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A Model of Focusing in Economic Choice

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  • Adam Szeidl

    (UC-Berkeley)

  • Botond Koszegi

    (UC-Berkeley)

Abstract

We present a theory of individual choice in which the decisionmaker focuses more on, and hence weights more heavily, attributes on which the options in her consideration set are more different. Consistent with evidence on salience in monetary choices, our model predicts that the decisionmaker is biased toward options whose advantages are concentrated in fewer attributes. In intertemporal choice, because a single period's choice can lead to a different concentration of consequences than a lifetime perspective that integrates many choices, the model often predicts time inconsistency in behavior. The decisionmaker exhibits present bias in ``lifestyle'' decisions whose consequences are distributed over many future dates, but also overcommits to an increasing number of future goals with a single large benefit each. In response to the bias toward concentration, profit-maximizing firms design products with one core attribute, and split prices into as many pieces as they can. A strong firm designs products which are strong on its competitor's weak attribute, while a weak firm copies the strong firm's strength. We also propose a theory of consideration-set determination in which the agent considers the set of options that maximizes a combination of utility and differences between attributes.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1441.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1441

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  1. Damon Jones, 2010. "Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds," NBER Working Papers 15963, National Bureau of Economic Research, Inc.
  2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and taxation: theory and evidence," Finance and Economics Discussion Series 2009-11, Board of Governors of the Federal Reserve System (U.S.).
  3. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2008. "Learning in the Credit Card Market," NBER Working Papers 13822, National Bureau of Economic Research, Inc.
  4. Andrei Shleifer & Nicola Gennaioli & Pedro Bordalo, 2011. "Salience theory of choice under risk," 2011 Meeting Papers 1442, Society for Economic Dynamics.
  5. Kfir Eliaz & Michael Richter & Ariel Rubinstein, 2011. "Choosing the two finalists," Economic Theory, Springer, vol. 46(2), pages 211-219, February.
  6. 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.
  7. Rabin, Matthew & Weizsäcker, Georg, 2007. "Narrow Bracketing and Dominated Choices," IZA Discussion Papers 3040, Institute for the Study of Labor (IZA).
  8. 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, vol. 99(2), pages 424-29, May.
  9. 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.
  10. Asheim, Geir B., 2007. "Procrastination, partial naivete, and behavioral welfare analysis," Memorandum 02/2007, Oslo University, Department of Economics.
  11. 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 77, Princeton University, Department of Economics, Center for Economic Policy Studies..
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Cited by:
  1. Edward J. Webb, 2014. "Perception and quality choice in vertically differentiated markets," Discussion Papers 14-07, University of Copenhagen. Department of Economics.
  2. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2010. "Salience Theory of Choice Under Risk," NBER Working Papers 16387, National Bureau of Economic Research, Inc.
  3. Pedro Bordado & Nicola Gennaioli & Andrei Shleifer, 2012. "Salience and Consumer Choice," Working Papers 501, Barcelona Graduate School of Economics.
  4. Ennio Bilancini & Leonardo Boncinelli, 2014. "Persuasion with Reference Cues and Elaboration Costs," Working Papers - Economics wp2014_04.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  5. Fabrizio Adriani & Silvia Sonderegger, . "Evolution of similarity judgements in intertemporal choice," Discussion Papers 2014-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  6. Michael A. Kuhn & Peter Kuhn & Marie Claire Villeval, 2014. "Self Control and Intertemporal Choice: Evidence from Glucose and Depletion Interventions," Post-Print halshs-00954539, HAL.
  7. Dohmen, Thomas, 2014. "Behavioural Labour Economics: Advances and Future Directions," IZA Discussion Papers 8263, Institute for the Study of Labor (IZA).
  8. Fels, Markus, 2013. "Limited Attention and the Demand for Health Insurance," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80485, Verein für Socialpolitik / German Economic Association.
  9. Comerford, David A. & Ubel, Peter A., 2013. "Effort Aversion: Job choice and compensation decisions overweight effort," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 152-162.
  10. Hanna, Rema & Mullainathan, Sendhil & Schwartzstein, Joshua, 2012. "Learning through Noticing: Theory and Experimental Evidence in Farming," Working Paper Series rwp12-044, Harvard University, John F. Kennedy School of Government.

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