Narrow Bracketing and Dominated Choices
American Economic Review
vol. 99,
no. 4, September 2009
(pp. 1508-43)
Abstract
We show that any decision maker who "narrowly brackets" (evaluates decisions separately) and does not have constant-absolute-risk-averse preferences will make a first-order stochastically dominated combined choice in some simple pair of independent binary decisions. We also characterize the preference-contingent monetary cost from this mistake. Empirically, in a real-stakes laboratory experiment that replicates Tversky and Kahneman's (1981) experiment, 28 percent of participants choose dominated combinations. In a representative survey eliciting hypothetical large-stakes choices, higher proportions do so. Violation rates vary little with personal characteristics. Average preferences are prospect-theoretic, with an estimated 89 percent of people bracketing narrowly. (JEL D12, D81)Citation
Rabin, Matthew, and Georg Weizsäcker. 2009. "Narrow Bracketing and Dominated Choices." American Economic Review, 99 (4): 1508-43. DOI: 10.1257/aer.99.4.1508Additional Materials
JEL Classification
- D12 Consumer Economics: Empirical Analysis
- D81 Criteria for Decision-Making under Risk and Uncertainty