IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_11611.html
   My bibliography  Save this paper

Context-Dependent Risk Preferences and Decoy Effects

Author

Listed:
  • Fabian Herweg
  • Daniel Müller
  • Asri Özgümüs
  • Fabio Römeis

Abstract

We present a theory of context-dependent risk preferences under which within-state payoff comparisons and regret aversion shape decisions. Defining the attraction and compromise effect in reference to a state-space-based description of the choice problem, we show that our theory can account for both these prominent decoy effects. We test our theoretical predictions with an online experiment, including comparative statics results. We find strong evidence for the attraction and the compromise effect. Furthermore, we find some supportive evidence for our comparative static predictions and weakly diminishing sensitivity regarding ex-post regret.

Suggested Citation

  • Fabian Herweg & Daniel Müller & Asri Özgümüs & Fabio Römeis, 2025. "Context-Dependent Risk Preferences and Decoy Effects," CESifo Working Paper Series 11611, CESifo.
    • Handle: RePEc:ces:ceswps:_11611
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11611.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Marcel Lichters & Paul Bengart & Marko Sarstedt & Bodo Vogt, 2017. "What really matters in attraction effect research: when choices have economic consequences," Marketing Letters, Springer, vol. 28(1), pages 127-138, March.
    2. Indraneel Dasgupta & Prasanta Pattanaik, 2007. "‘Regular’ choice and the weak axiom of stochastic revealed preference," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(1), pages 35-50, April.
    3. Botond Koszegi & Adam Szeidl, 2013. "A Model of Focusing in Economic Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(1), pages 53-104.
    4. Loomes, Graham & Starmer, Chris & Sugden, Robert, 1989. "Preference Reversal: Information-Processing Effect or Rational Non-transitive Choice?," Economic Journal, Royal Economic Society, vol. 99(395), pages 140-151, Supplemen.
    5. Mohr, Peter N. C. & Heekeren, Hauke R. & Rieskamp, Jörg, 2017. "Attraction Effect in Risky Choice Can Be Explained by Subjective Distance Between Choice Alternatives," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 7, pages 1-10.
    6. Chris Starmer, 1992. "Testing New Theories of Choice under Uncertainty using the Common Consequence Effect," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(4), pages 813-830.
    7. Heath, Timothy B & Chatterjee, Subimal, 1995. "Asymmetric Decoy Effects on Lower-Quality versus Higher-Quality Brands: Meta-analytic and Experimental Evidence," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 22(3), pages 268-284, December.
    8. Huber, Joel & Payne, John W & Puto, Christopher, 1982. "Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 9(1), pages 90-98, June.
    9. repec:bla:econom:v:55:y:1988:i:217:p:47-62 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Castillo, Geoffrey, 2020. "The attraction effect and its explanations," Games and Economic Behavior, Elsevier, vol. 119(C), pages 123-147.
    2. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2013. "Salience and Consumer Choice," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 803-843.
    3. Fabio Galeotti & Maria Montero & Anders Poulsen, 2022. "The Attraction and Compromise Effects in Bargaining: Experimental Evidence," Management Science, INFORMS, vol. 68(4), pages 2987-3007, April.
    4. Michael Canty & Felix Josua Lang & Susanne Jana Adler & Marcel Lichters & Marko Sarstedt, 2024. "Caffeine’s complex influence on the attraction effect: a mixed bag of outcomes," Marketing Letters, Springer, vol. 35(3), pages 451-476, September.
    5. Li, Feng & Du, Timon C. & Wei, Ying, 2020. "Enhancing supply chain decisions with consumers’ behavioral factors: An illustration of decoy effect," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 144(C).
    6. Dertwinkel-Kalt, Markus & Köster, Mats, 2020. "Attention to online sales: The role of brand image concerns," DICE Discussion Papers 335, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    7. Helfrich, Magdalena & Herweg, Fabian, 2020. "Context-dependent preferences and retailing: Vertical restraints on internet sales," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 87(C).
    8. Radka Kubalová & Martin Klepek, 2022. "Brand Presence in Decision-Making Involving Decoys," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 34(1), pages 9-24.
    9. Howard Kunreuther & Erwann Michel-Kerjan, 2015. "Demand for fixed-price multi-year contracts: Experimental evidence from insurance decisions," Journal of Risk and Uncertainty, Springer, vol. 51(2), pages 171-194, October.
    10. Nunnari, Salvatore & Zapal, Jan, 2017. "A Model of Focusing in Political Choice," CEPR Discussion Papers 12407, C.E.P.R. Discussion Papers.
    11. Zhang, Tao & Zhang, David, 2007. "Agent-based simulation of consumer purchase decision-making and the decoy effect," Journal of Business Research, Elsevier, vol. 60(8), pages 912-922, August.
    12. Bogard, Jonathan E. & Reiff, Joseph S. & Caruso, Eugene M. & Hershfield, Hal E., 2024. "Social inferences from choice context: Dominated options can engender distrust," Organizational Behavior and Human Decision Processes, Elsevier, vol. 183(C).
    13. Davies, Antony & Cline, Thomas W., 2005. "A consumer behavior approach to modeling monopolistic competition," Journal of Economic Psychology, Elsevier, vol. 26(6), pages 797-826, December.
    14. Ronayne, David & Brown, Gordon D.A., 2016. "Multi-attribute decision by sampling: An account of the attraction, comprimise and similarity effects," The Warwick Economics Research Paper Series (TWERPS) 1124, University of Warwick, Department of Economics.
    15. Slaughter, Jerel E. & Bagger, Jessica & Li, Andrew, 2006. "Context effects on group-based employee selection decisions," Organizational Behavior and Human Decision Processes, Elsevier, vol. 100(1), pages 47-59, May.
    16. Markus Dertwinkel-Kalt & Katrin Köhler & Mirjam R. J. Lange & Tobias Wenzel, 2017. "Demand Shifts Due to Salience Effects: Experimental Evidence," Journal of the European Economic Association, European Economic Association, vol. 15(3), pages 626-653.
    17. Roman Inderst & Martin Obradovits, 2023. "Excessive Competition On Headline Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 783-808, May.
    18. Ola Andersson & Jim Ingebretsen Carlson & Erik Wengström, 2021. "Differences Attract: An Experimental Study of Focusing in Economic Choice," The Economic Journal, Royal Economic Society, vol. 131(639), pages 2671-2692.
    19. Markus Dertwinkel-Kalt & Mats Köster, 2020. "Salience and Skewness Preferences [Risk-neutral Firms can Extract Unbounded Profits from Consumers with Prospect Theory Preferences]," Journal of the European Economic Association, European Economic Association, vol. 18(5), pages 2057-2107.
    20. Inderst, Roman & Obradovits, Martin, 2019. "Competitive Strategies when Consumers are Relative Thinkers: Implications for Pricing, Promotions, and Product Choice," EconStor Preprints 253658, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

    asymmetric dominance effect; attraction effect; compromise effect; context-dependent preferences; correlation-sensitive preferences; decoy effect; regret theory;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_11611. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.