Framing under risk : Endogenizing the Reference Point and Separating Cognition and Decision
AbstractWe aim at improving the classical explanation of the framing effect phenomenon, based on Prospect Theory by, first, making the reference point shifting that generates the phenomenon endogenous, and second, providing a theory of risky choice framing that accounts for the fundamental intuition that framing effects do not come from cognitive limitations of the subjects. We introduce a normative equivalence relation on the set of lottery prizes that models different descriptions and axiomatizing a preference functional of the Expected Lottery-Dependent Utility type. We first show that the framing effect relates to the indeterminacy of preferences over the space of prizes, modelled by a set of von Neumann-Morgenstern utility functions interpreted as states of mind or reference points. Second, we show that it is possible to identify the precise effect of the reference point shifting by disentangling the perception of the prizes of a lottery from the reaction to its description. The framing phenomenon is thus explained by an endogenous reference point shifting that stems from the feelings that arise in the spirit of the decision maker as a consequence of a variation in the description, in line with psychological explanations of other kinds of framing.
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Bibliographic InfoPaper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number bla04090.
Length: 37 pages
Date of creation: Sep 2004
Date of revision:
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Framing effects; descriptions; states of mind; reference point shifting; lottery-dependent expected utility; partial orders.;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D00 - Microeconomics - - General - - - General
- A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-03-13 (All new papers)
- NEP-BEC-2005-03-13 (Business Economics)
- NEP-CBE-2005-03-13 (Cognitive & Behavioural Economics)
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