Narrow Bracketing and Dominated Choices

Authors: Rabin, Matthew; Weizsäcker, Georg

Source: The American Economic Review, Volume 99, Number 4, September 2009 , pp. 1508-1543(36)

Publisher: American Economic Association

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Abstract:

We show that any decision maker who "narrowly brackets" (evaluates decisions separately) and does not have constant-absolute-risk-averse preferences will make a first-order stochastically dominated combined choice in some simple pair of independent binary decisions. We also characterize the preference-contingent monetary cost from this mistake. Empirically, in a real-stakes laboratory experiment that replicates Tversky and Kahneman's (1981) experiment, 28 percent of participants choose dominated combinations. In a representative survey eliciting hypothetical large-stakes choices, higher proportions do so. Violation rates vary little with personal characteristics. Average preferences are prospect-theoretic, with an estimated 89 percent of people bracketing narrowly.

Document Type: Research article

DOI: 10.1257/aer.99.4.1508

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