Values → Preferences: How Values Shape Preferences

In models of decision making, preferences refer to the ordering of alternatives based on an individual’s tastes, values, or subjective assessments of desirability. Preferences reflect what individuals consider better or worse choices among available options. Preferences are a key concept in economics as they provide a basis for predicting choices and behavior.

An individual’s values, among other factors, influence the preferences that they will have over options in a decision situation. This text outlines six types of mechanisms which have been proposed to explain how values influence preferences in decision making. The six are as follows.

• Identity-based mechanisms focus on how individuals’ group affiliations shape preferences via group-specific norms and psychological reactions.
• Social preferences and fairness norms suggest that people derive satisfaction from fair and equitable outcomes, influencing their choices significantly.
• Expressive preferences highlight that decisions often serve to communicate deeply-held personal or moral values, providing intrinsic psychological rewards.
• Cognitive dissonance and moral cognition theories explain how discrepancies between values and behaviors cause individuals to adjust their preferences to maintain internal consistency.
• Reference-dependence and framing suggest that subjective evaluation based on personal values influences decision-making through context-specific framing.
• Cultural transmission and social learning illustrate the role of societal norms in shaping individual preferences through internalization and socialization.

The following diagram illustrates the mechanisms. Labels on edges correspond to sections in this text, where these relationships are discussed.

This text is part of the series on decision governance. Decision Governance is concerned with how to improve the quality of decisions by changing the context, process, data, and tools (including AI) used to make decisions. Understanding decision governance empowers decision makers and decision stakeholders to improve how they make decisions with others. Start with “What is Decision Governance?” and find all texts on decision governance here.

1. Identity-Based Mechanism

The Identity-Based Mechanism argues that individuals form preferences consistent with their social identities. Akerlof and Kranton (2000) suggest that identity significantly affects behavior through identity-consistent values and emotional responses.

Key Variables:

• Social Identity: Individual’s sense of belonging to social groups and alignment with group norms.
• Identity-Based Values: Values linked explicitly to group membership.
• Psychological Comfort or Discomfort: Emotional response to alignment or misalignment with identity values.
• Individual Preferences: Preferred choices or actions.

Mechanism:

• Social Identity → Identity-Based Values
• Identity-Based Values → Psychological Comfort or Discomfort
• Psychological Comfort or Discomfort → Individual Preferences

Example: A manager strongly identifies with her company’s culture of environmental responsibility. Adopting values aligned with this identity, she prefers sustainable investments, despite potentially lower short-term profits.

2. Social Preferences and Fairness Norms Mechanism

This mechanism demonstrates that fairness and equity significantly affect preferences. Fehr and Schmidt’s (1999) research emphasizes that social interactions often include fairness considerations.

Key Variables:

• Fairness Norms: Shared societal beliefs about fairness and equity.
• Perceived Fairness of Outcomes: Personal assessment of outcome fairness.
• Utility from Social Outcomes: Satisfaction derived from equitable outcomes.
• Individual Preferences: Preferred choices or actions.

Mechanism:

• Fairness Norms → Perceived Fairness of Outcomes
• Perceived Fairness of Outcomes → Utility from Social Outcomes
• Utility from Social Outcomes → Individual Preferences

Example: An employee believes in equal pay for equal work. Discovering wage inequality decreases their satisfaction, prompting actions aimed at restoring fairness, even if economically costly.

3. Expressive Preferences Mechanism

Bénabou and Tirole (2006) proposed expressive preferences, suggesting individuals prefer choices allowing them to signal their personal values, deriving psychological satisfaction from such expressions.

Key Variables:

• Personal Values or Moral Commitments: Deeply held ethical beliefs.
• Value Expression: Actions signaling personal values.
• Expressive Utility: Satisfaction from expressing one’s values.
• Individual Preferences: Preferred choices or actions.

Mechanism:

• Personal Values or Moral Commitments → Value Expression
• Value Expression → Expressive Utility
• Expressive Utility → Individual Preferences

Example: A consumer committed to animal welfare regularly purchases cruelty-free products, expressing their moral stance despite higher costs.

4. Cognitive Dissonance and Moral Cognition Mechanism

Festinger’s (1957) cognitive dissonance theory describes how inconsistencies between personal values and behaviors cause psychological discomfort, leading individuals to adjust their preferences accordingly.

Key Variables:

• Personal Values or Moral Standards: Individual ethical principles.
• Actual Behavior: Actions performed by individuals.
• Cognitive Dissonance: Psychological discomfort due to inconsistency.
• Preference Adjustment: Change in preferences to achieve consistency.
• Individual Preferences: Preferred choices or actions.

Mechanism:

• Personal Values or Moral Standards & Actual Behavior → Cognitive Dissonance
• Cognitive Dissonance → Preference Adjustment
• Preference Adjustment → Individual Preferences

Example: An executive valuing honesty exaggerates marketing claims, experiencing discomfort. To resolve this, the executive may adjust their future actions or justify their behavior, thus altering preferences.

5. Reference-Dependence and Framing Mechanism

Kahneman and Tversky (1979) argue that individuals evaluate outcomes relative to personal reference points, affecting preferences through framing effects.

Key Variables:

• Personal Values and Reference Points: Personal benchmarks or standards.
• Framing of Outcomes: Contextual presentation of outcomes.
• Subjective Evaluation of Outcomes: Evaluation of outcomes as gains or losses.
• Individual Preferences: Preferred choices or actions.

Mechanism:

• Personal Values and Reference Points → Framing of Outcomes
• Framing of Outcomes → Subjective Evaluation of Outcomes
• Subjective Evaluation of Outcomes → Individual Preferences

Example: An investor prioritizing capital preservation views moderate gains positively but experiences disproportionate dissatisfaction from small losses, thus preferring safer investment strategies.

References

• Akerlof, G.A., & Kranton, R.E. (2000). Economics and Identity. Quarterly Journal of Economics, 115(3), 715–753.
• Fehr, E., & Schmidt, K.M. (1999). A Theory of Fairness, Competition, and Cooperation. Quarterly Journal of Economics, 114(3), 817–868.
• Bénabou, R., & Tirole, J. (2006). Incentives and Prosocial Behavior. American Economic Review, 96(5), 1652–1678.
• Festinger, L. (1957). A Theory of Cognitive Dissonance. Stanford University Press.
• Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), 263–291.
• Bisin, A., & Verdier, T. (2011). The Economics of Cultural Transmission and Socialization. In Handbook of Social Economics, Vol. 1A, Elsevier.