Memory and Reference Prices: An Application to Rental Choice

10 Pages Posted: 19 Mar 2019 Last revised: 31 Jan 2022

See all articles by Pedro Bordalo

Pedro Bordalo

University of Oxford - Said Business School

Nicola Gennaioli

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: March 2019

Abstract

Simonsohn and Loewenstein (SL 2006) present evidence that a household moving from one US city to another tends to pay a rent level that is closer to the city of origin, relative to comparable locals. Building on “Memory, Attention, and Choice” (BGS 2019), we show that these effects emerge from the interaction between memory and attention. In our model, memory is a database of experiences such as rents. The current rent cues recall of past rents, giving rise to a rental norm. A large discrepancy between the current rent and the memory-based norm surprises and attracts the mover’s attention, distorting choice. Thus, when rents in Pittsburgh cue recall of rent experiences in San Francisco, they look surprisingly cheap by comparison, leading the household to spend more. We revisit the SL evidence in light of the model. Besides generating the basic SL findings, our model yields two new predictions, which we test and confirm using 20 additional years of data.

Suggested Citation

Bordalo, Pedro and Gennaioli, Nicola and Shleifer, Andrei, Memory and Reference Prices: An Application to Rental Choice (March 2019). NBER Working Paper No. w25650, Available at SSRN: https://ssrn.com/abstract=3354289

Pedro Bordalo (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Nicola Gennaioli

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

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