Optimal similarity judgments in intertemporal choice (and beyond)

Arbeitspapier

We use a simple cost-benefit analysis to derive optimal similarity judgments - addressing the question: when should we expect a decision maker to distinguish between different time periods or different prizes? Our key premise is that cognitive resources are costly and are to be deployed only where they really matter. We show that this simple insight can explain a number of observed anomalies, such as: (i) time preference reversal, (ii) magnitude effects, (iii) interval length effects. For each of these phenomena, our approach allows to identify the direction of the bias relative to the benchmark case where cognitive resources are costless. Finally, we show that, when applied to choice under risk, the same insights predict anomalies such as the ratio and certainty effects, and rationalize Rabin's risk aversion paradox. This suggests that the theory may provide a parsimonious explanation of behavioral anomalies in different contexts.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CeDEx Discussion Paper Series ; No. 2019-06

Classification and Topics

• Classification: Wirtschaft ; Microeconomic Behavior: Underlying Principles ; Consumer Economics: Theory ; Micro-Based Behavioral Economics: General‡
• Subject: Similarity judgments ; Intertemporal Choice ; Rational Inattention ; Choice Under Risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adriani, Fabrizio ; Sonderegger, Silvia
• Event: Veröffentlichung
• (who): The University of Nottingham, Centre for Decision Research and Experimental Economics (CeDEx)
• (where): Nottingham
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/228353
• Last update: 10.03.2025, 11:43 AM CET