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Context effects: A representation of choices from categories

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  • Barbos, Andrei

Abstract

This paper studies a model of reference-dependent choice from sets of options grouped into categories. The proposed model is consistent with experimental evidence documenting context effects in a variety of choice situations. In our model, the reference point for any given category is subjective, and corresponds to the least preferred element in the category under consideration. Every object in a category is evaluated relative to the corresponding reference point; this may distort the objective ranking of options across different categories, and thus possibly give rise to a context-effects bias. The resulting representation is essentially unique. We also provide an economic application of the preferences that we axiomatize to principal-agent models. We show how sellers facing consumers exhibiting the context-effects bias can increase their profits by exploiting their bounded rationality.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 3 (May)
Pages: 1224-1243

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:1224-1243

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Context effects Reference point bias Choice from categories;

References

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  1. Todd Sarver, 2008. "Anticipating Regret: Why Fewer Options May Be Better," Econometrica, Econometric Society, vol. 76(2), pages 263-305, 03.
  2. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  5. Hsee, Christopher K & Leclerc, France, 1998. " Will Products Look More Attractive When Presented Separately or Together?," Journal of Consumer Research, University of Chicago Press, vol. 25(2), pages 175-86, September.
  6. Kopylov, Igor, 2009. "Finite additive utility representations for preferences over menus," Journal of Economic Theory, Elsevier, vol. 144(1), pages 354-374, January.
  7. Huber, Joel & Payne, John W & Puto, Christopher, 1982. " Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis," Journal of Consumer Research, University of Chicago Press, vol. 9(1), pages 90-98, June.
  8. William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer, vol. 28(3), pages 681-692, 08.
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Citations

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Cited by:
  1. O'Callaghan, Patrick, 2013. "Ordinal, nonlinear context dependence," Risk and Sustainable Management Group Working Papers 152450, University of Queensland, School of Economics.
  2. Barbos, Andrei, 2013. "A reference-dependent representation with subjective tastes," Journal of Mathematical Economics, Elsevier, vol. 49(2), pages 111-123.
  3. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," AMSE Working Papers 1316, Aix-Marseille School of Economics, Marseille, France.
  4. Oktay Sürücü, 2013. "Welfare Improving Discrimination based on Cognitive Limitations," Working Papers 495, Bielefeld University, Center for Mathematical Economics.
  5. Riella, Gil, 2013. "Preference for Flexibility and Dynamic Consistency," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2467-2482.
  6. SATO, Motohiro & SAITO, Makoto, 2011. "The context effect in the choice of earthquake insurance contracts in Japan," Discussion Papers 2011-10, Graduate School of Economics, Hitotsubashi University.

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