Context-Dependent Risk Preferences and Decoy Effects

Fabian Herweg, Daniel Müller, Asri Özgümüs and Fabio Römeis

No 11611, CESifo Working Paper Series from CESifo

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.

Keywords: asymmetric dominance effect; attraction effect; compromise effect; context-dependent preferences; correlation-sensitive preferences; decoy effect; regret theory (search for similar items in EconPapers)
JEL-codes: C91 D01 D81 D91 M31 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cbe and nep-exp
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