Deciding to sell: The effect of prior inaction and offer source

Deciding to sell: The e�ect of prior inaction and o�er source

Adam Butler a,*, Scott Highhouse b

a Department of Public and Environmental A�airs, University of Wisconsin-Green Bay, USAb Department of Psychology, Bowling Green State University, USA

Received 6 July 1998; received in revised form 16 June 1999; accepted 3 November 1999

Abstract

Recent research has shown that decision makers are less likely to accept an opportunity

after failing to act on a previous o�er, an e�ect labeled inaction inertia. We extended the

original research by examining the phenomenon in the domain of losses as well as in the

domain of gains. A pattern consistent with the inaction inertia e�ect was found for gains but

not for losses. We also manipulated the source of the second o�er and found that evaluations

of gains decreased after inaction regardless of source, but evaluations of losses increased when

the second o�er came from a di�erent source. Evaluations of the o�er were highly correlated

with ratings of anticipated regret, suggesting that the avoidance of negative emotions may be

partially responsible for the e�ect. Ó 2000 Elsevier Science B.V. All rights reserved.

PsycINFO classi®cation: 3660; 3020; 3920

JEL classi®cation: D23; E49

Keywords: Inaction inertia; Regret; Decision making persistence

Journal of Economic Psychology 21 (2000) 223±232www.elsevier.com/locate/joep

* Corresponding author. Present address: Department of Psychology, University of Northern Iowa,

Cedar Falls, IA 50614-0505, USA. Tel.: +1-319-273-7293; fax: +1-319-273-6188.

E-mail address: [email protected] (A. Butler).

0167-4870/00/$ - see front matter Ó 2000 Elsevier Science B.V. All rights reserved.

PII: S 0 1 6 7 - 4 8 7 0 ( 0 0 ) 0 0 0 0 2 - 7

1. Introduction

The tendency to persist in a state of action is a well-known phenomenon inpsychology. Research on compliance, for instance, demonstrates that aninitial action can induce commitment to a subsequent action undertaken at ahigher cost (Beaman, Cole, Preston, Klentz & Steblay, 1983). Research ondecision making shows that individuals who sustain a loss as a result of theiraction escalate their commitment to the course of action (Staw, 1981). Re-cently, Tykocinski, Pittman and Tuttle (1995) found a similar e�ect operatingin cases of inaction. That is, when individuals failed to act on a decisionopportunity, they were likely to persist in the course of inaction when con-fronted with a subsequent decision, an e�ect labeled ``inaction inertia''.

In their original studies of inaction inertia, Tykocinski et al. (1995) foundthat participants who failed to act on an initial opportunity were less likely toact on a second, somewhat less desirable opportunity compared to partici-pants who did not experience inaction. In one of their vignettes, participantswere given the opportunity to enroll in a frequent ¯ier program which wouldearn a free ticket with the accumulation of 20,000 miles. Participants weretold that if they joined the program, they would earn 5500 miles. In the priorinaction condition, participants were told that they passed on the opportu-nity to join the program earlier in the year which would have earned them10,000 miles. Inaction inertia was demonstrated when participants in theprior inaction condition were signi®cantly less likely to join the program thanparticipants with no prior inaction. The authors replicated the inaction in-ertia e�ect in monetary and non-monetary scenarios and also behaviorally ina gambling decision.

1.1. Theoretical explanations of inaction inertia

Two explanations have been proposed for the inaction inertia e�ect. Thecognitive explanation is that the e�ect arises from an anomaly in mentalaccounting. In the frequent ¯ier vignette, participants in both the inactionand no inaction conditions stand to gain the same amount (i.e., 5500 miles).However, in the context of a failure to act on a more attractive opportunity(i.e., 10,000 miles), the less attractive opportunity may be perceived as a lossrather than a gain (i.e., a loss of 4500 miles). That is, participants appear touse the foregone gain as a reference point from which to evaluate the secondopportunity.

224 A. Butler, S. Highhouse / Journal of Economic Psychology 21 (2000) 223±232

Tykocinski et al. (1995) tested the mental accounting explanation by ma-nipulating the salience of the future gain or foregone opportunity. Attentionwas focussed on future gains by telling participants that they could still earnfree miles by accepting the o�er. Attention was focused on foregone bene®tsby telling participants that they lost free miles by not accepting the initialo�er. A third group of participants did not receive any framing manipulation.Tykocinski et al. found that participants in the loss frame and control con-ditions were less likely to accept the second opportunity than participantswho received a gain frame. Thus, in the absence of any framing information,the second opportunity may automatically be perceived as a loss.

An alternative, motivationally based explanation is that inaction inertiarepresents an attempt to avoid the emotional experience of regret. Regrettheory assumes that decision makers compare actual outcomes to other,foregone outcomes and feel regret if the foregone outcome is superior to theactual (Loomes & Sugden, 1982). The theory further assumes that emotionsare anticipated prior to choice and that they in¯uence decisions. Numerousstudies indicate that decision makers make choices that minimize anticipatedregret (Zeelenberg, 1999; Zeelenberg, Beattie, Pligt & Vries, 1996).

The experience of regret is based on imagined alternative outcomes, andone factor which in¯uences the imagination of alternatives is whether theactual outcome resulted from action or inaction. Research demonstrates that,in the short term, action is regretted more than inaction because it is mucheasier to imagine counterfactual alternatives after an action (Gilovich &Medvec, 1995; Kahneman & Miller, 1986; Zeelenberg, van der Pligt &Manstead, 1998). For example, a person who decides to enroll in the frequent¯ier program after failing to enroll earlier is more likely to be plagued by ``ifonly'' type thoughts than one who never enrolls. By not acting, the decisionmaker reduces the possibility of imagining what might have been and therebyminimizes the negative emotional experience of regret (Tykocinski & Pitt-man, 1998).

Tykocinski and Pittman (1998) reasoned that making the counterfactual,foregone opportunity di�cult to avoid would decrease inaction inertia be-cause inaction would no longer be an e�ective strategy to minimize regret. Infour studies, they found that when avoidance of the foregone opportunitywas impossible, costly, or unnecessary, the likelihood of acting on the secondopportunity increased. When asked to provide reasons for their decisions,participants were most likely to list thoughts suggesting regret when avoid-ance of the foregone opportunity was possible. A similar study by Hutzel andArkes (1997) found that regret and inaction inertia were more likely when an

A. Butler, S. Highhouse / Journal of Economic Psychology 21 (2000) 223±232 225

initial, foregone purchasing opportunity was geographically closer and,therefore, more di�cult to avoid.

These studies suggest that inaction is a strategy that allows decisionmakers to avoid the missed opportunity and, in e�ect, reduce the experienceof counterfactual regret.

1.2. The present study

We sought to extend the original research by Tykocinski and his colleagues(Tykocinski et al., 1995; Tykocinski & Pittman, 1998) in several ways. First,we examined whether inaction inertia occurs in the domain of losses as wellas gains. Although participants in the Tykocinski et al. (1995) studies ap-peared to frame outcomes as losses, they were nevertheless faced with ab-solute gains in all of the experimental conditions. It is unclear whether thisphenomenon occurs when people are facing clear losses or are in the lossdomain. Consider, for example, a situation in which a stock holder learnsthat her stock has declined in value one dollar per share. Instead of selling,the stockholder decides to hold ®rm, only to ®nd that the stock has declinedanother dollar the following day. Would this person be less likely to sell thestock than one who learns that his stock has declined two dollars per share?

The answer to this question is not straightforward. On the one hand, wemight expect that the second stock holder perceives a two dollar loss pershare, whereas the ®rst may perceive both the overall loss plus a one dollarloss from the previous day. This would likely result in the inaction inertiafound by Tykocinski et al. (1995). On the other hand, one might argue thatthe stock holder who passed on the initial opportunity to sell shifted herreference point down to minus one dollar. In the same way that an absolutegain is perceived as a relative loss after a more attractive missed gain, anabsolute loss might be perceived as relatively smaller following a previousloss. Thus, the second loss in the example would be perceived as only anincremental loss of one dollar (compared to the two dollar loss experiencedby the second stock holder). This might result in no inaction inertia for the®rst stock holder.

A second way in which we sought to extend the original research on in-action inertia was by changing the source of the second o�er. In each of theprevious experiments on the phenomenon, the ®rst and second o�ers havecome from the same source or involved two di�erent commodities. Accordingto the mental accounting explanation, people who fail to act on a previousopportunity will shift their reference point to the ®rst o�er in evaluating


subsequent o�ers. One might expect that presenting the second o�er ascoming from a di�erent source would weaken the e�ect. That is, participantsshould be less likely to use the ®rst o�er as a reference point when it camefrom a di�erent source than the second o�er.

In addition to examining evaluations of the o�er, we also examined an-ticipated regret. Tykocinski and Pittman (1998) measured regret in one oftheir four studies using a thought listing procedure. In the present study, wedeveloped a scale to directly measure anticipated regret. As a replication ofTykocinski and Pittman (1998), we predicted that inaction inertia (i.e., lowerevaluations) would be associated with feelings of greater anticipated regret.Extending the work of Tykocinski and Pittman (1998), we predicted thatreceiving a second o�er from a di�erent source would reduce feelings ofanticipated regret. This e�ect may occur because the counterfactual alter-native (i.e., the ®rst o�er) may be less salient when the second o�er is receivedfrom a di�erent source rather than the same source. That is, an individualwho accepts a second o�er from a di�erent source may be reminded less oftenabout ``what might have been'' than one who accepts a second o�er from thesame source. We were interested in exploring the e�ect of domain on regretbut, given a lack of previous research, we did not advance any speci®c hy-pothesis for that manipulation.

2. Method

2.1. Participants

The participants were individuals enrolled in either an MBA or Admin-istrative Science (M.A.) graduate program �n � 117�. The participants av-eraged 32.6 years of age and 9.4 years of full time employment experience.

2.2. Materials and procedure

The participants read the paragraph length scenario presented in AppendixA in which they imagined that they owned a small business which was thesubject of a buy-out o�er from a big corporation. For some participants, thesource of the ®rst o�er and second o�er was the same big corporation,whereas for other participants, the source of the ®rst o�er was the big cor-poration, and the source of the second o�er was a company in a nearby city.Participants in the control group received a single o�er that was equivalent to


the second o�er received by participants in other conditions. The participantswere presented with either gain or loss versions of the scenario and completedthe study at the beginning of a class period. Thus, we employed a 3 (source:same, di�erent, control) �2 (domain: gain, loss) factorial design.

2.3. Measures

Participants responded to 4, 5-point Likert scaled items indicating theirlikelihood of accepting the o�er, satisfaction with the o�er, anticipatedhappiness if the o�er was accepted, and anticipated regret if the o�er wasaccepted. The likelihood of accepting and satisfaction items were averaged toform an o�er appraisal scale (a � 0:81), and the anticipated happiness (re-verse scored) and anticipated regret items were averaged to form a regretscale (a � 0:84). Higher ratings indicated greater levels of the construct.

3. Results

As we predicted, there was a signi®cant, negative correlation between theo�er appraisal and anticipated regret measures (r � ÿ0:71), some of whichmay be attributed to common method variance. The results of a factoranalysis on the scale items, available from the ®rst author, showed that theitems tended to load on a single factor. Nevertheless, regret theory (Loomes& Sugden, 1982) makes a distinction between the emotional responses thataccompany choice and the choice itself, and our measures were intended tore¯ect this theoretical distinction. Thus, we conducted separate analyses ofvariance (ANOVA) on the o�er appraisal and anticipated regret measures.We also calculated the e�ect size (eta squared, g2) associated with each of themodel terms. Descriptive statistics for all measures are presented in Table 1.

There was a signi®cant e�ect for domain on appraisal of the o�er,F �1; 111� � 43:11; p < 0:001; g2 � 0:280. Gains were appraised more highly(M � 3:02; S:D: � 1:06) than losses (M � 1:96;S:D: � 0:68). The e�ect fordomain functions as a manipulation check, showing that the gain-domainscenario was more positively received than the loss-domain scenario. Themain e�ect for source on appraisal of the o�er was not signi®cant,F �2; 111� � 0:28; p � 0:755; g2 � 0:005. However, the interaction amongsource and domain was marginally signi®cant, F �2; 111� � 2:89; p �0:060; g2 � 0:049. Given the lack of power a�orded by the size of our sampleand an e�ect size near 5%, we went ahead and conducted Tukey-HSD post


hoc tests to explore the nature of the interaction. As can be seen in Table 1,appraisals of gains became more negative when a second o�er was receivedfrom either source, but appraisals of loss became more positive with thereceipt of a second o�er. However, there were no signi®cant di�erences acrosssource conditions within each domain. Testing for di�erences across domainshowed that gains were appraised more highly than losses when there was noinaction and when a second o�er was received from the same source as the®rst. However, when the second o�er came from a di�erent source, there wasno di�erence in appraisals of gains and losses.

There was a signi®cant e�ect from domain on anticipated regret,F �1; 111� � 52:61; p < 0:001; g2 � 0:360. Again, the e�ect demonstrates thatour manipulation was successful, as gains were associated with less antici-pated regret than losses (M � 2:66; S:D: � 0:92 vs. M � 3:85;S:D: � 0:74).The main e�ect for source on regret was not signi®cant, F �2; 111� � 0:77;p � 0:466; g2 � 0:014. However, the interaction among source and domainapproached conventional levels of signi®cance, F �2; 111� � 2:45; p � 0:091;

Table 1

Means and standard deviations for dependent measuresA

Condition n Appraisal Regret

Gain/No inaction 17

M 3:32a 2:29a

S.D. 1.09 0.73

Gain/Inaction ± same source 21

M 2:91ac 2:81a

S.D. 1.16 0.97

Gain/Inaction ± di�erent source 21

M 2:88ac 2:81a

S.D. 0.93 0.97

Loss/No inaction 19

M 1:71b 3.97b

S.D. 0.35 0.66

Loss/Inaction ± same source 20

M 1:93b 3:93b

S.D. 0.67 0.80

Loss/Inaction ± di�erent source 19

M 2:24c 3.67b

S.D. 1.04 0.77

A Pairs of means within a column not sharing a superscript are signi®cantly di�erent (Tukey-HSD post hoc

comparisons).


g2 � 0:042. Again, given our lack of statistical power and the size of theinteraction e�ect, we conducted Tukey-HSD post hoc tests to explore theinteraction. Although regret increased slightly for gains when there was asecond o�er from either source and decreased slightly for losses when thesecond o�er came from a di�erent source (see Table 1), in fact, there were nosigni®cant di�erences across source within each domain. In addition, losseswere associated with more regret than gains for every source condition.

4. Discussion

The purpose of this study was to examine inaction inertia in the domain oflosses as well as gains and to examine the e�ect of o�er source on the inactioninertia e�ect. We found that the e�ect of prior inaction may operate di�er-ently in the domain of losses than in the domain of gains. As would be ex-pected, the likelihood of accepting a loss was low regardless of whether aninitial opportunity was foregone or whether the source of the second o�erwas the same or di�erent. However, the trends for accepting gains and losseswere divergent. Though we observed a trend consistent with the inactioninertia e�ect for gains regardless of whether the source of the second o�er wasthe same or di�erent, we observed an opposite trend for losses, such thatparticipants were slightly more likely to accept a second o�er, particularlywhen it can from a di�erent source.

Although we hypothesized that decision makers may be less likely to usethe ®rst o�er as a reference point when the second o�er came from a di�erentsource, our results were only consistent with that explanation in the domainof losses; the inaction inertia e�ect was not in¯uenced by o�er source in thedomain of gains. It is possible that the e�ect in the domain of losses arisesfrom the social information that a second source provides. Speci®cally, a lessattractive o�er from a second source may provide converging evidence aboutmarket price trends. Thus, when the o�ers are getting worse and seem un-likely to get better, individuals may ``cut their losses'' and be more likely totake action. As this is the ®rst study to examine the e�ects of prior inaction inthe domain of losses, more research is needed to determine what factorsin¯uence decisions to act on losses.

We also directly measured anticipated regret and, consistent with priorresearch (Tykocinski & Pittman, 1998), found some support for the hy-pothesis that anticipated regret may explain inaction inertia. There is astrong, negative correlation between anticipated regret and appraisal of the


o�er. This suggests that as anticipated regret increases, inaction inertia is alsolikely to occur. Tykocinski and Pittman (1998) note that it is not clearwhether inaction inertia is a response to avoid anticipated regret or to escapepresent feelings of regret. Given that our study speci®cally measured antici-pated regret, it appears that at least some of the inaction inertia e�ect is dueto the avoidance of projected emotional responses. More research is neces-sary, however, to determine the role of regret avoidance and escape responsesin producing inaction inertia.

Although the inaction inertia e�ect is an interesting decision phenomenon,the practical importance of the e�ect is unclear. Limits to the e�ect havealready been identi®ed: Tykocinski et al. (1995) and Tykocinski and Pittman(1998) only found the e�ect when the di�erence between the prior and presento�ers was large. The present study suggests other factors may also limit thee�ect. We found a relatively weak inaction inertia e�ect for a business vi-gnette with experienced business decision makers as participants. It may wellbe the case that experienced decision makers consider more information, likethe opportunity for future gains, and are therefore less likely to show inactioninertia (cf., Smith & Kida, 1991). It is important to remember that this andprevious studies of inaction inertia have all been laboratory investigationsemploying simple vignettes or simulations. Outside of the laboratory, deci-sions to act are made in a considerably richer context, and many factors willlikely in¯uence whether or not action is taken. Our study suggests that socialinformation may be one such factor. Clearly, however, future research shouldattempt to uncover other predictors of inaction.

Acknowledgements

We are grateful for Amie Skattebo's assistance with data collection and forthe comments of an anonymous reviewer.

Appendix A. Business vignettes

A.1. Inaction scenario

Imagine you are an independent contractor with your own small business.You have been approached by a big corporation about buying out your smallbusiness. The big corporation indicated that, if you signed their contract bythe 15th of October, they would buy you out for $1 million. Your small


business has an estimated worth of $600,000 [$1,400,000]. Although thissounded like an attractive o�er, you could not get the necessary legal work inorder by October 15th. Later, the big corporation [a company in a similarline of business operating in a nearby city] approached you again and indi-cated that, although you missed the deadline, they would o�er you $850,000for your small business. How likely would you be to accept their o�er?

A.2. Control scenario

Imagine you are an independent contractor with your own small business.You have been approached by a big corporation about buying out your smallbusiness. The big corporation said that, if you signed their contract by the15th of October, they would buy you out for $850,000. Your small businesshas an estimated worth of $600,000 [$1,400,000]. How likely would you be toaccept their o�er?

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