Lay Scientism: Ignorance of Value in Compensation Decisions

Claire Tsai, University of Chicago, USA
Christopher Hsee, University of Chicago, USA
How should one compensate a consumer who loses something irreplaceable because of someone else’s fault? Normatively, compensation should equal the value (utility) of the lost item and thus make the victim as happy as she would be had the damage never occurred. Our experiments demonstrate that people’s compensation decisions often ignore value and are based on the normatively irrelevant factor of cost (the price that the victim originally paid for the item). We explain this phenomenon in terms of lay scientism (a tendency to base decisions on objective factors) and discuss how the popular cost-based compensation rule hurts consumer welfare.
[ to cite ]:
Claire Tsai and Christopher Hsee (2007) ,"Lay Scientism: Ignorance of Value in Compensation Decisions", in NA - Advances in Consumer Research Volume 34, eds. Gavan Fitzsimons and Vicki Morwitz, Duluth, MN : Association for Consumer Research, Pages: 265-268.