A Test of Narrow Framing and its Origin
Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)
CEPR Discussion Paper No. DP7112
I provide a test of narrow framing to explain why individuals turn down small positive expected value lotteries. Participants in a large survey have been asked whether they would accept a small lottery of winning 180 euros with probability of 1/2 or losing 100 euros with the same probability. To half of the sample, randomly selected, the lottery question was asked at the beginning of the interview; the other half made the decision immediately after they were asked to think about and report their subjective probability distribution of future earnings. Consistent with narrow framing, I find that individuals that were induced to bring their earnings risk to mind before facing the decision are significantly less likely to turn it down. Furthermore, only those who actually say they are uncertain about their incomes are less likely to reject the lottery. I show that attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly.
Number of Pages in PDF File: 45
Keywords: intuitive thinking, loss aversion, Narrow framing, reasoning, regret
JEL Classification: D1, D8working papers series
Date posted: February 18, 2009
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