Pricing strategy & practice
Perceived variance and preference for
sequences of outcomes
Eric Dolansky
Brock University, St Catharines, Canada, and
Mark Vandenbosch
University of Western Ontario, London, Canada
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.
Keywords Sequences, Variance, Price perception, Uncertainty, Outcomes, Prices, Uncertainty management
Paper type Research paper
1. Introduction
Imagine you were offered a job that paid an average of
$50,000 per year over six years, and you could structure the
salary payments any way you wanted to. Would you opt to get
the same amount every year? More at the beginning? More at
the end? A study (Loewenstein and Sicherman, 1991)
examined this very question, and found that the majority of
people would rather have a steadily increasing salary over the
six years. Economically, of course, this makes no sense; the
time value of money would point in the direction of obtaining
as much money as possible up front. Yet individuals opted to
defer most of the money to later in the contract.
There is a great deal of research indicating that individuals
have a preference for sequences of ascending utility
(Loewenstein and Prelec, 1991, 1992, 1993; Loewenstein
and Sicherman, 1991). This effect persists across different
contexts (e.g. wages, pain, unusual experiences such as one-
of-a-kind prizes) and is in spite of rational, economic
considerations. In researching sequences of prices for this
paper, it was also discovered that uncertainty in terms of
future outcomes has a strong effect on choice (Gneezy et al.,
2006). Because a more variable sequence of past events leads
to greater uncertainty as to future events and probabilities,
work on uncertainty is important to this topic.
Variability is an under-researched sub-topic to sequences;
while the mean and slope of sequences of events or amounts
have been investigated, both the variability of a sequence and
its perception has not yet been examined in adequate detail.
This topic touches many facets of consumption and
marketing, such as the timing of gasoline purchases and the
choice between a fixed or floating loan interest rate. From the
high finance of the stock market to the basic budgeting of
household purchases, variability and our preference for
predictability have an impact.
Past research has returned conflicting theories as to an
individual’s preference with regard to sequences of events of
varying utility. The aim of this paper is to propose a new
explanation for preferences of sequences of outcomes, one
based in the individual’s distaste for variability. Simply put,
based on well-established theory and research, people would
perceive a sequence of increasing utility (e.g. rising wages or
falling prices) to be less variable than an equivalent sequence
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
21/4 (2012) 285 –292
q Emerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610421211246711]
285