American Economic Review Vol. 99 No. 4 2009
Narrow Bracketing and Dominated Choices
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.
- DOI
- 10.1257/aer.99.4.1508
- Volume
- 99
- Issue
- 4
- Pages
- 1508-1543
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref