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Context-Dependent Risk Preferences and Decoy Effects

Author

Listed:
  • Fabian Herweg
  • Daniel Müller
  • Asri Özgümüs
  • Fabio Römeis

Abstract

We present a theory of context-dependent risk preferences under which within-state payoff comparisons and regret aversion shape decisions. Defining the attraction and compromise effect in reference to a state-space-based description of the choice problem, we show that our theory can account for both these prominent decoy effects. We test our theoretical predictions with an online experiment, including comparative statics results. We find strong evidence for the attraction and the compromise effect. Furthermore, we find some supportive evidence for our comparative static predictions and weakly diminishing sensitivity regarding ex-post regret.

Suggested Citation

  • Fabian Herweg & Daniel Müller & Asri Özgümüs & Fabio Römeis, 2025. "Context-Dependent Risk Preferences and Decoy Effects," CESifo Working Paper Series 11611, CESifo.
    • Handle: RePEc:ces:ceswps:_11611
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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