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Designing Choice Sets to Exploit Focusing Illusion

Linda Dezső, Jonathan Steinhart, Barna Bakó and Erich Kirchler

Corvinus Economics Working Papers (CEWP) from Corvinus University of Budapest

Abstract: Focusing illusion describes how, when making choices, people may put disproportionate attention on certain attributes of the options and hence, causing those options to be overvalued. For instance, in deciding whether or not to take out a loan, people may focus more on getting the loan than on its small and dispersed costs. Building on recent literature on focusing illusion in economic choice, we theoretically propose and empirically test that focusing illusion can be advantageously exploited such that attention is put back on the ignored attributes. To demonstrate this, we use hypothetical loan decisions where people choose between loans with different repayment plans to finance a purchase. We show that when adding a steeply decreasing-installments plan to the original choice set of not borrowing or borrowing under a fixed-installments plan, the preference for the fixed-installments plan is lessened. This is because preference for the fixed-installments plan shifted towards not borrowing. We discuss potential applications of our results in designing choice sets of intertemporal sequences.

Keywords: focusing illusion; focus-weighted utility; loan decisions; intertemporal choice (search for similar items in EconPapers)
JEL-codes: D03 D91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-sog and nep-upt
Date: 2016-08-18
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