Time pressure and regret in sequential search

https://doi.org/10.1016/j.jebo.2022.12.019Get rights and content

Highlights

  • We study the role of regret and urgency in sequential search experimentally.

  • Anticipated regret has minor effects on search behavior.

  • Experienced regret leads to systematic adjustments in search length.

  • Urgency reduces decision times and perceived decision quality.

  • With urgency, inexperienced decision-makers search shorter.

Abstract

Perceived urgency and regret are common in many sequential search processes; for example, sellers often pressure buyers in search of the best offer, both time-wise and in terms of potential regret of forgoing unique purchasing opportunities. Theoretically, these strategies result in anticipated and experienced regret, which systematically affect search behavior and thereby distort optimal search. In addition, urgency may alter decision-making processes and thereby the salience of regret. To understand the empirical relevance of these aspects, we study the causal effects of regret, urgency, and their interaction on search behavior in a pre-registered, theory-based, and well-powered experiment. Empirically, we find that anticipated regret does not affect search behavior either with or without time pressure, while experienced regret leads to systematic adjustments in search length. Urgency reduces decision times and perceived decision quality, but does not generally alter search length. Only very inexperienced decision-makers buy earlier when pressured. Thus, consumer protection measures against pressure selling tactics can help inexperienced consumers in particular.

Introduction

Perceived urgency and regret are common in many markets. For instance, in many goods and service markets, sellers pressure buyers searching for the best price with time-limited offers and emphasize potential regret about forgone purchasing opportunities (Sugden et al., 2019). In labor markets, job seekers face deadlines and anticipate (or experience) regret when they reject or accept offers. In financial markets, investors facing rapid price changes may regret forgone selling opportunities when holding onto badly performing assets (Strack and Viefers, 2021).1 It is thus important to understand to what extent perceived urgency and regret may affect individual choice in dynamic market environments, and whether their combination aggravates or alleviates potential biases in decision making.

Our study investigates the effects of perceived urgency and regret in a pre-registered, theory-based laboratory experiment.2 Many of the above-mentioned examples for the relevance of urgency and potential regret reflect a search process that can be represented by an optimal stopping problem. In optimal stopping problems, a decision-maker observes a sequence of realizations of some stochastic process and, after observing a realization, decides on whether or not to take an action. For example, buyers may learn about price offers for a flight and then decide on whether to continue searching for a better realization (e.g., by looking at other platforms or waiting another day) or they may stop searching and immediately buy the item for the best available price.3

By trading off the best current price with potentially better future prices at higher search costs, decision-makers may experience regret of two types. First, if it turns out that decision-makers could have saved unnecessary search costs, they may regret not having stopped searching earlier (which is often referred to as inaction regret). Second, when deciding on whether or not to accept the currently best available price, decision-makers may anticipate that better price realizations can become available after purchase, and thus may anticipate regret from not having searched for longer (i.e., if they observe price realizations after purchase, which is often referred to as anticipated action regret).

While an expected utility maximizer is assumed to calculate the optimal search length given her knowledge about the underlying stochastic process and given search costs, perceived urgency may render full optimization unlikely. Time-pressured individuals may rely more on intuitive rather than deliberative decision making (Epstein, 1994, Kahneman, 2003, Kahneman, 2011), use heuristics to a greater extent (Gigerenzer and Todd, 1999), or forgo a thorough and in-depth processing of available information (Kruglanski and Freund, 1983).4 Furthermore, perceived urgency may not only result in lower levels of choice accuracy, but may also alleviate anticipated action regret because anticipation of regret is less salient when there is (or appears to be) limited time to deliberate.5

Our experiment disentangles these channels in a parsimonious dynamic decision-making environment that allows us to identify the role of regret, perceived urgency, and their interaction. Participants in the experiment buy one unit of a product and maximize their payoff by purchasing the item at a low price without searching for too long. They can sequentially request additional price offers and incur a fixed search cost for every offer that they request (see also Schotter, Braunstein, 1981, Hey, 1987, Cox, Oaxaca, 1989, Kogut, 1990, Sonnemans, 1998). In other words, the participants themselves decide to continue the search for another round or to take the best standing offer. They know the distribution from which offers are drawn and that all previously observed offers are attainable (i.e., we employ optimal stopping with recall). Consequently, expected profit maximization is characterized by adherence to a constant reservation price strategy (Lippman and McCall, 1976). Expected payoff-maximizing individuals search until an offer at or below their reservation price is observed and they then buy the item at that price.

Two deviations from the constant reservation price strategy are commonly observed in search environments, in which buyers do not receive post-purchase information on prices: early stopping and the recall of previously rejected prices. Regardless of the context, previous studies show that participants request fewer offers than theoretically predicted (e.g., Hey, 1987, Cox, Oaxaca, 1989, Sonnemans, 1998, Houser, Winter, 2004, Einav, 2005) and they often make use of the recall option (e.g., Schotter and Braunstein, 1981; Hey, 1987, Kogut, 1990, Houser, Winter, 2004, Ibanez, Czermak, Sutter, 2009, Schunk, 2009; Schunk and Winter, 2009), which is in line with the idea of anticipated inaction regret. Indeed, expanding a standard sequential search model (Lippman and McCall, 1976) by regret aversion predicts both of these commonly observed patterns of behavior (see Appendix A.1 for more detail). Consequently, we designed our experiment to ensure that we can empirically assess the relevance of regret. By manipulating whether or not information on post-purchase price realizations is available, we exogenously vary whether anticipated action regret can prolong search, countervailing the potential effects of inaction regret. Further, we employ random variation in feedback to study the role of experienced action regret. As buyers are also often pressured time-wise, we further study how perceived urgency alters search behavior and the role of regret. We implement a 2×2 between-subjects design with high or low perceived urgency that avoids potential selection bias due to time pressure, and vary search costs (within-subjects) to analyze the extent to which participants understand the general logic of the reservation-price strategy.

Our empirical results confirm stylized facts from previous experiments, as in all treatments, participants search on average too little (as compared to the expected payoff-maximizing strategy), make use of the recall option, and search longer with lower search costs and more experience. In our main analyses, we study the causal role of perceived urgency, regret, and their interaction for search behavior. We find that perceived urgency reduces decision times and perceived decision quality but does not change search length in general. However, in the very first search task, time pressure does affect search length and reduces payoffs substantially. Anticipated action regret (i.e., anticipating regret from stopping too early) does not increase search length, while experienced regret, both action and inaction regret, leads to systematic adjustments in search length. Learning that one has stopped searching too early, leads to longer search in the subsequent task while searching for too long reduces search length. These adjustments do not increase payoffs substantially, as some participants over-adjust their search length. Finally, perceived urgency does not substantially alter the observed role of regret.6 In addition to our main analysis, our study highlights the need for strategies consumers may employ to protect themselves from searching sub-optimally. Thus, we also discuss commitment to reservation prices as a simple strategy that may circumvent inefficient search and provide empirical evidence showing that such commitment can indeed improve the optimality of search and results in larger payoffs.

The rest of this manuscript is organized as follows. Section 2 discusses the three-fold contribution of our approach (i.e., understanding the role of time-pressure, regret, and their potential interaction in sequential search tasks) relative to the existing literature. In Section 3, we explain the experimental design. In Section 4, we specify theory-based hypotheses, which we test in our main empirical analyses in Section 5. In Section 6, we discuss our findings and their robustness. Section 7 concludes.

Section snippets

Related literature

Our search design builds on classical search experiments (e.g., Schotter, Braunstein, 1981, Sonnemans, 1998, Houser, Winter, 2004) which revealed two commonly observed anomalies in sequential search problems: early stopping and recall. Our experimental treatment variations complement and advance earlier experimental findings on active sequential search under conditions with or without perceived urgency as well as with or without post-purchase price information.

Our analyses on perceived urgency

Experimental design

The main part of the preregistered experiment consists of 10 standard sequential search tasks and two additional search tasks with pre-commitment on a reservation price (see also Einav, 2005). For the 10 sequential tasks, we vary perceived urgency by inducing high or low time pressure (High-TP,  Low-TP) and whether participants can anticipate inaction regret by providing feedback on post-purchase price offers (InfoNo-Info) in a 2×2 between-subject design, while holding all other aspects of

Predictions

Our main hypotheses concern search behavior; that is, they are directed at differences in the number of requested offers within and across treatment conditions. We also investigate how the number of requested offers corresponds to (ex-ante) efficiency and actual payoffs.

Search behavior without feedback

As outlined above, in this sequential problem, the optimal strategy for a payoff-maximizing regret-free and risk neutral agent is a constant reservation price strategy (see Lippman and McCall, 1976). That is, conditional on search costs, agents derive a cutoff value for the price below which they will buy the good (see also Appendix A.1).14 Given search costs and

Discussion

Our main findings documented limited differences across decision environments that may (or may not) involve anticipated regret and perceived urgency. In this section, we i) provide further insights into more subtle changes in search behaviors across decision environments and discuss how participants perceive their own decision quality (Section 6.1), ii) study whether commitment can serve as a simple tool to improve search efficiency (Section 6.2), and iii) provide evidence on the robustness of

Conclusion

From a theoretical perspective, perceived urgency and regret may substantially affect individual choice in dynamic market environments and hence aggravate or alleviate any potential biases in decision-making. We used a well-powered experimental study to evaluate the empirical importance of both aspects and their interaction. The 95 percent confidence intervals for the treatment effect estimates in our preferred regression specification (Table 3, Column 3) are consistent with differences across

Declaration of Competing Interest

Authors declare that they have no conflict of interest.

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  • Cited by (2)

    We thank Marvin Deversi, Paul Heidhues, Fabian Herweg, Marieke Huysentruyt, Nicolas Jacquemet, Heiko Karle, Matthias Lang, Robin Mamrak, Franz Ostrizek, Christoph Schwaiger, Olga Shurchkov, and seminar audiences at the LMU Munich, the Max Planck Institute for Innovation and Competition Munich, the Competition and Innovation Summer School in Ulcinj, the European ESA Meeting in Dijon, the CRC TRR 190 Workshop 2020, and the VfS Annual Meeting 2021 for their helpful thoughts and comments. Financial support by the German Research Foundation (DFG) through CRC TRR 190 (Project number 280092119) is gratefully acknowledged.

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