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Focusing and framing of risky alternatives

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  • Dertwinkel-Kalt, Markus
  • Wenzel, Tobias

Abstract

This paper develops a theory of focusing and framing in an intertemporal context with risky choices. We provide a selection criterion between 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 downside risk but overrate upside risk and accordingly reveal overoptimistic choices. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (entrepreneurship, lotteries, gambling) in one coherent framework. Notably, overoptimistic actions are not universal, but have plausible limits. We characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic.

Suggested Citation

  • Dertwinkel-Kalt, Markus & Wenzel, Tobias, 2019. "Focusing and framing of risky alternatives," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 289-304.
  • Handle: RePEc:eee:jeborg:v:159:y:2019:i:c:p:289-304
    DOI: 10.1016/j.jebo.2017.12.020
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    Cited by:

    1. Fan, Wen & Zhang, Lifang, 2020. "Examining framing effect when subject's perspective matters: Evidence from China," Finance Research Letters, Elsevier, vol. 35(C).

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    More about this item

    Keywords

    Focusing; Salience; Framing; Overoptimism;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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