Choice with Endogenous Categorization

Abstract

We propose a novel categorical thinking model (CTM) where the framing of the decision problem affects how the agent categorizes each product, and the product's category affects her evaluation of the product. We show that a number of prominent models of salience, status quo bias, loss-aversion, inequality aversion, and present bias all fit under the umbrella of CTM. This suggests categorization as an underlying mechanism for key departures from the neoclassical model of choice and an account for diverse sets of evidence that are anomalous from its perspective. We specialize CTM to provide a behavioral foundation for the salient thinking model of Bordalo et al. [2013], highlighting its strong predictions and distinctions from other existing models.