The Impact of Narrow Bracketing on Choices

Abstract

We analyze the bracketing behaviour of decision makers, i.e., whether multiple decisions are evaluated separately or the overall payoff distribution is considered. We propose a theoretical framework that allows us to disentangle preferences from bracketing and to measure the impact of bracketing on choices. We run an experiment considering two independent draws of binary lotteries and confirm the well-known result that subjects tend to narrowly bracket decisions, i.e., to consider each draw separately. We measure the impact of bracketing on choices and find that subjects' bracketing behavior generally leads to riskier representations of alternatives, such that people request an additional premium (that we call editing premium) compared to the case where the overall payoff distribution is considered. The editing premium can account up to 40\% of the overall risk premium.

Keywords: editing, segregation, aggregation, repeated lotteries.

JEL Classification: D81