Menu dependence

Abstract: Desire for flexibility suggests that the value of a choice-menu should increase with the number of options included. Complexity-aversion on the other hand may imply that the value of a menu decreases with its cardinality. We present the results of an experiment where 5 groups of subjects were asked to evaluate saving plans that let the investor choose between alternative indexing-schemes before the saving period ends. The complexity of the different plans was manipulated in two ways: (1) increasing the number of indexing options; (2) reducing the quality of information upon which the choice between different indices is made. We show that an increase in the number of indexing-options produces a negative complexity effect when the quality of information is high. The same change however results in a positive flexibility effect when the quality of information is low. More generally our results suggest a `negative cross interaction of complexity effects' and that the impact of complexity is marginally decreasing. We discuss possible cognitive explanations to the observed evaluation-patterns.

Abstract: The common choice theory in economics is based on the assumption that an individual is defined in terms of a binary preference relation. This preference relation is defined over alternatives without taking into account menu dependence and, in particular, freedom of choice or, more generally, the set that contains the alternatives. In this study we clarify the nature and the significance of freedom of choice which may positively or negatively affect the individual's welfare. Our proposed extended preference relation of the individual takes into account both the particular alternative and the opportunity set that he faces. This extended relation does not induce ranking of opportunity sets. Its restriction to a particular opportunity set is the paradigmatic preference relation and it can capture the dependence of preferences on freedom of choice. Our main result establishes the inconsistency between dependence of extended preferences on freedom of choice and the existence of a utility that represents the paradigmatic preference relation and any of its restrictions.

Abstract: A Rational Shortlist Method (RSM) translates into economic language some sequential choice heuristics studied in psychology We show that the use of this boundedly rational procedure can be detected from observed choice data through tests that are very similar to those used to detect `rational' choice (such as Samuelson's WARP) Yet, RSMs are compatible with some highly `irrational' patterns of choice observed in experiments, such as pairwise cycles We also provide partial results on a generalization of RSMs

Abstract: A sequentially rationalizable choice function is a choice function which can be obtained by applying sequentially a fixed set of asymmetric binary relations (rationales) A Rational ShortlistMethod (RSM) is a choice function which is sequentially rationalizable by two rationales These concepts translate into economic language some human choice heuristics studied in psychology We provide a full characterization of RSMs and study some properties of sequential rationalizability These properties allow some degree of menu dependence in choice