawn sequences were also coded by a second rater. Interrater agreement was 91%.

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preferred for the health domain as compared to the monetary domain. Subjects provided self-codings of their expected and ideal sequences by identifying which of the 16 sequences was most similar to each drawing. These codings were used to determine whether each subject considered her or his drawings to be decreasing or nondecreasing sequences. In Fig. 1, sequences 1, 2, 3, 4, 5, 12, 13, and 16 are strictly monotonically decreasing; if a subject identified one of these sequences, the drawing was coded as decreasing. The remaining 8 sequences in Fig. 1 are either increasing, uniform, or peaked; if a subject identified one of these as most similar to the drawing, it was coded as non-decreasing. As shown in Table 3, in self-codings of the drawings of expected sequences, 86% of health sequences were decreasing, compared to only 49% for money sequences. In selfcodings of the drawings of preferred sequences, 95% of the health sequences were decreasing, compared to only 13% of the monetary sequences. Thus, self-codings provide the same results as the experimenter codings. Next, the relation between expectations and preferences was examined directly. Experimenter codings of drawings of preferred sequences were compared to those of expected sequences. For health sequences, 32 subjects drew decreasing preferred sequences and 7 subjects drew non-decreasing preferred sequences. Of the 32 subjects with decreasing preferred sequences, 28 (88%) also drew decreasing expected sequences. Of the 7 subjects who drew non-decreasing preferred sequences, only 4 (57%) drew decreasing expected sequences. Thus, ideal sequences were marginally related to expected sequences (88% versus 57%, x2(1) Å 3.60, p õ .06). There was also a trend toward a relation between expectations and preferences for sequences of money (21% versus 4%, x2(1) Å 2.96, p õ .09). The same analysis was repeated for subject codings of the drawn sequences, however a relation between ideal and expected sequences was not found for health (x2(1) õ 1, p ú .5) or money sequences (x2(1) Å 2.5, p ú .11). Thus, there is only limited evidence that preferences are directly related to expectations. The analyses thus far indicate three results. First, expectations about sequences depend on the domain (health or money) (see Table 3). Second, domain determines whether decreasing sequences are preferred (see Fig. 2). Third, there is some limited evidence that expectations are directly related to preferences. These facts suggest that expectations about how sequences typically occur might mediate the effect of domain on preferences. To test this hypothesis, experimenter codings of preferred sequences (decreasing or not decreasing) were

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used as the dichotomous dependent variable in a logistic analysis. The independent variable was domain, in addition to dummy variables for subject and counterbalance condition. The effect of domain was significant (odds ratio Å 10.10, x2(1) Å 16.1, p õ .0001). This effect is analogous to the pattern shown for ideal sequences in Table 3 and indicates that decreasing sequences are more preferred in health than in money. If this effect is mediated by expectations of sequences, then adding subjects’ expectations to the model should reduce the domain effect. Experimenter codings of expected sequences were then added as another independent variable. Expectations were related to preferences (odds ratio Å 3.38, x2(1) Å 6.3, p õ .02). With the addition of the expectation variable, the domain effect was no longer significant (odds ratio Å 2.07, x2(1) Å 0.79, p ú .3). Thus, by the criteria outlined by Baron and Kenny (1986), expectations mediate the relationship between domain and preferences. The same analysis was repeated using subject codings of the drawn sequences and similar results obtained. This analysis shows that subjects’ differing preferences for sequences in different domains are due to the fact that they have different expectations about how these sequences are usually experienced. Discussion Experiment 1 showed that decreasing sequences of health were preferred to increasing sequences. In contrast, decreasing sequences were less preferred in the monetary domain. This result constitutes a difference between intertemporal choice for health and money. One interesting aspect of this result is that, contrary to Loewenstein and Sicherman’s (1991) results, Experiment 1 did not find a preference for increasing monetary sequences. Instead, decreasing monetary sequences were slightly preferred (Analysis 2) or preferred approximately equally to increasing sequences (Analysis 3). This result is similar to that found by Stevenson (1993), where students showed a neutral time preference for 4 year sequences of college funding. One reason for the disparity between the current results and those of Loewenstein and Sicherman (1991) may be that they used relatively short sequences (income over the next 5 years), whereas Experiment 1 used lifetime sequences. People may be more futureoriented for short sequences than for long sequences. Experiment 2 explored preferences for shorter sequences. Experiment 1 showed that decision domain affected not only preferences but also expectations about how sequences are experienced. In addition, expectations mediated the relation between domain and prefer-

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ences. Thus, at least one explanation for the fact that subjects preferred declining sequences in health more than in money is that they expect to experience decreasing sequences of health more than they expect decreasing sequences of money. This explanation could be tested further by querying subjects about their preferences for sequences about which they have few expectations. For example, people are unlikely to have strong expectations about whether health or income will decline or improve in the next year. In such a situation, preferences for health and money sequences should be more similar. Experiment 2 tested this prediction. EXPERIMENT 2

In Experiment 2, lifetime sequences were compared to shorter 1-year sequences. Decision makers are less likely to have expectations about how their income or health will change over the next year, and there is no reason to suspect that any expectations they have will differ between domains. In contrast, as seen in Experiment 1, subjects have consistent expectations about how health and income will change over their lifetime. Thus, it was predicted that preferences would be similar for 1-year sequences of health and money but that, as in Experiment 1, preferences would differ for lifetime sequences of health and money. That is, sequence length will affect preferences for health but not for money, indicating an interaction between decision domain and sequence length. Such a result would support the hypothesis that expectations influence preferences. Methods Subjects. The subjects were 50 undergraduates at the University of Illinois at Chicago who participated for class credit. Procedure. Subjects were asked to complete a paper-and-pencil questionnaire that contained four sections: lifetime sequences of money, lifetime sequences of health, 1-year sequences of money, and 1-year sequences of health. The order of these sections was counterbalanced across subjects. Each section consisted of 10 sequences. As in Experiment 1, for lifetime sequences, subjects were instructed to imagine that they were 20 years old and would live for 60 more years, and the sequences described health or money outcomes from the ages of 20 to 80, in 5-year bins. The 1-year sequences presented income or health for the coming year in 1-month bins. For 1-year money sequences, subjects were asked to imagine they would be paid $66,000 over the next year, and that their monthly income could range from $1000 to $10,000. For 1-year health sequences, subjects were

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asked to imagine that for the next year they needed to be treated for a medical condition. The treatment would cause them to experience different qualities of health over the next year; at the end of the year, treatment would be complete and their health would go back to its usual quality. In each of the four sections, 10 sequences were presented as bar graphs as in Experiment 1. For health sequences, the heights of the 12 bars of each graph always summed to 66. For money sequences, the heights of the 12 bar summed to $660,000 for lifetime sequences and $66,000 for 1-year sequences. Each of the four sections contained the same constant-rate sequences used in Experiment 1 (sequences 1–5 and 7–11 in Fig. 1 and Table 1). Within each of the four sections, subjects were asked to rate each of the 10 sequences using a 0 to 100 scale. They were then asked to draw their ideal sequence (the one they would most prefer to experience), and to identify which of the 10 sequences was most similar to their ideal sequence. Finally, they were asked to draw a typical sequence (the one they expected to experience) and to identify which of the 10 sequences was most similar to their typical sequence. Results To determine whether the ratings of the 10 sequences differed in the health and money domains and for lifetime and 1-year sequences, ratings of the 10 sequences were used as the dependent variable in an ANOVA including the between-subjects factor of counterbalance condition and the within-subject factors of domain (health or money), sequence length (lifetime or 1-year), sequences direction (increasing or decreasing), and sequence slope (5 levels of increase or decrease). Table 4 shows the results of the ANOVA and Fig. 3 illustrates the mean preference ratings for sequences of each domain, length, and direction. The ANOVA revealed a main effect of domain, indicating that money sequences were rated higher than health (mean ratings 52 versus 47). In addition, increasing sequences were preferred to decreasing (53 versus 47). The main effect of slope indicated that gradually increasing or decreasing sequences were preferred to those that changed steeply (linear contrast F(1,46) Å 75.87, p õ .0001, non-linear contrasts were not significant.) The mean preference ratings for the most shallow to most steep sequences were 68, 57, 49, 40, and 35, respectively. This effect is similar to Loewenstein and Prelec’s (1993) result showing a preference for outcomes that are spread evenly over time. Figure 3 illustrates the three-way interaction among domain, length, and direction. For 1-year sequences,

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TABLE 4 ANOVA Results from Experiment 2 Factor

df1

df2

F

MSe

Counterbalance condition Domain Length Direction Slope Domain∗length Domain∗direction Domain∗slope Length∗direction Length∗slope Direction∗slope Domain∗length∗direction Domain∗direction∗slope Domain∗length∗slope Length∗direction∗slope Domain∗length∗direction∗slope

3 1 1 1 4 1 1 4 1 4 4 1 4 4 4 4

46 46 46 46 184 46 46 184 46 184 184 46 184 184 184 184

0.65 6.14* 2.30 7.35** 57.48*** 0.61 4.81* 0.91 39.36*** 0.82 3.64** 10.19** 0.87 2.65* 9.58*** 2.92*

6165 46269 33867 64003 9892 8109 12652 1783 26967 1461 1459 5466 403 519 718 212

FIG. 3. Mean preference ratings given in Experiment 2 as a function of domain (health or money) and direction (increasing or decreasing). The left side of the figure shows preference ratings for lifetime sequences. The right side shows ratings for 1-year sequences.

Note. Columns list the factors included in the ANOVA, the degrees of freedom for the numeration (df1) and denominator (df2) for the F ratio (F), and the mean-squared error (MSe). * P õ .05, **P õ .01, ***P õ .0001.

increasing sequences were preferred to decreasing in both the health and money domains (mean ratings 59 versus 37 for health, 64 versus 45 for money). In contrast, for lifetime sequences, preferences for health differed from those for money. Decreasing lifetime health sequences were preferred to increasing (mean ratings 54 versus 38). Decreasing and increasing lifetime money sequences were equally preferred (51 versus 50). The four-way interaction was also significant, indicating that the three-way pattern in Fig. 3 is strongest for the steeper sloped sequences. A second set of analyses examined the ideal and expected sequences that subjects drew. As in Experiment 1, drawings were coded by the experimenter and selfcoded by subjects.3 The percentage of health sequences that were decreasing was compared to the percentage of money sequences that were decreasing, as shown in Table 5. For lifetime sequences (both expected and preferred), more health than money sequences were decreasing. In contrast, for 1-year sequences, a similar percentage of money and health sequences were decreasing. Thus, preferences for health and money were similar for the short sequences, but diverged for lifetime sequences. The preferences for sequences of health and money mirrored expectations about what sequences were likely to be experienced.

Interestingly, subjects apparently had relatively strong expectations about how their health and income would change over the next year in the sense that very few subjects expected a decrease. Although I had predicted that subjects would have no strong expectations for 1-year sequences, the percentage of subjects who

3

Drawn sequences were coded by the experimenter and a second rater. Inter-rater agreement was 90%.

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TABLE 5 Percentage of Drawn Sequences in Experiment 2 That Were Decreasing Health

Money

McNemar’s x2

Experimenter codings Lifetime expected Lifetime preferred 1-year expected 1-year preferred

89% 75% 13% 9%

16% 39% 11% 20%

30.12* 14.22* 0.14 2.27

Subjects self-codings Lifetime expected Lifetime preferred 1-year expected 1-year preferred

84% 92% 44% 38%

64% 46% 42% 28%

6.25* 21.16* 0.04 1.32

Note. The health and money columns show the percentage of drawn sequences that were coded as decreasing. Percentages are shown separately for expected (typical) and preferred (ideal) sequences of different lengths (lifetime or 1-year) and for codings by the experimenter and by the subjects. The final column shows the x2 comparing the health and money percentages. * P õ .01.

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expected 1-year health or money to decline was about as low as the percentage who expected lifetime income to decline. Unlike lifetime sequences, however, expectations about 1-year sequences were the same for health and money. Another analysis examined directly whether preferences were related to expectations. Experimenter codings of drawings of preferred sequences were compared to those of expected sequences. For example, for 1-year health sequences, 4 subjects drew decreasing preferred sequences and 42 subjects drew non-decreasing preferred sequences. (Four subjects provided no drawings). All 4 subjects with decreasing preferred sequences (100%) also drew decreasing expected sequences. Of the 42 subjects who drew non-decreasing preferred sequences, only 2 (5%) drew decreasing expected sequences. Thus, preferred sequences were related to expected sequences (100% versus 5%, x2(1) Å 14.1, p õ .001). This relation between expectations and preferences was also apparent for 1-year money sequences and for lifetime sequences of health and money (x2s(1) § 4.3, ps õ .05). The same analysis was repeated for subject codings of the drawn sequences. A relation between ideal and expected sequences was present for health sequences (x2s(1) § 6.6, ps õ .01) but was not apparent for money sequences (x2s(1) § 2.5, ps õ .11). Thus, as predicted, expectations and preferences were closely related for lifetime sequences. In contrast, I predicted that subjects would not have strong expectations about short sequences and therefore that preferences and expectations would not be closely related for 1-year sequences. Nevertheless, this relation was also apparent for the short sequences. As in Experiment 1, a mediational analysis examined whether expectations about how sequences typically occur mediated the effect of domain and length on preferences. Experimenter codings of ideal sequences (decreasing or not decreasing) were used as the dichotomous dependent variable in a logistic analysis. The independent variables were domain and length, in addition to dummy variables for subject and counterbalance condition. The interaction between domain and length was significant (odds ratio Å 143, x2(1) Å 15.9, p õ .0001). This effect is analogous to the pattern shown in Fig. 3. If this effect is mediated by expectations about sequences, then adding subjects’ expectations to the model should reduce the domain by length interaction. Experimenter codings of expected sequences were added as another independent variable. Expectations were related to preferences (odds ratio Å 37, x2(1) Å 19.6, p õ .0001). With the addition of the expectation variable, the domain by length interaction was smaller but still significant (odds ratio Å 59, x2(1)

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Å 4.9, p õ .05). Thus, by the criteria outlined by Baron and Kenny (1986), expectations mediate at least part of the relationship between domain and length and preferences. The same analysis was repeated using subject codings of the drawn sequences and similar results were obtained. These analyses show that subjects’ differing preferences for different domains and sequence lengths is due to the fact that they have different expectations about how these sequences are usually experienced. Discussion Experiment 2 demonstrated that preferences for sequences of outcomes depend on both the domain (health or money) and the length of the sequence. For short (1-year) sequences, decision makers prefer increasing sequences for both health and money. For long (lifetime) sequences, decision makers prefer increasing sequences of money, but decreasing sequences of health. This effect of decision domain can be explained by differing expectations about how health and money are usually experienced. Most decision makers expect to experience health that decreases as they age; in contrast, they expect an income that increases with age. They also prefer sequences that fit this pattern. In contrast, expectations about 1-year sequences do not differ between health and money. Tracking these expectations, preferences for 1-year sequences are similar for health and money; decision makers prefer increasing sequences in both domains. The results from the 1-year sequences are consistent with those of Loewenstein and Sicherman (1991) and others showing a general preference for improving series. These 1-year ratings may be the result of a preference for improvement or they may reflect the fact that subjects expected both health and money to improve over the next year. The results for lifetime sequences are inconsistent with Loewenstein and Sicherman’s (1991) results, and point to the importance of expectations. EXPERIMENT 3

Experiment 2 indicated that decision domain and sequence length affect preference for increasing or decreasing series, and that this effect is mediated by expectations. The design of Experiments 1 and 2 involved two troublesome aspects that were corrected in Experiment 3. First, the health outcomes in Experiments 1 and 2 were defined on a 10-point scale that could be subject to misunderstanding. Specifically, subjects may view a health state of 10 for an 80-year-old as inferior to a health state of 10 for a 20-year-old, because they

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expect elderly people to be less healthy than young adults. Consequently, a decreasing lifetime health sequence would be seen as yielding more total utility than an increasing sequence, assuming a neutral time preference. In contrast, one dollar gives the same spending power to a young person and an old person, so preferring an increasing to a decreasing lifetime monetary sequence would not sacrifice total utility. To address this limitation, in Experiment 3 subjects were explicitly instructed that a health unit meant the same thing regardless of where it occurred in the sequence. The second troublesome aspect of Experiments 1 and 2 was that the mediational analyses were based on experimenter (or subject) codings of subjects’ drawings. Codings of the preferred drawings could have influenced codings of the expected drawings. In addition, the mediational results were not as strong as they might have been. In Experiment 3, subjects rated both their expectations and their preferences for the same set of sequences. Coding of drawings was not necessary, and the mediational analysis could be performed using a more sensitive continuous rating scale. Method Subjects. The subjects were 79 undergraduates at the University of Illinois at Chicago who participated for class credit. Procedure. The procedure was similar to that for Experiment 2. Subjects rated their preferences for lifetime and short sequences of both health and money. Each of these four scenarios contained the same 10 sequences used in Experiment 2. In Experiment 3, the short sequences had a 12-day, rather than a 1-year time frame. In addition, subjects did not draw their preferred and expected sequences. Instead, they rated their expectations for the 40 sequences (10 sequences in the health and money, lifetime and 12-day scenarios). When rating their expectations, subjects were instructed to ‘‘decide how typical each sequence is of how you would probably experience health [or money] over the next 12 days [or over your lifetime].’’ When rating health sequences, subjects were given additional explicit instructions that a health unit meant the same thing regardless of when it occurred. For instance, a health quality of 7 near the beginning of the sequence meant the same thing as a health quality of 7 near the end of the sequence. ‘‘In other words, the amount of pain you experience, any disabilities or limitations, any feelings of well-being (whatever you think contributes to quality of health) is the same.’’ Subjects were also instructed to ‘‘assume that an 80year-old with a health quality of 10 would have the

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same physical abilities as a 20-year-old with a health quality of 10.’’ Half the subjects rated their preferences for all the sequences before rating their expectations; the remaining subjects did the reverse. In addition, the order of the four scenarios was counterbalanced across subjects. Results One subject was removed from the analysis because he or she failed to answer one third of the questions and gave the same answer (a rating of 50) to all remaining questions. Analyses are reported for the remaining 78 subjects. To determine whether the preference ratings of the 10 sequences differed in the health and money domains and for lifetime and 12-day sequences, I performed an ANOVA like that used in Experiment 2. Preference ratings of the 10 sequences were used as the dependent variable. An order factor (preferences rated before or after expectations) and a counterbalance factor (order of the four scenarios) were both between-subjects variables. Domain (health or money), sequence length (lifetime or 12-day), sequences direction (increasing or decreasing), and sequence slope (5 levels of increase or decrease) were the within-subjects factors. Table 6 shows the results of the ANOVA and Fig. 4 illustrates the mean preference ratings for sequences of each domain, length, and direction. An analogous ANOVA used expectation ratings as the dependent variable. These results are presented in Table 6 and Fig. 5. Both preferences and expectations revealed a pattern that was strikingly similar to the preference results in Experiment 2. Most importantly, both preferences and expectations showed a three-way interaction among domain, sequence length, and sequence direction. For 12-day sequences, increasing sequences were preferred and expected for both health and money. In contrast, for lifetime sequences, decreasing sequences were preferred and expected for health but not for money. The strong similarity between preference and expectation suggests that the two are related. Each subject gave both preference and expectation ratings for each of 40 sequences (10 sequences in each of 4 scenarios). For each subject, a correlation was computed between preference and expectation ratings. Thus, 78 correlations were computed, each based on 40 observations. The mean correlation was 0.49 (p õ .01, range 00.07 to 1.00). For each subject, preference rating was used as the dependent variable in a regression where expectation rating was the independent variable. Residual pref-

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TABLE 6 ANOVA Results from Experiment 3 Preference ratings

Expectation ratings

Residual preferences

Factor

df1

df2

F

MSe

F

MSe

F

MSe

Order Counterbalance condition Domain Length Direction Slope Domain∗length Domain∗direction Domain∗slope Length∗direction Length∗slope Direction∗slope Domain∗length∗direction Domain∗direction∗slope Domain∗length∗slope Length∗direction∗slope Domain∗length∗direction∗slope

1 3 1 1 1 4 1 1 4 1 4 4 1 4 4 4 4

70 70 70 70 70 280 70 70 280 70 280 280 70 280 280 280 280

7.02** 1.41 13.42** 1.29 2.83 87.47*** 1.26 7.96** 2.60* 53.25*** 1.91 2.16 14.38** 2.70* 4.41** 9.78*** 2.44*

4045 4045 1670 1148 5377 1226 1011 2500 417 2439 554 509 1570 286 339 335 281

0.26 1.44 5.98* 0.60 1.16 68.33*** 0.51 51.37*** 0.09 33.25*** 18.07*** 2.18 36.36*** 8.99*** 3.29* 8.91*** 6.11***

5206 5206 1943 1303 2806 1020 1101 2012 571 3201 578 392 2427 351 437 401 373

0.00 0.44 9.50** 0.57 1.20 44.92*** 0.84 0.17 2.60* 26.65*** 0.68 1.17 0.34 0.66 0.99 4.89** 1.40

3 3 1324 1035 3673 890 1044 1784 408 1690 518 436 1236 248 394 296 283

Note. Columns list the factors included in the ANOVA, the degrees of freedom for the numerator (df1) and denominator (df2) of the F ratio (F), and the mean-squared error (MSe). Residual preferences are preference ratings after controlling for expectation ratings. * P õ .05, **P õ .01, ***P õ .0001.

erence ratings were computed as the preference ratings after controlling for expectation ratings. These residual preference ratings were then used as the dependent variable in an ANOVA analogous to the

ANOVA used with preference and expectation ratings reported earlier. The result from this ANOVA are reported in Table 6. Mean residual preference ratings are shown in Fig. 6. Residual preference ratings did not show the threeway interaction pattern seen in preference and expectation ratings. Indeed, after controlling for expectations, the three-way interaction was no longer significant (F õ 1). Thus, the effect on preferences of domain and sequence length is mediated by expectations. Discussion

FIG. 4. Mean preference ratings given in Experiment 3 as a function of domain (health or money) and direction (increasing or decreasing). The left side of the figure shows preference ratings for lifetime sequences. The right side shows ratings for 12-day sequences.

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Experiment 3 replicated the results of Experiment 2. For short sequences, decision makers prefer increasing series of both health and money. For lifetime sequences, they prefer decreasing health but increasing money. The effect of domain and sequence length on preferences is mediated by expectations. Experiment 3 introduced two improvements over previous studies. First, subjects were instructed that a health state of ‘‘10’’ meant the same thing for a 20-yearold as for an 80-year-old. This instruction was meant to insure that the objective value of both health and money outcomes did not vary with age. The health outcomes, however, were still more ambiguous than the money outcomes. Future experiments could examine better defined health outcomes such a physical

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FIG. 5. Mean expectation ratings given in Experiment 3 as a function of domain (health or money) and direction (increasing or decreasing). The left side of the figure shows expectation ratings for lifetime sequences. The right side shows ratings of 12-day sequences.

strength (e.g., ability to lift different weights) or athletic ability (e.g., ability to run certain distances). The second improvement introduced in Experiment 3 was that subjects rated their expectations for the same sequences about which they expressed their preferences. Thus, it was not necessary for the experimenter to code drawings in order to make inferences about subjects’ expectations. This procedure provided a clearer picture of subjects’ expectations for health and money sequences of different lengths and directions (see Fig. 5). Finally, the mediational analysis could be performed using continuous ratings rather than dichotomous codings. Because subjects rated their expectations and preferences about the same sequences, one might worry that ratings made on the first section of the questionnaire would influence ratings made on the second section. However, the order factor (preferences or expectations rated first) did not interact with any other factor in the expectations ANOVA. In the preferences ANOVAs it interacted only with sequence slope. Most importantly, order did not affect the three-way interaction among domain, length, and direction. If subjects showed this three-way preference pattern because they were remembering their expectations ratings, we would expect this pattern to be stronger when subjects rated preferences second. In fact, the pattern was equally strong for the two order conditions.

Prelec, 1993; Loewenstein & Sicherman, 1991; Varey & Kahneman, 1992) have shown a preference for improving sequences. The present results indicate that this pattern does not always hold true. Although short sequences of health and money show a preference for improvement, lifetime health sequences show a preference for decline, and lifetime money sequences show an equal preference for increasing and decreasing series. These results provide another example of different time preferences for health and money (Cairns, 1992; Chapman, 1996; Chapman & Elstein, 1995). Decision makers prefer declining lifetime sequences for health but not for money. One possible explanation for this result is that young, healthy college students viewed the monetary outcomes as positive outcomes, because the monetary outcomes were more than their current earnings. In contrast, they may have viewed the health outcomes as negative outcomes, because all health states were only as good as or worse than their current health. Thus, these results may indicate that decision makers prefer declining sequences of negative events but improving sequences of positive events. This explanation is unlikely, however, because previous research has shown that, at least for short sequences, decision makers prefer improving sequences of negative outcomes (Kahneman et al., 1993) as well as positive outcomes (Loewenstein & Prelec, 1991). Additional research indicates that in decisions about individual outcomes, temporal discount rates are higher (more present-oriented) for gains than for losses (Benzion et al., 1989; Chap-

GENERAL DISCUSSION

A number of previous studies (Frank, 1992; Kahneman et al., 1993; Loewenstein, 1987; Loewenstein &

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FIG. 6. Mean residual preference ratings—preference ratings after controlling for expectation ratings.

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man, 1996). Thus, it is unlikely that the preference for declining lifetime health is due to a preference for declining sequences of negative events. Instead, the current results indicate that one determinant of preferences for sequences are expectations about how sequences are usually experienced. When declining sequences are expected, they are also preferred, contradicting the usual preference for improvement. Why do expectations influence preferences? Decision makers might prefer expected sequences because atypical sequences are so unfamiliar that their utility is difficult to assess. For example, health that increases with age may seem so unusual to subjects that they are not able to imagine whether they would like such a sequence. Another possibility is that the utility for a health state varies with age because of social roles. Decision makers may feel that it is important to be healthy when one is young because all of one’s friends are healthy, and the social roles expected of a young person require good health. In contrast, it may be less important to be healthy when one is old because all of one’s friends are in poor health and the social roles for an older person are based on expectations of poor health. Similarly, social roles may make wealth more important for a middle-aged person than for a young person. Another explanation for the relation between expectations and preferences is that preferences influence expectations through wishful thinking. That is, subjects who prefer improvement most strongly may be most effective in convincing themselves that improvement can be expected. This account could help to explain why, counter to prediction, subjects in Experiments 2 and 3 had such strong expectations about short sequences. Specifically, subjects might have a strong preference for improvement which induces an expectation of improvement. To determine the causal direction of the relation between expectations and preferences, expectations or preferences would need to be independently manipulated. For example, subjects’ expectations about lifetime health could be altered by asking them to imagine various chronic medical conditions. One could then examine whether preferences adapted to match the altered expectations. Expectations and Reference Points A final explanation for the relation between expectations and preferences is that expectations serve as a reference point. Decision research has shown that decision makers often prefer what they already have, an effect called the status quo effect (Samuelson & Zeckhauser, 1988) or the endowment effect (Thaler, 1980).

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An explanation of this effect is that people adapt to their current condition, which becomes a reference point. They then evaluate outcomes as gains or losses relative to that reference point. In addition, losses are weighed more heavily than gains, a construct called loss aversion (Tversky & Kahneman, 1991). Consequently, to balance a loss relative to the status quo, the corresponding gain must be quite large to counteract the more heavily weighted loss. This account is how Loewenstein and Sicherman (1991) explained their subjects’ preference for improvement. They postulated that people adapt to their current levels of monetary consumption and therefore view a decrease in consumption as a loss. Because of loss aversion, they prefer increases in consumption levels. A similar argument could apply to non-monetary decision outcomes such as health states. People adapt to their current health state and prefer increases relative to that reference point. This loss aversion explanation is similar to a contrast effect (Elster, 1985; Elster & Loewenstein, 1992; Loewenstein & Prelec, 1993) where current experience is contrasted with past experience. Thus, the loss aversion explanation can explain the preference for improvement. Interestingly, loss aversion could also account for the role of expectations by altering the concept of a reference point. Reference points need not always be a current status; they may also include expected experience. In Loewenstein’s (1988) reference point model, expectations of objects to be received later influenced the current reference point. Although in that model, reference points adapt to anticipated consumption, at any one point in time the same reference point is used to evaluate all outcomes. An extension of this idea is the suggestion that different reference points might be used to evaluated outcomes anticipated to occur at different points in time. Decision makers may have not a single reference point but rather a reference sequence. For example, most people expect to be in good health when they are young and in poorer health when they get older. This expected sequence provides a series of age-specific reference points. Actual health experienced may be evaluated relative to the expectation for a particular age. The prospect of being young with mild allergy symptoms may be viewed as a loss relative to the age-specific reference point of almost perfect health. In contrast, the prospect of being elderly with arthritis, poor vision, and a bad memory may be viewed as a gain relative to the reference point of the poor health that is typical for elderly people. Thus, decision makers do not necessarily evaluate their health state today relative to their health state

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yesterday (a current experience reference point). Instead, they may evaluate their health today relative to what they expected their health to be today. For example, someone going through rehabilitation after an injury may view her improving health as a loss because the rate of improvement is not as fast as she had expected. In contrast, someone dying from cancer may view his deterioration as a gain because it is not as rapid as expected. Similar evaluations could occur for monetary outcomes. Someone who receives a raise could be disappointed because he expected his income to rise more quickly. Another person whose salary was cut might be happy because she had expected to lose her job. Future research is needed to explore when current status is used as a reference point to evaluate future prospects and when expectations are used as a reference point or reference sequence. Current status reference points will lead to a preference for improving sequences. In contrast, when expectations are used as a reference point, decision makers will prefer the types of sequences that are typically experienced.

Loewenstein and Sicherman’s (1991) subjects likely had fairly strong expectations that their income would increase over the next five years, and these expectations may have influenced their preferences for 5-year sequences. Because expectation and current status reference points lead to the same prediction in that experiment, it is difficult to determine the relative influence of each. Expectations are likely to be much weaker in the restaurant scenarios or the weekend activity scenarios used by Loewenstein and Prelec (1991, 1993). In those experiments, it seems unlikely that expectations serve as a reference point. Instead, the preference for improvement found in these experiments likely results from using current status as a reference point. Thus, it appears that decision makers show both a preference for improving sequences and a preference for sequences that fit their expectations about how such sequences usually occur.

Preferences for Short Sequences

A preferences for improving sequences will sometimes conflict with a preference for typically occurring sequences, as with the lifetime health sequences used in the present experiments. In the present experiments, expectations took precedence over the preference for improvement found in previous experiments. Future research is needed to determine when a preference for sequences as they typically occur is stronger than the preference for improving sequences and, similarly, when preferences are based on expectation-based reference points rather than current status reference points. There may be individual differences in the relative preference for improving versus typically occurring sequences. For example, age of the decision maker might determine the relative weights of these two factors. The present experiments queried young healthy college students about their preferences for lifetime sequences of health and money. Preferences of older, less healthy subjects might be different. Other research (Green, Fry, & Myerson, 1994; Sieber, Ganiats, Carson, & Cantor, 1994) has shown that impulsiveness decreases with age, but has not explored the role of age in preferences for sequences. An older person, who is experiencing the expected decline in health, may not prefer the expected sequence. If an older person were asked retrospectively for her preferences about health sequences, starting at age 20, she might prefer a flat or increasing sequence that would provide more health quality in old age. Similarly, an older wealthy person might choose a monetary sequence that was not as steeply increasing as

One might suppose that current status would serve as the reference point when expectations are weak. In Experiment 2, for example, it was hypothesized that expectations about a 1-year sequence would be weaker than expectations about a lifetime sequence. Just as it is difficult to predict the behavior on the stock market for any one year but easy to make a confident prediction that it will increase over a lifetime, health and income could change in either direction over the next year, but over a lifetime one can be fairly confident of a general trend of declining health and increasing income. Thus, one would expect that preferences for lifetime sequences would be tightly related to expectations. In contrast, preferences for 1-year sequences would not be evaluated using expectations as reference points, because expectations are weak. Instead, 1-year sequences might be evaluated using another reference point such as current status. This would lead to a preference for improving sequences and to preferences that are not very related to expectations. Experiments 2 and 3 did find a preference for improving short sequences in both the health and money domains. Nonetheless, preferences were related to expectations even for these short sequences. In addition, subjects’ expectations that short sequences would not decline were as strong as their expectations about lifetime money sequences (see Table 5 and Fig. 5). Thus, 1-year sequences of health and money may not serve as a good example of weak expectations. Similarly,

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Preference for What Is Expected versus Preference for Improvement

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that chosen by a younger less wealthy person. The older person, in retrospect, might wish that more money had been available when he was young. Conclusions Preferences for sequences of outcomes are tied to expectations about how sequences are typically experienced. Decision makers prefer increasing lifetime sequences of monetary income, but decreasing lifetime sequences of health quality because they also expect these sorts of sequences. Thus, preferences for sequences of health differ from those for sequences of money when expectations about the two domains differ. In contrast, when expectations about health and money are similar, as they are for short sequences, then preferences are also similar for the two domains. These findings stand in contrast to previous demonstrations of an overall preference for improving sequences and can be explained by postulating that decision makers use expectations of future experience as reference points. REFERENCES Ainslie, G. (1986). Beyond microeconomics: Conflict among interests in a multiple self as a determinant of value. In J. Elster (Ed.), The multiple self. Cambridge: Cambridge Univ. Press. Ainslie, G. (1991). Derivation of ‘‘rational’’ economic behavior from hyperbolic discount curves. American Economic Review, 81, 334– 340. Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51, 1173–1182. Benzion, U., Rapoport, A., & Yagil, J. (1989). Discount rates inferred from decisions: An experimental study. Management Science, 35, 270–284. Cairns, J. A. (1992). Health, wealth and time preference. Project Appraisal, 7, 31–40. Chapman, G. B. (in press). Temporal discounting and utility for health and money. Journal of Experimental Psychology: Learning, Memory, and Cognition. Chapman, G. B., & Elstein, A. S. (1995) Valuing the future: Temporal

discounting of health and money. Medical Decision Making, 15, 373–386. Elster, J. (1985). Weakness of the will and the free-rider problem. Economics and Philosophy, 1, 231–265. Elster, J., & Loewenstein, G. (1992). Utility from memory and anticipation. In G. Loewenstein & J. Elster (Eds.), Choice over time (pp. 213–234). New York: Russell Sage Foundation. Frank, R. H. (1992). Frames of reference and the intertemporal wage profile. In G. Loewenstein & J. Elster (Eds.), Choice over time (pp. 371–382). New York: Russell Sage Foundation. Green, L., Fry, A. F., & Myerson, J. (1994). Discounting of delayed rewards: A life-span comparison. Psychological Science, 5, 33–36. Kahneman, D. Fredrickson, B. L., Schreibner, C. A., & Redelmeier, D. A. (1993). When more pain is preferred to less: Adding a better end. Psychological Science, 4, 401–405. Loewenstein, G. (1987). Anticipation and the valuation of delayed consumption. Economic Journal, 97, 666–684. Loewenstein, G. (1988). Frames of mind in intertemporal choice. Management Science, 34, 200–214. Loewenstein, G., & Prelec, D. (1991). Negative time preference. American Economic Review, 81, 347–352. Loewenstein, G., & Prelec, D. (1993). Preferences for sequences of outcomes. Psychological Review, 100, 91–108. Loewenstein, G., & Sicherman, N. (1991). Do workers prefer increasing wage profiles? Journal of Labor Economics, 9, 67–84. Ross, W. T., Jr., & Simonson, I. (1991). Evaluating pairs of experiences: A preference for happy endings. Journal of Behavioral Decision Making, 4, 273–282. Sieber, W. J., Ganiats, T. G., Carson, R. T., & Cantor, S. B. (1994). Discounting future health: Moderating effects of age, sex, and education. Paper presented at the annual meeting of the Society for Medical Decision Making, Cleveland, OH. [Abstract published in Medical Decision Making, 14, 441]. Samuelson, W., & Zeckhauser, R. (1988). Status quo bias in decision making. Journal of Risk and Uncertainty, 1, 7–59. Stevenson, M. K. (1993) Decision making with long-term consequences: Temporal discounting for single and multiple outcomes in the future. Journal of Experimental Psychology: General, 122, 3–22. Thaler, R. H. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization, 1, 39–60. Thaler, R. H. (1981). Some empirical evidence on dynamic inconsistency. Economic Letters, 8, 201–207. Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. The Quarterly Journal of Economics, 106, 1039–1061. Varey, C., & Kahneman, D. (1992). Experiences extended across time: Evaluation of moments and episodes. Journal of Behavioral Decision Making, 5, 169–185.

Received: November 27, 1995

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