A Canonical Model of Choice with Initial Endowments

Abstract

We use the revealed preference method to derive a model of individual decision making when one's endowment provides a reference point that may influence her choices. This model generalizes the classical rational choice model. While the latter views choice as a consequence of "utility maximization," the model proposed here views choice as arising from "mentally constrained utility maximization," where the constraints are induced by one's initial endowment. In particular, this model allows for status quo bias. A range of economic applications are presented to identify the predictive and explanatory strength of the model. . JEL Classification: D11, D81.

Asymmetric dominance, deferral, and status quo bias in a behavioral model of choice

“…Elements of M are menus. Almost exactly as in Masatlioglu and Ok (2005), the set of decision problems S ⊂ M × M is defined as the set of all pairs (A, B), where A ∈ M, A = ∅, and either B = ∅ or B = {s} for some s ∈ A. Thus, S is divided into pairs of the type (A, ∅) and (A, {s}), where s ∈ A.…”

“…Thus, S is divided into pairs of the type (A, ∅) and (A, {s}), where s ∈ A. To be consistent with the notation in Masatlioglu and Ok (2005), (A, ) will be written instead of (A, ∅), and (A, s) instead of (A, {s}).…”

“…Behaviour that exhibits choice deferral or status quo bias is sometimes called avoidant behaviour (Anderson, 2003). This paper uses the expanded choice domain introduced in Masatlioglu and Ok (2005) and extends the model of partially dominant choice proposed in Gerasimou (2015) in the direction of allowing for both types of avoidant behavior. This model is the first in the literature to feature a decision maker whose choices are guided by an acyclic and incomplete preference relation that is independent of the decision problem's type and menu of feasible alternatives.…”

“…Moreover, in contrast to existing models, it also formalizes directly, by means of a single preference relation, the explanation of status quo bias that is based on preference incompleteness (Bewley, 2002;Mandler, 2004;Masatlioglu and Ok, 2005). As such, it relies on neither the use of multi-functions (Masatlioglu and Ok, 2005) nor on multiple, reference-dependent preference relations (Tversky and Kahneman, 1991;Bleichrodt, 2007;Apesteguia and Ballester, 2009).…”

“…Moreover, in contrast to existing models, it also formalizes directly, by means of a single preference relation, the explanation of status quo bias that is based on preference incompleteness (Bewley, 2002;Mandler, 2004;Masatlioglu and Ok, 2005). As such, it relies on neither the use of multi-functions (Masatlioglu and Ok, 2005) nor on multiple, reference-dependent preference relations (Tversky and Kahneman, 1991;Bleichrodt, 2007;Apesteguia and Ballester, 2009). In addition, the partial dominance structure of the model allows for a simple explanation of findings reported in Dhar and Simonson (2003) suggesting a strengthening of the attraction effect (Huber, Payne, and Puto, 1982) and a weakening of the compromise effect (Simonson, 1989) when deferral is permissible.…”