Optimal similarity judgments in intertemporal choice (and beyond)

Fabrizio Adriani and Silvia Sonderegger

Journal of Economic Theory, 2020, vol. 190, issue C

Abstract: We use a simple cost-benefit analysis to derive optimal similarity judgments – addressing the question: when should we expect a decision maker to distinguish between different time periods or different prizes? Our key premise is that cognitive resources are costly and are to be deployed only where they really matter. We show that this simple insight can explain a number of observed anomalies, such as: (i) time inconsistency, (ii) magnitude effects, (iii) interval length effects. For each of these phenomena, our approach allows to identify the direction of the bias relative to the benchmark case where cognitive resources are costless. Finally, we show that, when applied to choice under risk, the same insights predict anomalies such as the ratio and certainty effects, and rationalize Rabin's risk aversion paradox. This suggests that the theory may provide a parsimonious explanation of behavioral anomalies in different contexts.

Keywords: Similarity judgments; Intertemporal Choice; Rational Inattention; Choice Under Risk (search for similar items in EconPapers)
JEL-codes: D01 D03 D11 D90 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Optimal similarity judgments in intertemporal choice (and beyond) (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:190:y:2020:i:c:s0022053118303405

DOI: 10.1016/j.jet.2020.105097

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