Advanced Search
MyIDEAS: Login to save this article or follow this journal

Close Encounters of Two Kinds: False Alarms and Dashed Hopes

Contents:

Author Info

  • Haipeng (Allan) Chen

    ()
    (Marketing Department, School of Business, University of Miami, Coral Gables, FL 33124)

  • Akshay R. Rao

    ()
    (Carlson School of Management, University of Minnesota, Minneapolis, Minnesota 55455)

Registered author(s):

    Abstract

    People are frequently exposed to potentially attractive events that are subsequently and unexpectedly reversed and to potentially painful events, which are also unexpectedly reversed. In the process of being returned to the initial asset position, does the sequence in which the positive and negative events occur matter? This issue of the combined effect of pleasurable and painful stimuli has received scant theoretical or empirical attention. We attempt to fill this lacuna in the literature by studying the retrospective evaluation of surprises that return individuals to their original economic state. Although such surprises do not change an individual's original economic state, we argue that the individual's psychological state changes, and the final affective state is, among other things, a function of the sequence in which the events occur. From a theoretical standpoint, several perspectives can be brought to bear on the issue. For instance, one reading of mental accounting, based on prospect theory's value function, would predict that losses should dominate gains, and therefore, regardless of sequence, people should be unhappy when exposed to two economically equivalent outcomes of different signs. Conversely, the literature on intertemporal choice would suggest that a series that ends on an up note is preferred to a series that ends on a down note, because people like to defer gratification so that they may savor positive outcomes. Similarly, people apparently have a preference for "happy endings." Finally, the extant literature on "recency effects" would predict that the last event in a series should have a disproportionate influence on overall affect. Our model relies on a shift in the reference point to explain how a surprising reversal of an event will lead to a nonzero evaluation of the sequence. We suggest that people's reference points shift immediately but imperfectly after a stimulus is presented. Intuitively, this implies that the first stimulus will shift the reference point in its direction, as a result of which the evaluation of a sequence of events in which an initial event is unexpectedly reversed will be more favorable if the first event is a loss than if it is a gain. This model captures the unanticipated nature of the second event (i.e., the surprise element) by allowing the first event to move the reference point. Consequently, by the time the next event occurs the reference point has been updated, as a result of which the zero economic outcome of the sequence yields nonzero utility. We further posit that the magnitude of the reference point shift should be affected by the time elapsed between the two stimuli. Specifically, the reference point shifts gradually with time, until it is fully updated. Consequently, the final affective state of the sequence is also a function of the temporal distance between the two events. The main predictions of the model were empirically supported first in a survey using a mall-intercept sample. Subsequently, we conducted a study of student subjects involving a coin-tossing game in which real money was at stake and in which subjects in one condition experienced the second outcome after a two-day delay. Our results from this second study supported the model's prediction regarding the impact of the elapsed time between the events. The experimental tasks involved surprising reversals of initial outcomes, thus ensuring that "savoring/dread" types of explanations (which require that subjects anticipate the second event) could not be operating. Finally, in a series of three follow-up studies, we tested the claim that the magnitude of outcomes would have an impact on observed affect, and consistent with our theory and contrary to recency predictions, we observed similar results across different magnitudes. While theoretically interesting, we should also note that our research is of potential pragmatic significance. People's reactions to a series of events is of considerable interest to marketers desirous of generating enhanced attitude, affect, purchase intention, and the like without offering economic inducements such as rebates, coupons, or other costly discounts. Additionally, public policy officials may be interested in protecting people from being manipulated into purchasing a product simply because of changes in the sequence in which a series of offers is made by the merchant.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://dx.doi.org/10.1287/mksc.21.2.178.148
    Download Restriction: no

    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 21 (2002)
    Issue (Month): 2 (August)
    Pages: 178-196

    as in new window
    Handle: RePEc:inm:ormksc:v:21:y:2002:i:2:p:178-196

    Contact details of provider:
    Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Email:
    Web page: http://www.informs.org/
    More information through EDIRC

    Related research

    Keywords: Sequences; Surprises; Judgment and Decision Making;

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Monga, Ashwani & Rao, Akshay R., 2006. "Domain-based asymmetry in expectations of the future," Organizational Behavior and Human Decision Processes, Elsevier, vol. 100(1), pages 35-46, May.
    2. Lee, Carmen & Kräussl, Roman & Lucas, André & Paas, Leo, 2010. "Why do investors sell losers? How adaptation to losses affects future capitulation decisions," CFS Working Paper Series 2010/23, Center for Financial Studies (CFS).
    3. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric price adjustment in the small," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 728-737, May.
    4. Arkes, Hal R. & Hirshleifer, David & Jiang, Danling & Lim, Sonya, 2008. "Reference point adaptation: Tests in the domain of security trading," Organizational Behavior and Human Decision Processes, Elsevier, vol. 105(1), pages 67-81, January.
    5. Arkes, Hal R. & Hirshleifer, David & Jiang, Danling & Lim, Sonya S., 2010. "A cross-cultural study of reference point adaptation: Evidence from China, Korea, and the US," Organizational Behavior and Human Decision Processes, Elsevier, vol. 112(2), pages 99-111, July.
    6. Mattos, Fabio & Poirier, Jamie, 2013. "Formation and adaptation of reference prices in grain marketing: An experimental study," Working Papers 148591, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
    7. Bahaji, Hamza, 2014. "Are Employee Stock Option Exercise Decisions Better Explained through the Prospect Theory?," Economics Papers from University Paris Dauphine 123456789/13098, Paris Dauphine University.
    8. Mattos, Fabio & Poirier, Jamie, 2013. "Formation and Adaptation of Reference Prices in Grain Marketing: An Experimental Study," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149672, Agricultural and Applied Economics Association.
    9. Carmen Lee & Roman Kraeussl & Andr� Lucas & Leonard J. Paas, 2008. "A Dynamic Model of Investor Decision-Making: How Adaptation to Losses affects Future Selling Decisions," Tinbergen Institute Discussion Papers 08-112/2, Tinbergen Institute, revised 02 Sep 2013.
    10. Bahaji, Hamza, 2012. "Cumulative Prospect Theory, employee exercise behaviour and stock options cost assessment," Economics Papers from University Paris Dauphine 123456789/9550, Paris Dauphine University.
    11. Carmen Lee & Roman Kraeussl & Andr� Lucas & Leonard J. Paas, 2008. "A Dynamic Model of Investor Decision-Making: How Adaptation to Losses affects Future Selling Decisions," Tinbergen Institute Discussion Papers 08-112/2, Tinbergen Institute, revised 02 Sep 2013.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:21:y:2002:i:2:p:178-196. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.