The Normalization of Consumer Valuations: Context-Dependent Preferences from Neurobiological Constraints

Consumer valuations are shaped by choice sets, exemplified by patterns of substitution between alternatives as choice sets are varied. Building on recent neuroeconomic evidence that valuations are transformed during the choice process, we incorporate the canonical divisive normalization computation into a discrete choice model and characterize how choice behaviour depends on both size and composition of the choice set. We then examine evidence for such behaviour from two choice experiments that vary the size and composition of the choice set. We find that divisive normalization more accurately captures observed behaviour than alternative models, including an example range normalization model. These results are robust across experimental paradigms. Finally, we demonstrate that Divisive Normalization implements an efficient means for the brain to represent valuations given neurobiological constraints, yielding the fewest choice errors possible given those constraints.