The observation of a number of recent studies that compensation demanded to sell goods or entitlements greatly exceeds willingness to pay for them is inconsistent with standard economic theory, and has become a key topic in experimental economics. These discrepancies are surprising, because they occur even when the effects of strategic bargaining and other such economic factors are eliminated. Instead, those gaps appear to be rooted in the cognitive psychological processes people use in evaluating opportunities to buy or sell goods or entitlements. The proposed work will assess via laboratory experiments how discrepancies between willingness to pay and compensation demanded for risky alternatives varies depending on (1) whether opportunity for learning in an economic market-like setting is provided, (2) the riskiness of the alternatives, (3) how the alternatives are described or framed, and (4) how willingness to pay and compensation demanded are elicited from buyers and sellers. Whereas previous studies have concentrated on whether these gaps are real phenomena, we propose, and provide preliminary data supporting, a theoretical model based on Kahneman and Tversky's prospect theory which predicts wide variation in gaps depending on factors such as 1 - 4. These predictions will be tested in Experiments 1 - 3. Experiments 4 and 5 will test prescriptive procedures using multiple perspectives, frames or reference points, and modes of response in an attempt to induce convergence between different measures of economic value, such as willingness to pay and compensation demanded. If the sizes of these buyer-seller gaps can be reduced by decision support procedures of this sort, the overall quality of buyer - seller "deals" should increase. More broadly, it is hoped that the proposed work will help to bridge the remarkably disjoint disciplines of experimental economics and psychology of judgment/decision making.
