The Normalization of Consumer Valuations: Context-Dependent Preferences from Neurobiological Constraints

57 Pages Posted: 7 Jul 2014 Last revised: 3 Jul 2019

See all articles by Ryan Webb

Ryan Webb

University of Toronto

Paul Glimcher

New York University (NYU) - Center for Neuroeconomics

Kenway Louie

New York University (NYU) - Center for Neuroeconomics

Date Written: July 2, 2019

Abstract

A long line of empirical research documents that consumer valuations are shaped by choice sets, yielding patterns of substitution between alternatives as choice sets are varied. Building on recent neuroeconomic evidence that valuations are transformed during the choice process, we incorporate the canonical divisive normalization computation into a discrete choice model and characterize its implications for consumer choice. We find that divisive normalization predicts choice behaviour that depends on both the size and composition of the choice set and examine evidence for such behaviour from two experiments. Divisive normalization more accurately captures observed behaviour compared to alternative models, including a range normalization model, and is robust across experimental paradigms. Finally, we demonstrate that divisive normalization implements an efficient means for the brain to represent valuations given neurobiological constraints, yielding the fewest choice errors possible.

JEL Classification: D87

Suggested Citation

Webb, Ryan and Glimcher, Paul and Louie, Kenway, The Normalization of Consumer Valuations: Context-Dependent Preferences from Neurobiological Constraints (July 2, 2019). Available at SSRN: https://ssrn.com/abstract=2462895 or http://dx.doi.org/10.2139/ssrn.2462895

Ryan Webb (Contact Author)

University of Toronto ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Paul Glimcher

New York University (NYU) - Center for Neuroeconomics ( email )

4 Washington Place, Room 809
New York, NY 10003
United States

Kenway Louie

New York University (NYU) - Center for Neuroeconomics ( email )

4 Washington Place, Room 809
New York, NY 10003
United States

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