A New Preference Model That Allows for Narrow Framing
68 Pages Posted: 6 Nov 2017 Last revised: 19 Jan 2021
Date Written: May 1, 2020
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: Suggested Citation