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Framing under risk : Endogenizing the Reference Point and Separating Cognition and Decision

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  • Raphaël Giraud

    ()
    (EUREQua/TEAM)

Abstract

We 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 Info

Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number bla04090.

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Length: 37 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:mse:wpsorb:bla04090

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Keywords: Framing effects; descriptions; states of mind; reference point shifting; lottery-dependent expected utility; partial orders.;

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References

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  1. Wang, X. T., 1996. "Framing Effects: Dynamics and Task Domains," Organizational Behavior and Human Decision Processes, Elsevier, vol. 68(2), pages 145-157, November.
  2. Chateauneuf, A. & Wakker, P., 1998. "An Axiomatization of Cumulative Prospect Theory for Decision Under Risk," Papiers d'Economie Mathématique et Applications 98.51, Université Panthéon-Sorbonne (Paris 1).
  3. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  4. Kuhberger, Anton, 1998. "The Influence of Framing on Risky Decisions: A Meta-analysis," Organizational Behavior and Human Decision Processes, Elsevier, vol. 75(1), pages 23-55, July.
  5. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  6. Ulrich Schmidt, 2001. "Lottery Dependent Utility: a Reexamination," Theory and Decision, Springer, vol. 50(1), pages 35-58, February.
  7. Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
  8. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October.
  9. Levin, Irwin P. & Johnson, Richard D. & Russo, Craig P. & Deldin, Patricia J., 1985. "Framing effects in judgment tasks with varying amounts of information," Organizational Behavior and Human Decision Processes, Elsevier, vol. 36(3), pages 362-377, December.
  10. Dubra, Juan & Maccheroni, Fabio & Ok, Efe A., 2004. "Expected utility theory without the completeness axiom," Journal of Economic Theory, Elsevier, vol. 115(1), pages 118-133, March.
  11. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  12. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
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Cited by:
  1. Dorian Jullien, 2013. "Asian Disease-type of Framing of Outcomes as an Historical Curiosity," GREDEG Working Papers 2013-47, Groupe de REcherche en Droit, Économie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. Sacha Bourgeois-Gironde & Raphaël Giraud, 2009. "Framing effects as violations of extensionality," Theory and Decision, Springer, vol. 67(4), pages 385-404, October.
  3. sacha bourgeois-gironde & Raphaël Giraud, 2005. "Accounting for Framing-Effects - an informational approach to intensionality in the Bolker-Jeffrey decision model," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) ijn_00000656, HAL.
  4. sacha bourgeois-gironde & Raphaël Giraud, 2005. "Accounting for Framing-Effects - an informational approach to intensionality in the Bolker-Jeffrey decision model," Working Papers ijn_00000656, HAL.

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