A New Preference Model That Allows for Narrow Framing

68 Pages Posted: 6 Nov 2017 Last revised: 19 Jan 2021

See all articles by Jing Guo

Jing Guo

Columbia University - Fu Foundation School of Engineering and Applied Science

Xue Dong He

The Chinese University of Hong Kong - Department of Systems Engineering and Engineering Management

Date Written: May 1, 2020

Abstract

Narrow framing is the idea that, when considering a monetary risk, the individual evaluates it to some extent in isolation and separately from her other risks. Originally documented in experimental settings, narrow framing has been widely applied to explain real-world investor behavior. We show that a prominent mathematical model of narrow framing presented in Barberis and Huang (2009, J. Econ. Dynam. Control, vol. 33, no. 8, pp. 1555--1576) has some drawbacks that limit its applicability. We then propose a new model of narrow framing that overcomes these limitations and show its tractability in applications to choice over monetary gambles.

Keywords: narrow framing, recursive utility, existence and uniqueness, dynamic programming, risk attitudes

JEL Classification: G02, G11

Suggested Citation

Guo, Jing and He, Xue Dong, A New Preference Model That Allows for Narrow Framing (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=2903619 or http://dx.doi.org/10.2139/ssrn.2903619

Jing Guo

Columbia University - Fu Foundation School of Engineering and Applied Science ( email )

New York, NY
United States

Xue Dong He (Contact Author)

The Chinese University of Hong Kong - Department of Systems Engineering and Engineering Management ( email )

505 William M.W. Mong Engineering Building
The Chinese University of Hong Kong, Shatin, N.T.
Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/xuedonghepage/home

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