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A Test of Narrow Framing and its Origin

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  • Luigi Guiso

    (European University Institute, EIEF and CEPR)

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. To half of the sample, randomly selected, the lottery question was asked at the beginning of the interview; the other half made the decision immediately after they were asked to think about and report their subjec- tive probability distribution of future earnings. 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.

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Bibliographic Info

Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0818.

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Length: 43 pages
Date of creation: 2008
Date of revision: Dec 2008
Handle: RePEc:eie:wpaper:0818

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  1. Luigi Guiso & Monica Paiella, 2008. "Risk Aversion, Wealth, and Background Risk," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(6), pages 1109-1150, December.
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  7. Dohmen Thomas & Falk Armin & Huffman David & Sunde Uwe, 2009. "Are Risk Aversion and Impatience Related to Cognitive Ability?," Research Memorandum 040, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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Cited by:
  1. van der Heijden, Eline & Klein, Tobias J. & Müller, Wieland & Potters, Jan, 2012. "Framing Effects and Impatience: Evidence from a Large Scale Experiment," IZA Discussion Papers 7085, Institute for the Study of Labor (IZA).

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