American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
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