Experience Goods and Risk Preferences

Abstract

Experience goods are those where the utility received is not known until consumed. The purchase can be viewed as a lottery. Consequently, risk preferences should affect willingness to pay and the price. Data from panels of experts rating cigars is used to test this assertion. For inexpensive cigars evidence is presented that the variation in the ratings reduces the price, as is consistent with Prospect Theory where consumers are risk averse for gains from a reference point and risk loving for losses. For expensive cigars the variation reduces prices, which is consistent with consumers who are risk loving.

Keywords: cigar, experience good, expert opinion, prospect theory, risk preferences

JEL Classification: D03, D81, L15, L66