Bounded rationality and valuation

A computational valuation model is developed to predict discrepancies between choices and valuations in economic experiments. The model is based on Boundedly Rational Expected Utility Theory (Navarro-Martinez et al., 2017) and predicts average certainty equivalents for monetary lotteries that are higher than choices would imply from the same set of underlying preferences. Thereby, the model predicts the preference reversal phenomenon (Slovic and Lichtenstein, 1968). The model predicts that a choice between a lottery and a sure payoff can influence a subsequent money valuation of the choice's strength of preference. This monetary strength of preference (MSoP), can be positively affected by spill-over effects from the choice process and also by consistency-seeking behaviour towards information about the choice. This can explain observations by Butler et al. (2014a) that participants systematically state MSoP values that are too high relative to their choices. Model simulations show how this model differs from existing computational valuation models. When adapted to predict MSoP values, these instead predict a negative MSoP mismatch. These predictions are tested in a laboratory experiment, which finds a positive MSoP mismatch but only when MSoP values stem from upward adjustments to a sure amount. When sure amounts are adjusted downwards, a negative MSoP mismatch occurs instead. Neither the novel model nor existing theory can explain this two-fold pattern. Controlling for the delay between choices and MSoP valuations also rules out the possibility of spill-over effects. Participants also value lotteries too high relative to their choice behaviour. Contrary to theory, a reaction time analysis shows that individually-longer reaction times do not reduce discrepancies between valuations and choice data. Preference reversals do not become less frequent when participants deliberate for longer. Altogether, these results show novel and yet unexplained phenomena in valuation behaviour but also highlight how theory needs to be adapted to explain these.