A Model of Focusing in Economic Choice

Interviene: Adam Szeidl, UC Berkeley e Central European University

Organizzato da: IGIER

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. In intertemporal choice, because the relative concentrations of an option's costs and benefits can be different from the perspective of a single period and the perspective of the entire choice problem, the decisionmaker often exhibits a form of time inconsistency. She is present-biased when the costs of current misbehavior are distributed over many future dates (such as in harmful consumption), but “future-biased" when the benefit of many periods' effort is concentrated in a single goal (such as in career advancement). In a market setting, a profit-maximizing firm selling to a consumer with focus-dependent behavior chooses a product with one core attribute, and splits its price into multiple components. A strong firm wants to be especially strong on its competitor's weak attribute, while a weak firm wants to be relatively strong on its competitor's strong attribute.