A Model of Focusing in Economic Choice*

Abstract

We present a generally applicable theory of focusing based on the hypothesis that a person focuses more on, and hence overweights, attributes in which her options differ more. Our model predicts that the decision maker is too prone to choose options with concentrated advantages relative to alternatives, but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated. Applying our model to intertemporal choice, these results predict that a person exhibits present bias and time inconsistency when—such as in lifestyle choices and other widely invoked applications of hyperbolic discounting—the future effect of a current decision is distributed over many dates, and the effects of multiple decisions accumulate. But unlike in previous models, in our theory (1) present bias is lower when the costs of current misbehavior are less dispersed, helping explain why people respond more to monetary incentives than to health concerns in harmful consumption; and (2) time inconsistency is lower when a person commits to fewer decisions with accumulating effects in her ex ante choice. In addition, a person does not fully maximize welfare even when making decisions ex ante: (3) she commits to too much of an activity—for example, exercise or work—that is beneficial overall; and (4) makes “future-biased” commitments when—such as in preparing for a big event—the benefit of many periods’ effort is concentrated in a single goal.

Do medical doctors respond to economic incentives?

“…A salient thinker discounts the choice dimension-quality or price-that is less salient within her consideration set by some parameter 0 < δ < 1. 10 Following Kőszegi and Szeidl (2013), we assume that the dimension is salient along which the options in a consumer's consideration set vary more. If all the options (i.e., all price-quality pairs) that a consumer considers are identical, neither quality nor price is salient and salience-weighted utility coincides with consumption utility.…”

“…A price-salient environment indeed occurs if and only if different prices are set in the different 10 Bordalo et al (201210 Bordalo et al ( , 2013b have proposed this discrete variant of modeling salience distortions. In contrast, Kőszegi and Szeidl (2013) propose an approach where salience weights are continuous in the attributes' salience.…”

“…Following the literature (see, e.g., Kőszegi and Szeidl, 2013), we assume that consumer surplus is determined by consumption utility. Accordingly, denote as q * := arg max q [v(q) − c(q)] the efficient quality level, which is implicitly given by c (q * ) = v (q * ).…”

“…Accordingly, if a product's price varies across distribution channels, consumers focus more on its price and less on its quality. The relevance of contrast effects for similar purchase decisions has been supported both in the lab (Dertwinkel-Kalt et al, 2017b) and in the field (Hastings and Shapiro, 2013).In order to model the contrast effect, we build on recent approaches by Kőszegi and Szeidl (2013) and Bordalo et al (2013b), which predict that a consumer's willingness-to-pay for a brand product is reduced in the presence of price disparities across channels. Thereby, these approaches suggest a novel externality that discounts in one channel have on consumers in another channel, namely consumers' offline willingness-to-pay can be affected by lower online prices.…”

“…In order to model the contrast effect, we build on recent approaches by Kőszegi and Szeidl (2013) and Bordalo et al (2013b), which predict that a consumer's willingness-to-pay for a brand product is reduced in the presence of price disparities across channels. Thereby, these approaches suggest a novel externality that discounts in one channel have on consumers in another channel, namely consumers' offline willingness-to-pay can be affected by lower online prices.…”