Dynamic and distributional properties of prices
- Peter Kvam, Department of Psychological & Brain Sciences, Indiana University, Bloomington, Indiana, United States
- Jerome Busemeyer, Cognitive Science, Indiana University, Bloomington, Indiana, United States
AbstractMost models of pricing embody a static, deterministic theory of value where the monetary amount people assign to an item is computed as a fixed function of its attributes. Preference reversals --- where prices assigned to gambles conflict with preference orders elicited through binary choices -- indicate that the response processes going into value assessments are important. In this paper, we additionally show that price responses are sensitive to time pressure, suggesting a dynamic underlying cognitive process. We also show that the elicited price distributions can possess strong positive or negative skew, indicating that diverging information is used to generate buying versus selling and certainty equivalent prices. We develop a computational cognitive model that predicts these continuous distributions of price responses and how they change over time, showing that it can account for the major dynamic and distributional properties of prices and decisions.
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