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Assessing Preferences for Environmental Decisions with Long-term Consequences

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Objective/Hypothesis: The main objectives of the proposed study are:
o to apply decision analysis, in particular multi-attribute utility analysis to examine time preferences;
o to expand previous research on discount rates for monetary consequences to on-monetary consequences (e.g., environmental impacts);
o to conduct experimental studies to find out what factors have an impact on monetary and non-monetary discount rates;
o to cross-validate the experimental results with a study of professional analysts;
o to develop sound assessment procedures that will help policy makers in the determination of appropriate discount factors.

Approach: Methods of multi-attribute utility analysis will be used to design questions about basic tradeoffs between consequences that occur at different points in time and differ along a variety of other dimensions, such as monetary vs. non-monetary consequences, risky vs. riskless consequences, gains vs. losses, etc. Previous research has shown that all of these factors potentially impact revealed preferences and are therefore also potential determinants of discount rates. These factors will be systematically manipulated in a series of experiments, along with at least two different methods to assess time preferences (choice vs. matching). The main results will form the basis for a cross-validation study using professional analysts that are confronted with large-scale decision problems.

Expected Results: We expect that the results of the proposed experiments and field observations will provide the EPA and other agencies with important insights about the nature and assessment of preferences about time-sensitive consequences. In particular, we expect that the substantive results as well as the development of sound methodologies to assess discount rates for monetary as well as non-monetary consequences will be of immediate benefit in the evaluation of policies designed to mitigate long-term risks, such as environmental pollution or health and safety risks.

Supplemental Keywords: Decision making, psychological, preferences, measurement methods, social science. , Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Ecology and Ecosystems, Economics & Decision Making, Social Science, decision-making, benefits assessment, community involvement, decision analysis, decision making, discount rates, ecosystem valuation, environmental policy, environmental values, incentives, long-term consequences, multi-attribute utility, multi-criteria decision analysis, multi-objective decision making, non-market valuation, policy analysis, preference formation, public policy, public values, social impact analysis, social psychology, social sciences

Metadata

EPA/NSF ID:
R826611
Principal Investigators:
Keller, L. Robin
Eppel, Thomas
Technical Liaison:
Research Organization:
California at Irvine, University of
Funding Agency/Program:
EPA/ORD/Valuation
Grant Year:
1998
Project Period:
July 1, 1998 - June 30, 2000
Cost to Funding Agency:
$181,851
Project Status Reports:
Project Reports:

Objective: The main objectives of the study were to: (1) expand previous research on discount rates for monetary consequences to non-monetary consequences (e.g., environmental or mortality impacts); (2) conduct experimental studies to discover what factors have an impact on monetary and non-monetary preferences for temporal sequences; and (3) cross-validate and generalize the experimental results with information from professional analysts to guide development of procedures that will assist policy makers in the determination of models for the temporal perceptions of different stakeholders in environmental decisions.

Summary/Accomplishments: An experimental study, reported in paper #1 on "Valuing Environmental Outcomes: Preferences for Constant or Improving Sequences," was designed and conducted to analyze individuals' preferences for sequences of outcomes over time related to air quality and near-shore ocean water quality. We were particularly interested in whether temporal preferences for monetary outcome streams differ from preferences for sequences of non-monetary outcomes. We compared our results for the environmental sequences with results on preferences for sequences of health and monetary outcomes, (from the California graduate business student participants in this study and previous research conducted by Gretchen Chapman, George Loewenstein, and others). Generally, participants gave significantly lower ratings to environmental and health sequences (with equal means) that worsened over time, relative to the ratings they gave to sequences that either remained the same or improved over time. This pattern is reversed when facing sequences of monetary payments. This preference structure held for both short (5-year) and long (50-year) time horizons, and was confirmed with choice data. In other words, the generally observed preference pattern implies negative discount rates for non-monetary, but positive discount rates for monetary outcome sequences. A relationship between expectations and choices also was found. A model proposed by Loewenstein and Drazen Prelec for the valuation of sequences of outcomes was applied to the current data set and compared to the traditional discounting model. In all cases, the model that incorporated "Gestalt" features of the sequence (slope and uniformity) performed better than the net present value discounting model at predicting the mean ratings for the sequences in the different domains.

Thus, we found that people have very different preferences for temporal sequences of environmental outcomes and income outcomes. This suggests that decisions involving monetary and non-monetary outcomes should not be modeled by first, pricing out all outcomes in money and then, discounting the monetary stream backwards.

Another study (paper #2) was conducted to investigate if the preference patterns observed in the air and water quality domains also exist in the "lives saved" and "lives lost" domains. Survey results on individuals' preferences for 3-year temporal sequences of mortality numbers are presented and compared to results from previous research on preferences for sequences of monetary, health, and environmental outcomes. Three anomalies (gain/loss asymmetry, short/long asymmetry, and the absolute magnitude effect) found in previous discounting research using pairwise matching questions, suggested that there might be preference differences when outcomes were framed as gains (lives saved) or losses (lives lost), when sequences begin now (short term) or in 15 years (long term), or when the number of total lives involved over a three-year sequence was small (60) or large (36,000).

California college student participants accessed the survey via a Web site and responded to eight scenarios by first providing a preference rank order for the five options in each scenario, and then providing demographic data. The first four scenarios involved 3-year sequences of numbers of lives lost each year. The scenarios varied by whether the sequences started now or in 15 years, and whether the total number of lives lost over the 3 years was 60 or 36,000. The five options in a scenario were different temporal patterns of the sequences (e.g., -20, -20, -20 is a constant number of 20 lives lost each year). Other patterns were steeply improving, moderately improving, moderately deteriorating, and steeply deteriorating over time. The final four scenarios involved numbers of lives saved over time and had the same structure as the first set of scenarios.

The standard discounting model would require a person preferring to have all the lives saved occur in the first year of a sequence, and no lives saved in the ensuing 2 years. (This assumes utility is linear in the number of lives lost). Similarly, in the case of lost lives, all the lives should be lost in the third year of the sequence. Such sequences are "steeply deteriorating over time." Only 25-33 percent of the subjects ranked such sequences first, when lost lives were involved. When lives were being saved, a larger percentage, from 39-43 percent, but still less than 50 percent, ranked first in the sequence, with all lives saved in the first year. So, fewer than half of the subjects conformed with the standard discounting model. Sizable numbers of subjects first ranked the constant sequence (32-43 percent in the lives lost scenarios and 25-29 percent in the lives saved scenarios). Improving sequences were first ranked by 19-24 percent in the lives lost cases and 23-29 percent in the lives saved cases.

We compare our results with prior results on income, health, air, and ocean water quality. Guyse, Keller, and Eppel (paper #1) found people preferred constant or moderately increasing sequences for their own health and for air and near-shore ocean water quality, but preferred steeply decreasing sequences for monetary income. In a study by Guyse ("Empirical Validity of Discounted Utility for Decisions Involving Sequences of Monetary Outcomes," working paper, California State Polytechnic University, Pomona, CA, 2002), which had the same survey design as in this paper, sequences of monetary outcomes were examined. Compared with our mortality sequences data, significantly more people preferred a steeply or moderately decreasing monetary sequence. Also, significantly fewer people preferred the constant sequence of money outcomes than the constant sequence of mortality outcomes. We also found a Gain/Loss effect similar to what Guyse found for monetary sequences. Participants preferred to spread the outcomes if there were lives lost, and consolidate them if there were lives saved. This preference for consolidation was stronger with a smaller magnitude of money or lives.

Based on these results, we conclude that temporal discounting models may be inappropriate for representing the value people place on mortality, health, and environmental outcomes. Preferences for constant or improving sequences should be considered in policy making, rather than presuming all people have a preference for deteriorating sequences.

We also gathered information from professionals working on environmental decisions with long-term consequences (paper #3). Four prominent practitioners were interviewed to discuss their practical experience with discounting and evaluating long-term consequences. The interviews were structured around a set of questions, ranging from general comments about the use of discounting, to specific questions about what discount factors to use and whether such factors should be dependent on the specific nature of the consequences. While the results of these interviews cannot give us a widely representative view on the practice of discounting, they nevertheless reveal important insights. None of the respondents indicated that discounting ought to drive the analysis of long-term consequences or could point to an application where discounting made a major difference. Everybody agreed that the complexity of consequences and the implications of various modeling assumptions (including discounting) should clearly be explained to all involved. Finally, the respondents warned against oversimplifying the richness of stakeholders' values by aggregating the streams of consequences into one number. Instead, the discussion and evaluation of long-term consequences should focus on a sub-aggregated level and should include extensive sensitivity analyses.

Paper #4, "Examining Predictive Accuracy Among Discounting Models," follows up with our experimental work above, and earlier experimental work by others, that identifies problems in consistency of preferences with any single discount rate. We ask the question: what discount rate should be used if you want to go ahead and use a discounting model? We present a methodology to analyze data from experimental surveys on intertemporal preferences. Focusing on the traditional exponential discounting model and the hyperbolic discounting model, we use different specifications to model experimental data published by Richard Thaler. Standard measures of goodness of prediction are then applied to fitted data to select among alternative specifications. We first presented our approach by applying it to simulated data. Then we presented a procedure for statistical estimation of the sample discount rate, testing four specifications. Such an approach could be used when temporal preference data has been collected from stakeholders and a discounting model is fitted to the data.

Publications and Presentations: Total Count: 17

TypeCitationJournal Searches
Journal ArticleKeller LR, Strazzera E. Examining predictive accuracy among discounting models. Journal of Risk and Uncertainty 2002;24(2):143-160. not available
Journal ArticleGuyse JL, Keller LR, Eppel T. Valuing environmental outcomes: preferences for increasing or constant sequences. Organizational Behavior and Human Decision Processes 2002;87(2):253-277. not available
PaperEppel T, Keller LR. Practitioners' views on discounting. Working Paper, Graduate School of Management, University of California-Irvine, Irvine, CA, 350 GSM, (in preparation, 2002). not available
PaperGuyse, JL, Keller LR, Eppel, T. Valuing environmental outcomes: preferences for increasing or constant sequences. Working paper MBS 99-16 of the Institute for Mathematical Behavioral Sciences, University of California, Irvine, CA, 1999. not available
PresentationEppel T, Guyse JL, Keller LR. Assessing preferences for environmental decisions with long-term consequences. Presented at the Society for Risk Analysis Annual Meeting, Phoenix, AZ, December 1998. not available
PresentationGuyse JL, Keller LR, Eppel T. Modeling environmental decisions over time. Presented at the Annual University of California-Los Angeles/University of California-Irvine/University of South California, Current Research in OR/OM Conference, University of California, Los Angeles, CA, June 4, 1999. not available
PresentationGuyse JL, Keller LR. Preference for sequences of long term environmental consequences. Presented at the Subjective Probability, Utility, and Decision Making Conference, Mannheim, Germany, August 1999. not available
PresentationGuyse JL, Keller LR. Preference for sequences of long term environmental consequences. Poster Presented at the Los Angeles Judgment/Decision Making Meeting, Los Angeles, CA, November 1999. not available
PresentationGuyse JL, Keller LR. Preference for sequences of long term environmental consequences. Presented at the Institute for Operations Research and the Management Sciences (INFORMS) Conference in Philadelphia, session on Decision Analysis Involving Outcomes Over Time and Environmental Risks, Philadelphia, PA, November 1999. not available
PresentationGuyse JL, Keller LR. Preference for sequences of long term environmental consequences. Presented at Campus Seminars at Wharton, Tulane, Darden, Virginia Tech, Indiana State, and the California State Universities at Northridge, Long Beach, and Sacramento. not available
PresentationGuyse JL, Keller LR. Preference for sequences of long term environmental consequences. Presented at the Society for Risk Analysis conference, Atlanta, GA, December 1999. not available
PresentationKeller LR. Preferences for environmental outcomes: consistent with discounting models or not? Presented at the U.S. Environmental Protection Agency Conference on Economic Valuation of Mortality Risk Reduction: Assessing the State of the Art for Policy Applications, Silver Spring, MD, November 6-7, 2001. not available
PresentationKeller LR. Preferences for environmental outcomes: consistent with discounting models or not? Presented at the Stanford University, Decision Analysis Colloquium, Decision and Ethics Center, Department of Management Science and Engineering, Stanford, CA, April 12, 2001. not available
PresentationGuyse JL, Keller LR, Eppel T. Valuing environmental outcomes: preferences for increasing or constant sequences. Presented at Decision Analysis Society of Institute for Operations Research and the Management Sciences Student Paper Competition, Finalist Award, Fall 1999. not available
PresentationGuyse JL, Keller LR. Valuing lives lost or saved over time. Presented at California State University, Pomona CA, and University of California-Irvine, Irvine, CA, 2002. not available
PresentationGuyse JL, Keller LR. Valuing lives lost over time. Presented at the Institute for Operational Research and the Management Sciences, International Conference, Maui, HI, June 2001. not available
PresentationGuyse JL, Keller LR. Valuing lives lost over time. Presented at the Society for Medical Decision Making, San Diego, CA, October 2001. not available

Supplemental Keywords: discounted utility theory, decision analysis, environmental policy, contingent valuation, nonmarket valuation, decisionmaking, psychological, preferences, survey, modeling, public policy, ambient air, marine water, measurement methods, social science. , Economic, Social, & Behavioral Science Research Program, RFA, Scientific Discipline, Ecology and Ecosystems, Economics & Decision Making, Social Science, decision-making, benefits assessment, community involvement, decision analysis, decision making, discount rates, ecosystem valuation, environmental policy, environmental values, incentives, long-term consequences, multi-attribute utility, multi-criteria decision analysis, multi-objective decision making, non-market valuation, policy analysis, preference formation, public policy, public values, social impact analysis, social psychology, social sciences

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