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A Test of Narrow Framing and its Origin

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  • Luigi Guiso

Abstract

I provide a test of narrow framing to explain why individuals turn down small positive expected value lotteries. Participants in a large survey have been asked whether they would accept a small lottery of winning 180 euros with probability of 1/2 or losing 100 euros with the same probability. Half of the sample, randomly selected, answered the lottery question immediately after they were asked to think about and report their subjective probability distribution of future earnings; the other half made the decision before. Consistent with narrow framing, I find that individuals that were induced to bring their earnings risk to mind before facing the decision are significantly less likely to turn it down. Furthemore, only those who actually say they are uncertain about their incomes are less likely to reject the lottery. I show that attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly. Copyright Società Italiana degli Economisti (Italian Economic Association) 2015

Suggested Citation

  • Luigi Guiso, 2015. "A Test of Narrow Framing and its Origin," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(1), pages 61-100, March.
    • Handle: RePEc:spr:italej:v:1:y:2015:i:1:p:61-100
    DOI: 10.1007/s40797-015-0013-8
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    2. Hwang, In Do, 2024. "Behavioral aspects of household portfolio choice: Effects of loss aversion on life insurance uptake and savings," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1029-1053.
    3. van der Heijden, Eline & Klein, Tobias J. & Müller, Wieland & Potters, Jan, 2012. "Framing effects and impatience: Evidence from a large scale experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 701-711.
    4. Liang, Xiaoqing & Jiang, Wenjun & Zhang, Yiying, 2023. "Optimal insurance design under mean-variance preference with narrow framing," Insurance: Mathematics and Economics, Elsevier, vol. 112(C), pages 59-79.
    5. Andersson, Henrik & Scholtz, Henrik & Zheng, Jiakun, 2023. "Measuring regret theory in the health and financial domain," TSE Working Papers 23-1449, Toulouse School of Economics (TSE).
    6. Wieland Mueller & Eline van der Heijden & Tobias J. Klein & Jan Potters, 2011. "Nudges and Impatience: Evidence from a Large Scale Experiment," Vienna Economics Papers 1110, University of Vienna, Department of Economics.
    7. Hwang, In Do, 2021. "Prospect theory and insurance demand: Empirical evidence on the role of loss aversion," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 95(C).

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    More about this item

    Keywords

    Narrow framing; Loss aversion; Intuitive thinking ; Reasoning; Regret; D1; D8;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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