category2010 - A Model of Temptation-Induced Compromise *...

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Unformatted text preview: A Model of Temptation-Induced Compromise * Madhav Chandrasekher Current Draft: March 3, 2011 Abstract: This paper models menu choice problems in which the decision maker (DM) faces temptation at the ex ante stage of choice and responds to this temptation by making a compromise. We introduce a new class of utilities, called the category model , which captures this phenomenon and provide axiomatic foundations for this model. Our theory provides an approach to modeling temptation that is distinct from the costly self-control approach, initiated by Gul-Pesendorfer (GP) (2001). Moreover, it provides a sharp representation of two behavioral phenomena of current interest in the decision theory literature - the compromise effect and the attraction effect. The innovation of this paper is that we identify temptation as a common cause for both of these effects and nest both of these features within an axiomatic model of compromise. Keywords : Menu Choice, Preference for Commitment, Strotz Model. * I am deeply grateful to Andrea Cann, Eddie Dekel, Haluk Ergin, Amanda Friedenberg, Bart Lipman, Wolfgang Pesendorfer, and Ed Schlee for their feedback on this project. Moreover, I owe the observation that the model in this paper connects with the literature on the attraction effect to Wolfgang Pesendorfer. An earlier draft was titled A Theory of Temptation without Uncertainty. Any errors are my own. Mailing address: Department of Economics, W.P. Carey School of Business, P.O. Box 873806, Tempe, AZ 85287-3806; E-mail address: madhav.chandrasekher@asu.edu 1 Introduction Compromise is a central feature of many decision problems. It can arise in the context of bargaining between two agents with non-aligned preferences, e.g. wage bargaining or dispute resolution. However, it can also arise in the context of single-agent decision- making - take the example of career choice or mate selection. In these situations the decision problem has the following structure. There is a menu of objective options from which the decision-maker (DM) must make a choice. However, there is a tension between what the DM wants and what the DM can actually choose. That is, not all of the options on the menu may be feasible choices for the DM. In particular, some of the options that the DM might most prefer may be infeasible. This tension leads the DM to maximize his normative preference not over the full menu of options, but over the subset of attainable options. 1 The utility maximizing outcome from this process is what we refer to as the DMs compromise. This paper develops and provides axiomatic foundations for a formal model of compromise. Taking the above procedure as a description of the process of compro- mise, there are two key questions that must be answered by our model if it is to provide insight into this process. First, why does the DM face a tension between what is on the menu and what he considers feasible? In other words, what is the root cause that leads the DM to compromise in the first place? Second, if the root cause iscause that leads the DM to compromise in the first place?...
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This note was uploaded on 04/28/2011 for the course BUS 315 taught by Professor Powell during the Spring '11 term at University of Hawaii, Manoa.

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category2010 - A Model of Temptation-Induced Compromise *...

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