Focusing and framing of risky alternatives

Markus Dertwinkel-Kalt () and Tobias Wenzel

No 279, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

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 fo- cusing 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.

Keywords: Focusing; Salience; Framing; Overoptimism (search for similar items in EconPapers)
JEL-codes: D03 D11 D90 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cbe, nep-mic, nep-neu, nep-rmg and nep-upt
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Journal Article: Focusing and framing of risky alternatives (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:279

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