Salience, Framing, and Decisions under Risk, Uncertainty, and Time

Jonathan Leland and Mark Schneider
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Mark Schneider: Economic Science Institute, Chapman University

Working Papers from Chapman University, Economic Science Institute

Abstract: We propose a comparative model of decision making under risk, uncertainty, and time, in which large differences in payoffs and probabilities or dates of receipt are perceived as salient and overweighted in the evaluation process. The predictions of the model depend on what differences are compared across alternatives which, in turn, depends on how the choice is framed. We formalize a class of matrix-based frames which applies to decisions under risk, uncertainty, and time, and we specify two important types of frames within this class: minimal frames which provide the simplest representation of choice alternatives, and transparent frames which make the normative appeal of the classical rationality axioms more transparent. We also propose two simple and natural assumptions regarding the perceived salience of differences in numerical magnitudes. We show that the model predicts systematic framing effects in which people will exhibit major violations of rational choice theory (the Allais paradox, common ratio effect, Ellsberg paradox, present bias, and violations of stochastic dominance) when the options are represented in a minimal frame but will behave more consistently with the classical axioms when the same choices are presented in a transparent frame. The model employs the same salience-based decision algorithm across the domains of risk, uncertainty, and time, thus providing a unified approach to explaining choice anomalies as decision errors. Moreover, because it maintains the assumption that preferences obey expected and discounted utility, it facilitates traditional welfare analysis.

Keywords: Salience Perception; Allais Paradox; Ellsberg Paradox; Present Bias; Diminishing Sensitivity (search for similar items in EconPapers)
JEL-codes: D03 D81 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-cbe, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:16-08

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