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A Model of Focusing in Economic Choice

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  • Botond Koszegi
  • Adam Szeidl

Abstract

We present a generally applicable theory of focusing based on the hypothesis that a person focuses more on, and hence overweights, attributes in which her options differ more. Our model predicts that the decision maker is too prone to choose options with concentrated advantages relative to alternatives, but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated. Applying our model to intertemporal choice, these results predict that a person exhibits present bias and time inconsistency when--such as in lifestyle choices and other widely invoked applications of hyperbolic discounting--the future effect of a current decision is distributed over many dates, and the effects of multiple decisions accumulate. But unlike in previous models, in our theory (1) present bias is lower when the costs of current misbehavior are less dispersed, helping explain why people respond more to monetary incentives than to health concerns in harmful consumption; and (2) time inconsistency is lower when a person commits to fewer decisions with accumulating effects in her ex ante choice. In addition, a person does not fully maximize welfare even when making decisions ex ante: (3) she commits to too much of an activity--for example, exercise or work--that is beneficial overall; and (4) makes "future-biased" commitments when--such as in preparing for a big event--the benefit of many periods' effort is concentrated in a single goal. JEL Codes: D03, D40, D91. Copyright 2013, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 128 (2013)
Issue (Month): 1 ()
Pages: 53-104

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Handle: RePEc:oup:qjecon:v:128:y:2013:i:1:p:53-104

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  1. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  2. Daniel Kahneman & Alan B. Krueger & David Schkade & Norbert Schwarz & Arthur A. Stone, 2006. "Would You Be Happier If You Were Richer? A Focusing Illusion," Working Papers, Princeton University, Department of Economics, Center for Economic Policy Studies. 77, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Sumit Agarwal & John C Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," Levine's Working Paper Archive 122247000000002028, David K. Levine.
  4. Rabin, Matthew & Weizsäcker, Georg, 2007. "Narrow Bracketing and Dominated Choices," IZA Discussion Papers 3040, Institute for the Study of Labor (IZA).
  5. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2010. "Salience Theory of Choice Under Risk," NBER Working Papers 16387, National Bureau of Economic Research, Inc.
  6. B. Douglas Bernheim & Antonio Rangel, 2008. "Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics," NBER Working Papers 13737, National Bureau of Economic Research, Inc.
  7. Asheim, Geir B., 2007. "Procrastination, partial naivete, and behavioral welfare analysis," Memorandum, Oslo University, Department of Economics 02/2007, Oslo University, Department of Economics.
  8. Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2005. "Information Acquisition: Experimental Analysis of a Boundedly Rational Model," Levine's Bibliography 666156000000000480, UCLA Department of Economics.
  9. Damon Jones, 2010. "Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds," NBER Working Papers 15963, National Bureau of Economic Research, Inc.
  10. Kfir Eliaz & Michael Richter & Ariel Rubinstein, 2011. "Choosing the two finalists," Economic Theory, Springer, Springer, vol. 46(2), pages 211-219, February.
  11. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, American Economic Association, vol. 99(2), pages 424-29, May.
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Cited by:
  1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, . "Salience Theory of Choice Under Risk," Working Paper 29210, Harvard University OpenScholar.
  2. Ennio Bilancini & Leonardo Boncinelli, 2014. "Persuasion with Reference Cues and Elaboration Costs," Center for Economic Research (RECent), University of Modena and Reggio E., Dept. of Economics 102, University of Modena and Reggio E., Dept. of Economics.
  3. Mullainatha, Sendhil & Hanna, Rema N. & Schwartzstein, Joshua, 2012. "Learning Through Noticing: Theory and Experimental Evidence in Farming," Scholarly Articles, Harvard Kennedy School of Government 9804491, Harvard Kennedy School of Government.
  4. Fels, Markus, 2013. "Limited Attention and the Demand for Health Insurance," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 80485, Verein für Socialpolitik / German Economic Association.
  5. Edward J. Webb, 2014. "Perception and quality choice in vertically differentiated markets," Discussion Papers, University of Copenhagen. Department of Economics 14-07, University of Copenhagen. Department of Economics.
  6. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 121(5), pages 803 - 843.
  7. Michael A. Kuhn & Peter Kuhn & Marie Claire Villeval, 2014. "Self Control and Intertemporal Choice: Evidence from Glucose and Depletion Interventions," CESifo Working Paper Series, CESifo Group Munich 4609, CESifo Group Munich.
  8. Comerford, David A. & Ubel, Peter A., 2013. "Effort Aversion: Job choice and compensation decisions overweight effort," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 92(C), pages 152-162.
  9. Dohmen, Thomas, 2014. "Behavioural Labour Economics: Advances and Future Directions," IZA Discussion Papers 8263, Institute for the Study of Labor (IZA).
  10. Fabrizio Adriani & Silvia Sonderegger, . "Evolution of similarity judgements in intertemporal choice," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2014-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.

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