This article is concerned with the possible role of reference points and loss aversion (as suggested by prospect theory) in subjects' judgments about the value of increments and decrements in automobile safety. The contingent valuation method is employed in two experiments, both of which consider subjects' willingness-to-pay (WTP) for increased safety and compensation demanded (CD) for decreased safety in hypothetical new vehicle purchases. The results establish that disparities exist in subjects' WTP and CD values for the same increment of auto safety, even for a close-to-market context such as hypothetical new vehicle purchases. The results also indicate that evaluations can be manipulated by changing the perception of the reference point: losses can be recast as forgone gains and forgone gains as losses, altering (or even eliminating) differences between WTP and CD values.
Key words contingent valuation - reference points - automobile safety - prospect theory
I would like to thank Mark Kamlet, Greg Fischer, and Granger Morgan for advice and help in structuring the research for the first experiment; Paul Slovic and Jack Knetsch for suggestions regarding the structure and content of the second experiment; Robin Gregory and two anonymous referees for insightful comments on earlier drafts; and the subjects who provided their time in the two experiments. Michael McNickle provided able research assistance for the second experiment. The survey for the first experiment was partially supported by the Program for Technology and Society at Carnegie Mellon University, with funds from the Andrew W. Mellon Foundation.