Focusing and framing of risky alternatives

Markus Dertwinkel-Kalt, Tobias Wenzel

Research output: Contribution to journalArticle

2 Citations (Scopus)
14 Downloads (Pure)

Abstract

This paper develops a theory of focusing and framing in an intertemporal context with risky choices. We provide a selection criterion between existing theories of focusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate downside risk but overrate upside risk and accordingly reveal overoptimistic choices. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (entrepreneurship, lotteries, gambling) in one coherent framework. Notably, overoptimistic actions are not universal, but have plausible limits. We characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic.
Original languageEnglish
Pages (from-to)289-304
Number of pages16
JournalJournal of Economic Behavior and Organization
Volume159
Early online date24 Dec 2017
DOIs
Publication statusPublished - 1 Mar 2019

Keywords

  • Focusing
  • Framing
  • Overoptimism
  • Salience

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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