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A Model of Focusing in Economic Choice

Author

Listed:
  • 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.

Suggested Citation

  • Adam Szeidl & Botond Koszegi, 2011. "A Model of Focusing in Economic Choice," 2011 Meeting Papers 1441, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:1441
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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