Attention and Endogenous Framing

This paper develops a theory of framing in an intertemporal context with risky choices. We provide a unifying account of existing theories of focusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate risk but overrate chances and accordingly reveal overoptimistic actions. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (enterpreneurship, lotteries, gambling). We also apply our theory to static lotteries and find that classical phenomena of decision making under risk (such as the Common Ratio Allais paradox) can be rationalized by our model. We provide experimental evidence to support our claims.