Perceived variance and preference for sequences of outcomes

Abstract

Purpose The purpose of this paper is to propose a new explanation for the well‐documented preference among individuals for sequences of increasing utility. It is put forward here that while there may be a preference for ascending‐utility sequences, this relationship is mediated by perceptions of variance. Specifically, there is reason to believe that sequences of ascending utility (e.g. receipt of payments) are perceived to be less variable than sequences of descending utility (e.g. prices). Design/methodology/approach Past and present price research supports the idea that perceived variance plays a key role in preference, which fits with established theory. This theory is examined and applied to a hypothetical scenario involving sequences of uncertain outcomes. The predicted effect is tested in two experimental studies. Findings The two studies lend support to the proposed explanation of sequence preference. Study one demonstrates that the effect of sequence direction on preference is mediated by perceptions of variability, and that individuals perceive a sequence of ascending utility to be less variable than an equivalent descending sequence. Study two shows that individuals prefer a sequence when it represents wages (ascending utility) than when it does prices (descending utility). Originality/value The paper provides a sound theoretical framework, as well as supporting evidence, for how sequences of outcomes, such as prices, are perceived by consumers. Given that such sequences are increasingly available thanks to information technology, and the increased use of yield management systems (leading to more price fluctuation), how they affect decisions is of obvious importance.

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