Framing under risk: Endogenizing the Reference Point and Separating Cognition and Decision

Raphaël Giraud

Cahiers de la Maison des Sciences Economiques from Université Panthéon-Sorbonne (Paris 1)

Abstract: We aim at improving the classical explanation of the framing effect phenomenon, based on Prospect Theory by, first, making the reference point shifting that generates the phenomenon endogenous, and second, providing a theory of risky choice framing that accounts for the fundamental intuition that framing effects do not come from cognitive limitations of the subjects. We introduce a normative equivalence relation on the set of lottery prizes that models different descriptions and axiomatizing a preference functional of the Expected Lottery-Dependent Utility type. We first show that the framing effect relates to the indeterminacy of preferences over the space of prizes, modelled by a set of von Neumann-Morgenstern utility functions interpreted as states of mind or reference points. Second, we show that it is possible to identify the precise effect of the reference point shifting by disentangling the perception of the prizes of a lottery from the reaction to its description. The framing phenomenon is thus explained by an endogenous reference point shifting that stems from the feelings that arise in the spirit of the decision maker as a consequence of a variation in the description, in line with psychological explanations of other kinds of framing

Keywords: Framing effects; descriptions; states of mind; reference point shifting; lottery-dependent expected utility; partial orders (search for similar items in EconPapers)
JEL-codes: A12 D00 D81 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2004-09
New Economics Papers: this item is included in nep-bec and nep-cbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:wpsorb:bla04090

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