Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/228353
Authors: 
Adriani, Fabrizio
Sonderegger, Silvia
Year of Publication: 
2019
Series/Report no.: 
CeDEx Discussion Paper Series No. 2019-06
Abstract: 
We use a simple cost-benefit analysis to derive optimal similarity judgments - addressing the question: when should we expect a decision maker to distinguish between different time periods or different prizes? Our key premise is that cognitive resources are costly and are to be deployed only where they really matter. We show that this simple insight can explain a number of observed anomalies, such as: (i) time preference reversal, (ii) magnitude effects, (iii) interval length effects. For each of these phenomena, our approach allows to identify the direction of the bias relative to the benchmark case where cognitive resources are costless. Finally, we show that, when applied to choice under risk, the same insights predict anomalies such as the ratio and certainty effects, and rationalize Rabin's risk aversion paradox. This suggests that the theory may provide a parsimonious explanation of behavioral anomalies in different contexts.
Subjects: 
Similarity judgments
Intertemporal Choice
Rational Inattention
Choice Under Risk
JEL: 
D01
D03
D11
D90
Document Type: 
Working Paper

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