Narrow Bracketing and Dominated Choices

Matthew Rabin and Georg Weizsäcker

American Economic Review, 2009, vol. 99, issue 4, 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)

JEL-codes: D12 D81 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/aer.99.4.1508
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Citations: View citations in EconPapers (141)

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Working Paper: Narrow Bracketing and Dominated Choices (2007)
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