Context-Dependent Choice under Risk

• Applicants: Professor Dr. Fabian Herweg; Professor Dr. Daniel Müller
• Subject Area: Economic Theory
• Term: from 2020 to 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 440656074

• Final Report Year: 2024

Final Report Abstract

With the introduction of regret theory in the 1980s, economists embraced the idea of context-dependent preferences for choice under risk. That is, when making her choices, a decision maker's evaluation of a particular risky choice option is determined not solely by that option's attributes but also by the attributes of the distinct choice options in the decision maker's consideration set. The interest in context-dependent risk preferences largely abated in the late 1990s because two major challenges were not satisfactorily met. First, with context-dependent risk preferences allowing for intransitive preferences, no consensus emerged on how to extend these theories beyond pairwise choice. Second, experimental studies documented behavior to be strongly influenced by the format of problem presentation, which was hard to reconcile with any of these theories. The recent introduction of salience theory revived the interest in context-dependent risk-preferences full force and, consequently, a plethora of contributions, both theoretical and empirical/experimental, started to re-explore context-dependent theories’ implications and test their predictions. This project comprises four research papers contributing to the extant literature on contextdependent choice and the overarching fields of decision-making under risk and over time. In the first research paper, we extend the original regret-theoretic model beyond pairwise choice and experimentally test the extended model’s predictions regarding the occurrence of decoy effects. The second research paper was inspired by the recently gained understanding that salience theory and regret theory, despite very different psychological underpinnings, for pairwise choice make virtually identical theoretical predictions and, therefore, are effectively not to be distinguished by observing actual choice behavior. Before the background of this insight, in the second research paper, we aim at experimentally disentangling whether choices that violate canonical choice axioms, as predicted by context-dependent theories, represent deliberate decisions, as posited by regret theory, or mistakes, as hypothesized by salience theory. The third research paper explores how salience-blurred perception affects the efficiency properties of the outcome of a principal-agent relationship in the presence of moral hazard. Finally, the fourth research paper extends the theoretical insights from the contextdependent choice under risk to intertemporal decision-making. Furthermore, the project comprises a study that is still work in progress.

Publications

• Axiom Preferences and Choice Mistakes under Risk. ECONtribute Discussion Paper, No. 326
  F. Herweg, S. Hippel, D. Müller & F. Römeis
  
• Multi-attribute heuristics and intertemporal choices. Journal of Economic Behavior & Organization, 200, 174-181.
  Herweg, Fabian & Weinschenk, Philipp
  
• Salience Bias and Overwork. Games, 13(1), 15.
  Römeis, Fabio; Herweg, Fabian & Müller, Daniel
  
• Context-Dependent Risk Preferences and Decoy Effects. Elsevier BV.
  Herweg, Fabian; Müller, Daniel; Özgümüs, Asri & Römeis, Fabio