Center for Behavioral Decision Research

CBDR : Seminar Series : Seminar by Emir Kamenica

Contextual Inference, Choice Overload, and Simplicity Seeking

	presented by Emir Kamenica (University of Chicago)


	Thursday, December 13	link to paper
	Noon-1:15
	Porter 223D	link to Speaker's Site

	Abstract:

	The talk is based on two papers: 1. Contextual Inference in Markets: On the Informational Content of Product Lines A large literature demonstrates that contexts and frames influence decisions. This malleability of choice is usually invoked as evidence against the assumption that people maximize a stable preference ordering. In a market equilibrium, however, contexts and frames provide payoff-relevant information to consumers: the information implicit in a firm's decision to offer a particular set of goods allows uninformed consumers to infer from the product line which good is optimal for them. Consequently, these consumers rationally violate naïve formulations of standard choice theoretic principles. I identify informational asymmetries under which apparently anomalous behaviors, namely the compromise effect and choice overload, arise as market equilibria. In addition, I establish that the presence of uninformed consumers may induce firms to reduce the number of varieties they offer or to introduce premium loss leaders, i.e., expensive goods of overly high quality that are unprofitable on their own but greatly increase the demand for other products. 2. Choice Overload and Simplicity Seeking In settings such as investing for retirement or choosing a drug plan, individuals face a staggering number of options. In this paper, we analyze how an abundance of options influences which alternative is selected. We present both laboratory experiments and field data that confirm our theoretical prediction: larger choice sets induce a stronger preference for simple, easy-to-understand options. The first experiment demonstrates that, in seeming violation of the weak axiom of revealed preference, subjects are more likely to select a given sure bet over non-degenerate gambles when choosing from a set of 11 options than when choosing from a subset of 3. The second experiment clarifies that excessive choice sets induce a preference for simpler, rather than less risky, options. Lastly, using records of more than 500,000 employees from 638 institutions, we demonstrate that the presence of more funds in an individual's 401(k) plan is associated with a greater allocation to money market and bond funds at the expense of equity funds.

	Host at CMU: George Loewenstein