"Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences

In six experiments we show that initial valuations of familiar products and simple hedonic experiences are strongly inuenced by arbitrary “anchors ” (some-times derived from a person’s social security number). Because subsequent valua-tions are also coherent with respect to salient differences in perceived quality or quantity of these products and experiences, the entire pattern of valuations can easily create an illusion of order, as if it is being generated by stable underlying preferences. The experiments show that this combinationof coherent arbitrariness (1) cannot be interpreted as a rational response to information, (2) does not decrease as a result of experience with a good, (3) is not necessarily reduced by market forces, and (4) is not unique to cash prices. The results imply that demand curves estimated from market data need not reveal true consumer preferences, in any normatively signicant sense of the term. Economic theories of valuation generally assume that prices of commodities and assets are derived from underlying “funda-mental ” values. For example, in nance theory, asset prices are believed to reect the market estimate of the discounted present value of the asset’s payoff stream. In labor theory, the supply of labor is established by the trade-off between the desire for con-sumption and the displeasure of work. Finally, and most impor-tantly for this paper, consumer microeconomics assumes that the demand curves for consumer products—chocolates, CDs, movies, vacations, drugs, etc.—can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products. Because it is difcult, as a rule, to measure fundamental values directly, empirical tests of economic theory typically ex-amine whether the effects of changes in circumstances on valua-tions are consistent with theoretical prediction—for example, whether labor supply responds appropriately to a change in the wage rate, whether (compensated) demand curves for commodi-