Hypothetical Bias Hypothetical bias 1 Valuation information from

Hypothetical Bias

Hypothetical bias (1) Valuation information from SP analyses is often used in policy analyses, impact statements, and resource management plans. The nature of cost-benefit and policy analyses and planning is ex ante: to guide a decision about what to do in the future. The action has not been taken yet or the particular good does not exists in that particular location. Hence it is difficult to rely on actual behavior (revealed preferences). SP methods are the only methods that in a convincing way can measure a value of a non-existing good, or a change in the quality of an existing good, as well as the only methods that can measure nonuse values in a direct way. 2

Hypothetical bias (2) At the same time, the main criticism against SP methods is that they measure stated choices/behavior and not actual choices/behavior observed at the market. The difference between stated WTP and the corresponding WTP if the payment were for real is often denoted hypothetical bias in the literature. Can be tested by comparing revealed and stated preferences methods with each other or actual and hypothetical payment in a lab/real life. NB! Selling real deliverable market goods in a lab for cash can lead to a risk; people understate their WTP. Their WTP is censored at the respondent´s knowledge about the price in a store. 3

Hypothetical bias (3) Two questions: 1. What is the magnitude of hypothetical bias? 2. What factors are responsible for it? Although the findings are mixed, there is considerable evidence that WTP-estimates are higher in SP than in the corresponding real setting; see for example Cummings et al. (1995), Cummings et al. (1997), and List and Gallet (2001) and Murphy et al. (2005) for meta-analyses. 4

Hypothetical bias (4) 1. Murphy et al. (2005) found that among 83 observations the median ratio of hypothetical to actual value is 1. 35 and there are few very large values that affect the mean. This is also an explanation to why their value is much lower than List´s and Gallet´s who found a ratio of about 3 ( List and Gallet, 2001). 2. Public goods and non-use values are the major explanations of hypothetical bias (List and Gallet, 2001). 5

Hypothetical bias (5) There are several strategies aiming to reduce the hypothetical bias in SP studies: (i) follow-up certainty questions (Champ et al. 1997, Champ and Bishop 2001). (ii) cheap-talk scripts (Cummings and Taylor, 1999, Carlsson et al. , 2005). (iii) consequential scripts (Bulte et al. , 2005; Vossler and Evans, 2009, Barrage and Lee, 2010). (iv) time to think protocol (Cook et al. 2007; Whittington et al. 1992). (v) Oath scripts (Jacqumet et al. , 2013, 2014; Carlsson et al. , 2013, Stevens et al. 2013, de-Magistris and Pascucci, 2014). 6

Hypothetical bias (6) (i) follow-up certainty questions: Respondents rate the level of certainty about their response to the WTP question. An example (Champ and Bishop, 2001): “On a scale of 1 to 10, where 1 means “very uncertain” and 10 means “very certain”, how certain are you that you would purchase the wind power offered in Question 1 if you had the opportunity to actually purchase it? (Circle one number) 1 2 3 Very uncertain 4 5 6 7 8 9 10 Very certain 7

Hypothetical bias (7) They found that those who circled 8, 9 or 10 are statistically similar to the actual donation level. ii) Cheap talk script: The cheap talk script is probably the most used method. The underlying idea of the script is that, by informing respondents about hypothetical bias, the respondents would be less prone to it. The observed effect of the cheap talk script varies among studies and its success seems to depend on the characteristics of the good, the length of the script, and the valuation method.

Hypothetical bias (8) An example of cheap talk script: “Before making your choices, please consider how an increased cost would affect your possibilities of buying other things. Previous studies of this kind have shown that people claim to be willing to pay more money than they actually would in a real situation. Given this, it is important for you to answer these questions as truthfully as possible. ” (iii) consequential scripts: The idea is that when respondents regard their answers as consequential, there is no bias. I. e. the answers will affect a policy outcome. One way to do this is to introduce the study to be an advisory one to policy makers.

Hypothetical bias (9) (iv) time to think protocol. The idea is to give time to the respondents to think about their answers. In Cook et al. 2007 the authors gave half of the respondents overnight to think about their choices to make the hypothetical valuation scenario as similar to a real-life choice situation as possible. Respondents who were given extra time had a lower average WTP.

Hypothetical bias (10) v) An oath script (Jacqumet et al. , 2013). With an oath, respondents are asked to swear (or promise) to answer truthfully, mimicking the act of taking an oath in a courtroom. According to research in social psychology it is not enough to only inform people about bad behavior (as we do in the cheap talk script). People also need to commit to the task to be able to change their behavior. Thus, promising to answer truthfully or signing an oath before the respondent is asked to answer a stated preference study is an attempt to use commitment theory to correct a possible hypothetical bias. 11

Hypothetical bias (11) An example of an oath script: “Do you feel you can promise us to answer the questions that will follow truthfully? ” “Yes, I promise to answer the questions in the survey truthfully” “No, I cannot promise this”. 12

Hypothetical bias (12) Jacquemet et al. (2013) investigates the impact of an oath script in two different laboratory experiments. For both experiments, they run three main treatments: a hypothetical, a real setting with monetary incentives; and a hypothetical with the option of signing an oath before participating. By signing the oath document, subjects agreed to “swear on their honour” to tell the truth and provide honest answers. They found that subjects who took the oath were on average less likely to overstate or understate their bids; that is, the variance of bids was reduced. The hypothetical payment treatment with the oath outperformed both the hypothetical non-oath treatment and the real payment treatment. 13

Hypothetical bias (13) In addition, “Inferred valuation”=asking what respondents think others would pay instead of what they themselves would pay. The idea behind is that respondents gain utility of pleasing the interviewer or maintaining a positive self-image. But when asked what others would pay, it will decrease the social desirability bias, and they will give more realistic WTP estimates (Lusk and Norwood, 2009; Norwood and Lusk, 2011). 14