Narrow Bracketing and Dominated Choices

We consider a decisionmaker who "narrowly brackets", i.e. evaluates her decisions separately. Generalizing an example by Tversky and Kahneman (1981) we show that if the decisionmaker does not have constant-absolute-risk-averse preferences, there exists a simple pair of independent binary decisions where she will make a …rstorder stochastically dominated combination of choices. We also characterize, as a function of preferences, a lower bound on the monetary cost that can be incurred due to a single mistake of this kind. Empirically, we conduct a real-stakes laboratory 1Rabin: University of California — Berkeley, 549 Evans Hall, Berkeley, CA 94720-3880, USA, [email protected]. Weizsäcker: London School of Economics, Houghton Street, London, WC2A 2AE, U.K., [email protected]. We are grateful to Dan Benjamin, Syngjoo Choi, Erik Eyster, Thorsten Hens, Michele Piccione, Peter Wakker, Heinrich Weizsäcker, seminar participants at Amsterdam, Caltech, Cambridge, Helsinki, IIES Stockholm, IZA Bonn, LSE, Zurich, Harvard, Nottingham, NYU, Oxford, Pompeu Fabra, and the LEaF 2006, FUR 2008 and ESSET 2008 conferences, and especially to Vince Crawford and three anonymous referees for helpful comments, and to Zack Grossman and Paige Marta Skiba for research assistance. The survey experiment was made possible by the generous support of TESS (Time-Sharing Experiments in the Social Sciences) and the e¤orts by the sta¤ of Knowledge Networks. We also thank the ELSE Centre at University College London for the generous support of the laboratory experiment, and Rabin thanks the National Science Foundation (Grants SES-0518758 and SES-0648659) for …nancial support. experiment replicating Tversky and Kahneman’s original experiment, …nding that 28% of the participants violate dominance. In addition, we conduct a representative survey among the general U.S. population that asks for hypothetical large-stakes choices. There we …nd higher proportions of dominated choice combinations. A statistical model suggests that the average preferences are close to prospect-theory preferences and that about 89% of people bracket narrowly. Results do not vary much with the personal characteristics of participants. Keywords: Lottery choice, narrow framing, representative-sample experiments JEL Classi…cation: B49 Contact: [email protected], [email protected]