Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172538
Authors: 
Dertwinkel-Kalt, Markus
Wenzel, Tobias
Year of Publication: 
2017
Series/Report no.: 
DICE Discussion Paper 279
Abstract: 
This paper develops a theory of focusing and framing in an intertemporal context with risky choices. We provide a selection criterion between existing theories of fo- cusing by allowing a decision maker to choose her frame such that her attention is either drawn to salient events associated with an option or to the expected utilities an option yields in different time periods. Our key assumption is that a decision maker can choose her frame in a self-serving manner. We predict that the selected frame induces overoptimistic actions in the sense that subjects underrate downside risk but overrate upside risk and accordingly reveal overoptimistic choices. Hence, our theory can explain phenomena such as excessive harmful consumption (smoking, unhealthy diet) and risky investments (entrepreneurship, lotteries, gambling) in one coherent framework. Notably, overoptimistic actions are not universal, but have plausible limits. We characterize under which situations overoptimistic actions are most likely to occur and under which circumstances choices should be rational or even pessimistic.
Subjects: 
Focusing
Salience
Framing
Overoptimism
JEL: 
D03
D11
D90
ISBN: 
978-3-86304-278-3
Document Type: 
Working Paper

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