I have been fortunate enough to have the best, most supportive ..... higher buying/selling price to gamble B. In experiment 2, the authors assessed ..... This includes information about the best and worst .... Compaq Presario laptop computer.
PREFERENCE REVERSALS IN EMPLOYEE EVALUATIONS OF CASH VERSUS NON-CASH INCENTIVES
DISSERTATION
Presented in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Graduate School of The Ohio State University
By Victoria A. Shaffer, B.A., M.A. *****
The Ohio State University 2005
Dissertation Committee: Professor Hal Arkes, Adviser
Approved by:
Professor Tom Nygren
______________________________
Professor Bob Billings
Adviser Psychology Graduate Program
Copyright by Victoria Anne Shaffer 2005
ABSTRACT
Preference reversals based on changes in evaluation mode demonstrate violations of the invariance axiom in models of rational choice. In this document, data are presented from 8 experiments which demonstrate that potential employees show variance in their preferences for cash versus non-cash incentives received from their employer. Furthermore, this preference reversal is shown to be partially caused by the evaluation mode, whether ratings are taken in isolation or in comparison. Two additional manipulations are employed in an attempt to persuade participants to choose the non-cash incentive in a direct comparison. Effort required to earn the bonus did not effect participant preferences for non-cash incentives. However, allowing participants to donate a portion of their paycheck to charity makes those who choose to donate more likely to choose the non-cash incentive. Together these 8 experiments demonstrate that employee preferences for incentives are not stable; they are influenced by the evaluation mode, the opportunity to donate to charity and, to a lesser extent, the luxuriousness of the non-cash incentive.
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Dedicated to my parents, Leigh & Barbara, to my future husband, Ed, and to my three orange angels: Solo, Simon, and Sydney
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ACKNOWLEDGMENTS
I would like to thank my advisor, Dr. Hal Arkes for his support and encouragement throughout this process. His guidance over the last 5 years has been immeasurable; I would never be prepared for a position in academia without him. In addition, I’ve had a lot of fun; thank-you Hal. The academic part of graduate school is only half the battle. Staying sane is the other half. I have been fortunate enough to have the best, most supportive and loyal friends in the world. I want to thank my girls: Rebecca Grime, Sarah Grime, Katie Thompson, and Rebecca Gertner for their love and support. Without you, life wouldn’t be so much fun. In addition, my parents, for whom I owe all of this to, have been my life for so many years. I will never be able to put into words how much I love you both; thank-you for all that you have done for me and all the love you have given me. To Ed, simply, you are my rock. I love you more than you’ll ever know. Thank-you for coming into my life and just being you. I can’t wait for July 16th .
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I also want to thank the assiduous colleagues who have helped me collect data on this project: Stephen Broomell, Amanda Braun, Abby Staarmann, Nicolette Avner, Aaron Beckley, Erin Anthony, Emily Houlis , Hallie Renninger, Brittany Shoots, Elizabeth Colarusso, Melissa Marks, and Becky White. I am also grateful to the Incentive Marketing Association who provided the funds for the crucial test of my hypothesis in experiment 8.
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VITA June 15, 1978 …………………………………………………Born- Lincoln, Nebraska 2000………………………………………………………B.A. West Chester University 2002………………………………………………...… M.A. The Ohio State University 2000- present……………………………………….Graduate Teaching and Research Associate, The Ohio State University
PUBLICATIONS Research Publication 1. Shaffer, V. & Renner, M. (2000). Black and white colobus monkeys (colobus guereza) do not show mirror self-recognition. International Journal of Comparative Psychology, 13.
FIELDS OF STUDY Major Field: Psychology
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TABLE OF CONTENTS Page: Abstract ………………………………………………………………………………….ii Dedication ………………………………………………………………………………iii Acknowledgments …………………………………………………………………….iv Vita ………………………………………………………………………………………vi List of Tables ………………………………………………………………………….viii List of Figures ………………………………………………………………………......ix Chapters: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.
Introduction ……………………………………………………………………..1 Preferences reversals: A review………………………………………………..4 Causes of preference reversals………………………………………………..12 Literature summary……………………………………………………………21 Experiment 1……………………………………………………………………24 Experiment 2……………………………………………………………………35 Experiment 3……………………………………………………………………39 Experiment 4……………………………………………………………………50 Experiment 5……………………………………………………………………61 Experiment 6……………………………………………………………………66 Experiment 7……………………………………………………………………75 Experiment 8……………………………………………………………………80 General Discussion…………………………………………………………….90
References………………………………………………………………………………99
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LIST OF TABLES Table:
Page:
1.
Average luxuriousness rating of 20 stimuli, experiment 2………………...38
2.
Median rating of satisfaction with bonus: Separate evaluation, experiment 3.………………………………………………………………………………….45
3.
Median scores of the preference between cash and non-cash incentives, experiment 3…..…........………………………………………………………..47
4.
Median rating of satisfaction with bonus: Separate evaluation, experiment 4.………………………………………………………………………………….57
5.
Median scores of the preference between cash and non-cash incentives, experiment 4…..…........………………………………………………………..58
6.
Spearman correlations between survey items, experiment 5………….......64
7.
Participation in charity program x Incentive choice, experiment 6……….74
8.
Average accuracy on anagram task, experiment 8…………………………88
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LIST OF FIGURES Figure: 1.
Pag e:
Histogram of participant satisfaction with bonus: Separate evaluation, experiment 1…………………………………………...……………………….29
2.
Histogram of participant preference between cash and non-cash incentives: Joint evaluation condition, experiment 1……………………….30
3.
Histogram of participant satisfaction with bonus: Separate evaluation, experiment 3…………………………………………...……………………….45
4.
Histogram of participant preference between cash and non-cash incentives: Joint evaluation, experiment 3…………………………………..47
5.
Histogram of participant satisfaction with bonus: Separate evaluation, experiment 4……………………………………………………………………55
6.
Histogram of participant preference between cash and non-cash incentives: Joint evaluation, experiment 4…………………………………..56
7.
Histogram of the likelihood of participation in the charity program, experiment 6……………………………………………………………………72
8.
Histogram of participant preference between cash and non-cash incentives, experiment 6…………….…………………………………………73
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Figure: 9.
Page:
Histogram of participant preference between cash and non-cash incentives, experiment 7……………………………….………………………79
10.
Histogram of participant satisfaction with bonus: Separate evaluation, experiment 8……………………………………………………………………86
11.
Histogram of participant preference between cash and non-cash incentives: Joint evaluation, experiment 8………………..…………………87
12.
Average accuracy on anagram task, experiment 8…………………….…...88
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CHAPTER 1
INTRODUCTION
Decision making has been studied for many centuries in various domains; however, it is a relatively new phenomenon studied by psychologists. Ward Edwards unofficially founded the discipline within psychology with his 1954 article in Psychological Bulletin, “The Theory of Decision Making”. Since that time, thousands of articles and books have been devoted to study of decision making. Several theories about decision making and choice have been developed in order to explain and predict human behavior. Most of these early models were rational theories of choice based largely on the axioms developed by Von Neumann and Morgenstern (1947). One basic assumption of rational choice theories is the principle of invariance; decision makers should have measurable and stable preferences. Preferences should not be affected by manner in which the options are presented or the method through which the choice is made. These concepts are referred to as description invariance and procedural invariance respectively. However, violations of both description and 1
procedural invariance have been repeatedly demonstrated. When either the format of presentation or the elicitation method is varied, decision makers often display a reversal in preference. These preference reversals have been the subject of much research inquiry over the last 30 years, and a large body of research has supported the claim that the invariance property does not hold in human judgment. Specifically, preferences appear to be constructed at the time of judgment, are sensitive to the mode of elicitation, and susceptible to framing effects (Slovic, 1995; Slovic & Lichtenstein, 1983; Tversky & Kahneman, 1981). In this paper, the rich literature on preference reversals will be used to shed some slight on a question that has plagued the incentive industry: should employees be rewarded with cash or non-cash bonuses? Much of the confusion within the industry arises from the contradictory findings reported in the literature. For example, Incentive magazine asked employees to indicate their preference among the following awards: $1500 cash, a travel award worth $1500, or a merchandise award worth $1500 (Heinz & Alonzo, 1998). Seventy-nine percent of the respondents chose to receive the cash. However, a study conducted by BI Performance Services and Goodyear Tire & Rubber Co. found that in a comparison of sales performance, the group of salespeople receiving non-cash incentives outperformed those receiving cash incentives by a margin of 46% (Alonzo, 1996). This latter finding is also at odds with traditional economic 2
theory which states that cash should always be preferred due to its flexibility in spending. Several principles from psychological research, in particular, research which has focused on understanding preference formation, can help resolve this apparent conflict within the incentive literature. This paper will begin with an overview of research on preference reversals in psychology, discuss new avenues for explorations, and introduce new experiments which reveal reversals in preference for incentive options. Several studies will demonstrate preference reversals in employee choice between cash and non-cash incentives. An additional set of studies will help to identify and isolate variables that affect this observed preference reversal: luxuriousness of the non-cash incentive, effort required to receive bonus, and the ability to concurrently donate a portion of your weekly earnings to charity. These studies will feature predominately questionnaire based measures on hypothetical choices. However, to increase ecological validity, the final experiment will examine real choices in a in a task where the highest performer earns a substantial incentive.
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CHAPTER 2
PREFERENCE REVERSALS: A REVIEW
Preference reversals have traditionally been demonstrated by asking participants to choose between a pair of gambles, A and B. Gamble A features a high probability of winning but a low monetary payoff while gamble B has a low probability of winning but a high monetary payoff. Typically, when asked to choose between the two gambles, participants will choose gamble A, the option with the high probability of success. However, when participants are asked to assign a dollar amount to the value of the gamble, they allot a higher monetary value to gamble B. This constitutes a violation of the invariance axiom upon which the majority of choice theories are based. The concept of a preference reversal was based upon the early observation by Paul Slovic and Sarah Lichtenstein (1968) that the response mode used affected reported preferences. Simple gambles, such as the following, were used as experimental stimuli: a 30% chance to win $16 and a 70% chance to lose $4. When Slovic and Lichtenstein asked participants to rate the attractiveness of 4
gambles or choose between them, their responses were mainly influenced by the probability of winning associated with each simple gamble. In addition to choice, there are other methods of reporting preference. For example, Slovic and Lichtenstein asked participants to assign buying and selling prices to each gamble. Specially, they were asked, “What is the most that you would pay to play this gamble?” or “What is the least amount for which you would sell a ticket to play this gamble?” These responses corresponded to the payoff amounts. That is, when participants found a gamble attractive, their buying and selling prices were correlated with the winning payoff amount. Consequently, when a gamble was deemed unattractive, their prices were correlated with the amount that would be lost. Slovic and Lichtenstein suggested that this result in the pricing task was due to participants anchoring their buying or selling price on the monetary payoff value and insufficiently adjusting downward to account for the probabilistic nature of the task. On the other hand, ratings and choices of the gambles appeared to correspond to different decision rules, ones which placed greater weight on the probabilities associated with winning and losing. Following this demonstration of response-mode effects, Lichtenstein and Slovic (1971) argued that the decision making process was different for choosing between two gambles and assigning buying/ selling prices. They demonstrated this in experiment 1 of their 1971 article by constructing pairs of gambles for 5
which participants, in direct comparison, preferred gamble A but assigned a higher buying/selling price to gamble B. In experiment 2, the authors assessed the robustness of this effect by examining the characteristics of the betting pairs which consistently resulted in preference reversals. Forty-nine pairs of gambles were constructed, in which they constrained gamble A to have a higher probability of winning a modest amount and gamble B to have a low to moderate probability of winning a large amount. Within these constraints the betting pairs were significantly different in the degree to which the pairs elicited preference reversals. The pairs of gambles which were more likely to elicit preference reversals were those where both the possible amounts lost and gained for gamble B were greater than those for gamble A. The following bet pair obtained the most preference reversals: gamble A has a 75% chance of winning $1.20 and a 25% chance of losing $.10; gamble B has a 25% chance of winning $9.20 and 75% chance of losing $2.00. This experiment was largely criticized by economists due to the lack of external validity. The critics believed that the participants chosen for this experiment lacked the appropriate motivation to give the experiment their complete attention. Economists argued that, had they chosen a population that would be highly motivated to perform the tasks in a rational manner, the obtained preference reversals would disappear. Therefore, Lichtenstein and 6
Slovic (1973) attempted to replicate their results using gamblers at the Four Queens Casino in Las Vegas. Pairs of gambles were again constructed so that gamble A had a high probability of winning a modest amount and gamble B had a low to moderate probability of winning a large amount. The only change in experimental design was the addition of gambles with negative expected values. Forty-four gamblers, most of whom were highly educated, participated in this experiment. Lichtenstein and Slovic found that preference reversals occurred frequently for many participants- even for the gambles with a negative expected value. The following is an example of a typical pair of gambles offered to the participants at the casino, where each chip was worth $.25: Gamble A: 11/12 chance to win 12 chips; 1/12 chance to lose 24 chips Gamble B: 2/12 chance to win 79 chips; 10/12 chance to lose 5 chips. The participants first chose between the two gambles and later indicated their minimum selling price. For this particular pair of gambles, each gamble was chosen equally often; however, 88% of the participants indicated that gamble B should have a higher minimum selling price. Lichtenstein and Slovic described those who consistently and repeatedly displayed this pattern of preference reversals as “money pumps”; these participants would be “continuously giving money to the experimenters without ever playing the gambles” (Slovic, 1995, p. 366). 7
Following the publication of Slovic and Lichtenstein’s work, several economists attempted to discredit the preference reversal phenomenon in an attempt to save rational models of choice (Grether & Plott, 1979; Pommerehne, Schneider, & Zweifel, 1982; Reilly, 1982). In particular, most economists believed that if motivation and payoff amount were increased, people would eventually exhibit rational, consistent preferences. Grether and Plott (1979) were the first to question Slovic and Lichtenstein’s findings. Their experiments were based upon 13 hypotheses which, if true, would make Lichtenstein and Slovic’s work either irrelevant from an economists’ perspective or explain their results in terms of accepted economic theory. Grether and Plott criticized the literature on preference reversals on the following grounds: 1- the incentives were misspecified, 2- income effects accounted for the results, 3- the experiments did not allow participants to indicate indifference between the two gambles, 4- the term “selling price” elicited a strategic response natural to real world negotiations that was difficult to overcome in the experimental setting, 5subjective probabilities changed throughout the experiment creating the illusion of a reversal in preference, 6- the results could be explained by Tversky’s concept of elimination by aspects, 7- the results could also be explained by the phenomenon underlying Tversky’s demonstration of Lexigraphic Semiorder, 8the experimental outcomes were the result of heuristical reasoning associated 8
with the decision costs in information processing, 9- words or contexts caused some dimensions of the choice problem to become anchors, thereby obscuring the “true” preference held by an individual, 10- participants were confused or misunderstood, 11- the preference reversal phenomenon only occurs with low frequency, therefore, there is not be much need for concern. 12- the participants were unsophisticated subjects, therefore, the results should not be generalized to the entire population of decision makers, and 13- because the experimenters were psychologists, and they have a reputation for deceiving subjects, the participants were influenced by what they perceived to be the purpose of the experiment. Despite designing the experiments to address these 13 specific flaws, the results of Grether and Plott’s experiments replicated Slovic and Lichtenstein’s findings. In experiment 1, 71 out of 127 (56% ) choices between pairs of gambles were inconsistent with the given prices, and in experiment 2, 30 out of 44 choices were inconsistent with the prices. However, many economists were still unconvinced. Pommerehne, Schneider, and Zweifel (1982) believed that Grether and Plott did not sufficiently motivate their participants to make careful decisions nor were their incentives sufficiently strong to entice subjects to make rational choices over the entire experiment. Therefore, in order to increase motivation throughout the experiment, they increased both the payoff amounts offered to participants and 9
the discrepancy between payoff amounts in the pairs of gambles. The experimenters found that with a sizeable payoff they were able to decrease, but not eliminate, preference reversals. Additionally, they found a decreased frequency of preference reversals when the payoff differentials were larger. However, this difference was not statistically significant. The authors were forced to conclude that “even when the subjects are exposed to strong incentives for making motivated, rational decisions, the phenomenon of reversal does not vanish” (Pommerehne, Schneider, & Zweifel, 1982; p. 573). Still unconvinced, Reilly (1982) argued that Grether and Plott did not adequately increase participants’ understanding of the task. Therefore, he conducted two experiments with manipulations aimed to increase participant knowledge in hopes of extinguishing the preference reversal phenomenon. In his first experiment, Reilly supplied the participants in the experimental group with a brief description of the concept of expected value and the expected values for every gamble. In the second experiment, he ran participants in smaller groups to encourage more effective communication between the experimenters and the participants. Additionally, the money with which the participants were gambling remained on the desks in front of them in order to increase the salience of the incentives. The manipulations designed to increase the salience of the monetary payoffs resulted in a small but significant decrease in the frequency of 10
preference reversals. Furthermore, the addition of expected value information also further reduced the rate of observed preference reversals. Although the experimental manipulations were able to decrease the amount of preference reversals, the effect was not eliminated. Reilly concluded that his experiments provided additional evidence that preference reversals were a robust phenomenon. However, Chu and Chu (1990) were finally able to eliminate preference reversals by designing market like environments where participants were exposed to repeated arbitrage transactions which caused them to lose money. Those who demonstrated preference reversals in earlier rounds quickly changed their responding to reflect transitive preferences after an average of 1.71 arbitrage transactions. These environments through which preference reversals were eliminated were characterized by immediate feedback, repetition, and stiff penalties. In sum, preference reversals have been found to be an extremely robust phenomenon. Preference reversals were reduced but not eliminated even when heavy handed attempts have been made to persuade participants to act “rationally” by providing a tutorial on expected value and supplying the expected values for each gamble.
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CHAPTER 3
CAUSES OF PREFERENCE REVERSALS
By the mid 1980’s, preference reversals had been established as a robust finding in both psychology and economics; however, the cognitive mechanisms underlying the phenomenon were not well understood. In an attempt to further understand the causes of preference reversals, a set of literature developed which provided three hypotheses about the process through which axiomatic violations occur: the compatibility hypothesis, the prominence hypothesis, and the comparison of joint versus separate evaluations. In 1990, Tversky, Slovic, and Kahneman noted that the preference reversals observed in the literature could be due to a violation of either the transitivity or procedural invariance axioms common to rational theories of choice. Transitivity implies that the following pattern of preferences must hold for any rational actor: if A>B and B>C, then A>C. Procedural invariance dictates that a decision maker should be indifferent to choosing between two forms of the same gamble. That is, people should have no preference when offered the choice
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between a simple gamble and a mathematically equivalent compound gamble. The invariance axiom is violated when framing effects are observed. Tversky, Slovic, and Kahneman (1990) created a method for identifying whether a single preference reversal is caused by procedural invariance or intransitivity. They extended the traditional two choice gamble (used to demonstrate the preference reversals previously cited), to include the option of receiving X$ for sure. The authors use the following pair of gambles in their experiment: H bet: 28/36 chance to win $10 L bet: 3/36 chance to win $100 Each participant chose between these three bet pairs: H bet-L bet, H bet-X$ for sure, and L bet -X$ for sure. Participants were also asked to indicate CH and CL which represented the minimum selling prices associated with bets H and L. From all of the choice patterns elicited, Tversky et al. (1990) used the following data pattern for diagnosing the source of a preference reversal: H>L and CL >X> C H. The important data examined were the choices between H and X and between X and L. Intransitivity was observed when L>X and X>H resulting in L>X>H>L. However, preference reversals due to the failure of procedural invariance could be caused by the overpricing of gamble L, the underpricing of gamble H, or both, leading to three possible data patterns. Overpricing of L 13
occurs when people prefer the selling price for L to bet L in a direct choice (CL > L). This forms the following preference reversal pattern: X>H and X>L which results in CL>X>L. Underpricing of H occurs when people prefer the bet H to the selling price associated with H (H >CH). This creates the following pattern: H>X and L>X resulting in H>X> CH. Over and under pricing can occur simultaneously which results in the following pattern: H>X and X>L yielding, H>X> CH and CL >X>L. Over and underpricing do not imply that the bias associated with procedural invariance is strictly due to the pricing process; Tversky et al. argue that there is error associated with both response modes, choice and pricing. In their experiments, the typical preference reversal rates were observed (40-50%); however, only 10% of the preference reversal patterns were due to intransitivity. The remaining 90% of the preference reversal patterns could be explained by procedural invariance. More specifically, the majority of these patterns resulted from the overpricing of bet L. That is, participants were overpricing the bet with the largest payoff amount. The Compatibility Hypothesis The results from Tversky et al (1990) led to the formulation of the scale compatibility hypothesis presented by Slovic, Griffin, and Tversky (1990). The authors proposed that the weight a stimulus receives during the judgment process is directly related to its compatibility with the response mode. Slovic et 14
al. argued that this over-reliance on a compatible attribute is a result of two cognitive artifacts. First, if stimulus A is not on the same scale as the required response, then, additional mental operations are required to translate stimulus A into the appropriate scale. There is also additional error associated with this translation; therefore, both the increased effort and the additional error are likely to reduce the impact of the non-compatible stimulus (A). Secondly, a match between scales of the response mode and stimulus B will naturally make stimulus B more salient during the response process. This was supported by a series of studies conducted by Slovic and colleagues which substituted nonmonetary outcomes (such as a dinner for two at a nice restaurant) for the traditional monetary payoffs. They hypothesized that this substitution would reduce the compatibility between the stimuli and the response mode. When participants were asked to indicate their minimum selling price, the most compatible stimulus in the gamble was the monetary payoff. Therefore, that stimulus received more weight during response elicitation. However, when the payoffs are changed to non-monetary outcomes, the compatibility between the response mode and the stimulus should decrease, thereby reducing the rate of preference reversals. Following this substitution of non-monetary incentives, the preference reversal rates decreased from 41% to 24%, confirming the authors’ prediction. 15
Additional support for the scale compatibility hypothesis came from Schkade and Johnson’s (1989) study investigating the amount of time participants spent examining probabilities and payoffs during choice and pricing. Their results indicated that participants spent a significantly greater amount of time examining payoff information during pricing when respondents produced preference reversals. However, if respondents did not show preference reversals, there was no significant difference in the amount of time spent viewing payoff information versus information about the probabilities. The Prominence Hypothesis Concurrently, an additional set of literature had developed that examined preference reversals between choice and matching response modes. Tversky, Sattath, and Slovic (1988) developed the prominence hypothesis to explain the psychological mechanisms that underlie the preference reversal between these two response modes. They argued that the more important attribute will be given more weight in choice problems than in matching. The classic demonstration of this effect is through the highway safety problem: About 600 people are killed each year in Israel in traffic accidents. The ministry of transportation investigates various programs to reduce the number of casualties. Consider the following two programs, described in terms of yearly costs in millions of dollars and the number of casualties 16
per year that is expected following the implementation of each program. Which program do you favor? Program: X Y
# casualties: 500 570
cost: $55 million $12 million
In this problem, the more important dimension is number of casualties. Therefore, when participants were asked to choose which program they favored, 67% selected program X, the one with fewer casualties. In the matching condition, the participants saw the same information but one of the four values from casualties or cost was missing. For example, if the cost for Program X was missing, the participants would be asked to write in the value for the cost of Program X that would make them indifferent between the two programs. Preference can be inferred from this input value. For example, if participants filled in $50 million dollars as the cost of Program X that would result in indifference between X and Y, then any value for the cost of Program X that is more than $50 million dollars should result in a preference for Program Y. However, the results indicate an overwhelming majority favored Program Y in the matching task while in the choice task, the majority of participants indicated a preference for Program X. Tversky et al. argued that the response mode evokes different decisional strategies. The choice mode naturally brings to mind a more 17
qualitative reasoning strategy—such as the lexicographic strategy. This strategy is a heuristic which is based on selecting the option that dominates on the most important dimension. However, the matching response mode suggests a more quantitative reasoning strategy. Preference Reversals in Joint Versus Separate Evaluation Finally, Hsee, Loewenstein, Blount, & Bazerman (1999) proposed the evaluability hypothesis to explain preference reversals in joint versus separate evaluations. Joint evaluation mode (JE) refers to stimuli presented simultaneously for evaluation, while separate evaluation mode (SE) refers to items being evaluated in isolation. Decisions made in JE mode often differ significantly from SE. “Traditional” preference reversals arise because of differences between scales in the response modes. However, preference reversals observed between JE and SE occur because of differences in the evaluation mode itself (Hsee et al, 1999). A typical demonstration of a preference reversal in this domain uses the following problem:
Dictionary J: Dictionary S:
# of entries 20,000 10,000
Any defects? yes, cover is torn no, it is like new
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Participants were asked to indicate their willingness to pay (WTP) for each journal. In SE, participants, dictionary S received higher WTP values while in JE, dictionary J received higher WTP values. In this case, the same evaluation scale is used in both groups but the only difference employed is evaluation mode. The theoretical explanation for the preference reversals in joint versus separate evaluation modes relies on the ease with which an attribute can be evaluated in isolation. Using the dictionary example above, the condition of the book is easy to evaluate in isolation; there is an absolute indicator of quality—a torn cover demonstrates low quality. However, the number of entries in not easy to evaluate in isolation; it is a characteristic that is highly context dependent. There is no gold standard for appropriate number of words for a dictionary; therefore, without information about other dictionaries, it is difficult to evaluate this attribute. In SE, attributes that are difficult to evaluate in isolation will have less impact, and, in JE, attributes that are difficult to evaluate in isolation will have a greater impact. In SE, these easy-to-evaluate attributes will be the major determinant for the evaluations, whereas in JE, the easy-to-evaluate attributes will play a smaller role in determining the overall evaluation of the target. A preference reversal will only occur if there is a large shift in the relative impact of the easy and difficult to evaluate attributes between SE and JE modes. The ease of evaluability of an attribute is determined by the type and amount of 19
information about that attribute that is available; this information is referred to as the evaluability information. This includes information about the best and worst possible values of an attribute, neutral values of an attribute, and any additional information that allows the decision maker to locate a particular value of an attribute in the total attribute space. The evaluation function can be mapped, and the result is predictable based upon the evaluability information possessed by the decision maker. The functions can range from a flat line, when the decision makers have no information, to a steep function, when the decision makers have all of the information about an attribute. However, the evaluability of an attribute is not necessarily related to the ability to understand or interpret the values. It reflects the ability a decision maker has to interpret the desirability of particular values.
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CHAPTER 4
LITERATURE SUMMARY
Slovic and Lichtenstein’s (1968, 1983) impressive demonstration of the preference reversal phenomenon led to a flurry of research by economists in an attempt to revive rational models of choice (Lichtenstein & Slovic, 1971; Lichtenstein & Slovic, 1973). A series of papers raised the monetary payoffs and increased the knowledge and motivation of the participants in order to eradicate preference reversals (Grether & Plott, 1979; Pommerehne, Schneider & Zweifel, 1982; Reilly, 1982). Some of the experimental manipulations were effective in decreasing the rate of preference reversals, but none eliminated them. This feat was finally accomplished by Chu and Chu (1990) using very strict experimental conditions: a market-like environment, repeated trials, with immediate and severe feedback. However, there was also no indication that the extinction of the preference reversal would generalize to a new task potentially susceptible to such a reversal. Preference reversals are thought to be caused by either differences in response mode (such as a choice task versus a matching task) or differences in 21
evaluation mode (such as joint evaluation (JE) mode versus separate evaluation (SE) mode). The latter cause often corresponds to issues that arise in more naturalistic settings. For example, preference is often elicited in JE mode, but consumption of a product takes place in SE mode. Therefore, how should preferences in these types of situations be evaluated? Which method would result in greater post-decisional satisfaction? The research examined in this paper explores the issue of incentive preferences in organization settings. The incentive industry has struggled with the question: which do employees prefer, cash or non-cash incentives? And, it turns out that the answer will depend on how you ask the question. Incentive magazine asked employees to indicate their preference among the following awards: $1500 cash, a travel award worth $1500, or a merchandise award worth $1500. Seventy-nine percent of the respondents chose to receive the cash (Heinz & Alonzo, 1998). However, a study conducted by BI Performance Services and Goodyear Tire & Rubber Co., found that in a comparison of sales performance, the group of salespeople receiving non-cash incentives outperformed those receiving cash incentives by a margin of 46% (study reported in Alonzo, 1996). The following set of studies seeks to help explain the variables underlying the discrepancy in this research field. Experiment 1 demonstrates that the preference reversals in the literature are in part due to the mode of elicitation: joint versus separate evaluation. Experiments 22
2 , 3, and 4 attempt to further extend the work by arguing that the luxuriousness of the non-cash incentive effects whether the preferences elicited will be transitive or intransitive. Experiment 5 examines preferences of employees who have been involved in a non-cash incentive program. Experiments 6 and 7 apply variables that effect the consumptions of hedonic goods in the consumer to the employee incentive literature in an attempt to increase the selection of the noncash incentive. Finally, experiment 8 will attempt to replicate the questionnaire findings with a performance based incentive experiment which will test both preference and performance as dependent variables.
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CHAPTER 5
EXPERIMENT 1
The first experiment was conducted to answer the basic question: what would employees prefer, a cash or non-cash incentive? Would the two incentives be appraised differently in joint versus separate evaluations? In order to accomplish this, students were asked to place themselves in the role of an employee and evaluate one of three bonus scenarios. In the scenario for group 1, participants received a cash bonus, in group 2 they received a non-cash incentive, and in group 3 they were offered a choice between the cash and non-cash incentives. Groups 1 and 2 evaluated their bonuses in separate evaluation mode; while group 3 used joint evaluation mode. Method Participants: One hundred ninety students participated in this experiment (group 1 N=64, group 2 N=60, & group 3 N=66). All participants were Psychology 100 students who were taking part in the Research Experience Program; they received course credit for their participation in this study.
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Materials: All data were collected via computer using the program Media Lab. The participants were presented with a short, online scenario and asked to respond to one scaled response question and one open ended question. Procedure: Participants arrived in the lab and received the following instructions: The following study is aimed to help employers identify valuable ways to reward their employees. Please read the following scenario carefully, placing yourself in the role of the employee.
Participants in group 1 were given the cash incentive scenario: Assume that you have graduated from Ohio State and have a job paying you $35,000 per year. You consider this to be a good starting salary for someone in your field. You are satisfied with your working conditions, and you get along well with your co-workers. Although this is not the type of job you hope to hold when you are further along in your career, it is satisfactory at this point. As you near the end of your first year of employment, the company decides to reward its most productive employees with a bonus. Due to your good performance, you are one of the approximately 50% of the employees who will receive this bonus. The amount of your bonus will be $1,500. (The bonus is actually more than $1,500, but you have to pay taxes on that amount, which leaves you with $1,500 as the final value of the bonus.) Participants in group 2 were given the non-cash incentive scenario: Assume that you have graduated from Ohio State and have a job paying you $35,000 per year. You consider this to be a good starting salary for someone in your field. You are satisfied with your working conditions, and you get along well with your co-workers. Although this is not the 25
type of job you hope to hold when you are further along in your career, it is satisfactory at this point. As you near the end of your first year of employment, the company decides to reward its most productive employees with a bonus. Due to your good performance, you are one of the approximately 50% of the employees who will receive this bonus. For the bonus, you can choose one of five packages (listed below), which total $1,500 in value. (The value of the bonus is actually more than $1,500, but you have to pay taxes on the monetary value of the bonus, which leaves you with $1,500 as the final value of the bonus.) 1. home audio system The system will include 2 Klipsch synergy series floorstanding speakers (35” high, 8” wide), a Sony 600-watt, 6.1 channel audiovisual receiver with Dolby digital sound, a Sony 400-disc mega storage CD changer with CD-RW and MP3 capability, and a Sony progressive scan DVD/hi fi VCR combo. 2. Sony 51” widescreen rear-projection HDTV The 51” TV has a 16:9 aspect ratio (movie style screen) and 1080i capability which provides the highest quality picture from a highdefinition source. It also has a 2-tuner PIP (picture in picture) which allows you to watch two equally sized shows at once. 3. Compaq Presario laptop computer The laptop has an Intel Pentium 2.3 Ghz processor with a 40 GB harddrive. The screen is 15” and the computer comes with DVD/CD-RW combination drive. 4. Columbus Blue Jackets ticket package 2 club-level box seat tickets to four Columbus Blue Jackets games of your choice. Additionally, for each game, you will receive dinner for two at the Italian restaurant, Buca di Beppo, located across the street from the Nationwide Arena. 5. A 5 night Carnival western Caribbean cruise This cruise package includes an ocean-view room for two adults on the Carnival cruise ship, the Imagination; the cruise departs from Miami, Fl and travels to the Grand Cayman, the Cayman Islands, and Ocho Rios, Jamaica. All food and non-alcoholic beverages are included as well as all entertainment on board the ship. 26
Then both groups 1 and 2 were asked to answer the following question: We are interested in your opinion of this bonus, given your salary and your job. Please circle the number on the scale below which best reflects your opinion of the bonus.
-3 -------------------- -2 --------------------- -1 --------------------- 0 ---------------------+ 1--------------------- +2 ---------------------+3 extremely very somewhat neither somewhat very extremely dissatisfied dissatisfied dissatisfied satisfied satisfied satisfied satisfied nor dissatisfied
Group 3 was given the option to choose between the cash and non-cash incentives in the following scenario: Assume that you have graduated from Ohio State and have a job paying you $35,000 per year. You consider this to be a good starting salary for someone in your field. You are satisfied with your working conditions, and you get along well with your co-workers. Although this is not the type of job you hope to hold when you are further along in your career, it is satisfactory at this point. As you near the end of your first year of employment, the company decides to reward its most productive employees with a bonus. Due to your good performance, you are one of the approximately 50% of the employees who will receive this bonus. The amount of your bonus will be $1,500. You can take your bonus either in the form of a $1,500 check, or you can select a $1,500 bonus from one of the following 5 options: 1. home audio system The system will include 2 Klipsch synergy series floorstanding speakers (35” high, 8” wide), a Sony 600-watt, 6.1 channel audiovisual receiver with Dolby digital sound, a Sony 400-disc mega storage CD changer with CD-RW and MP3 capability, and a Sony progressive scan DVD/hi fi VCR combo. 2. Sony 51” widescreen rear-projection HDTV
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The 51” TV has a 16:9 aspect ratio (movie style screen) and 1080i capability which provides the highest quality picture from a highdefinition source. It also has a 2-tuner PIP (picture in picture) which allows you to watch two equally sized shows at once. 3. Compaq Presario laptop computer The laptop has an Intel Pentium 2.3 Ghz processor with a 40 GB harddrive. The screen is 15” and the computer comes with DVD/CD-RW combination drive. 4. Columbus Blue Jackets ticket package 2 club-level box seat tickets to four Columbus Blue Jackets games of your choice. Additionally, for each game, you will receive dinner for two at the Italian restaurant, Buca di Beppo, located across the street from the Nationwide Arena. 5. A 5 night Carnival western Caribbean cruise This cruise package includes an ocean-view room for two adults on the Carnival cruise ship, the Imagination; the cruise departs from Miami, Fl and travels to the Grand Cayman, the Cayman Islands, and Ocho Rios, Jamaica. All food and non-alcoholic beverages are included as well as all entertainment on board the ship. If you select the check, it will actually be for more than $1,500, but you have to pay taxes on that amount, which leaves you with $1,500 as the final value of the bonus. Similarly, if you select one of the bonus packages, its value is actually more than $1,500, but you have to pay taxes on the monetary value of the bonus, which leaves you with $1,500 as the final value of that bonus, too.
Group 3 was then asked to respond to the following question: We are interested in your preference between these two possible bonuses, given your salary and your job. Please circle the number on the scale below which best reflects your preference. -3 -------------------- -2 --------------------- -1 --------------------- 0 ---------------------+ 1--------------------- +2 ---------------------+3 extremely very somewhat indifferent somewhat very extremely likely to likely to likely to likely to likely to likely to choose the choose the choose the choose the choose the choose the check check c heck bonus bonus bonus
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(Note: On the computer screen the full statement for options 1, 2, and 3 ended with “likely to choose one of the bonuses”; the full statement did not easily fit into this document).
Results Participants in both groups 1 and 2 were asked to report their satisfaction with the bonus. The dependent variable, satisfaction, was negatively skewed. 60
Frequency
50 40
Mean = 5.57 Std. Dev. = 0.997 N = 124
30 20 10 0 1
2
3
4
5
6
7
Satisfaction
Figure 1: Histogram of participant satisfaction with bonus: Separate evaluation, experiment 1.
Therefore, nonparametric statistics were used in favor of the traditional parametric approach which requires more stringent distributional assumptions. Participants in group 1 reported a median response of 5.00 which indicated that they were somewhat satisfied with the bonus they received at this job; note the scale responses were recoded ‘1’= extremely dissatisfied and ‘7’=extremely 29
satisfied). However, participants in group 2 indicated that they were very satisfied with the bonus they received; they reported a median satisfaction rating of 6.00. Using a Mann-Whitney U test of ranks, it was determined that Group 2 was significantly more satisfied with their bonus than group 1; participants in group 1 had a mean rank of 53.19 while participants in group 2 had a mean rank of 72.42, Mann-Whitney Z=3.17,p
