localmenupreferences - A Theory of Local Menu Preferences...

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Unformatted text preview: A Theory of Local Menu Preferences * Madhav Chandrasekher † Current Draft: May 24, 2010 Abstract: This paper develops a theory of choice in which the constraints of a decision problem influence the decision-maker’s preferences over the objects of choice. We use the framework of menu choice to model this idea. In this setting, the menu is the constraint and the objects of choice are the elements in the menu. Most papers in the menu choice literature assume that the decision-maker (DM) implicitly formulates a state-dependent ranking over all elements of the consump- tion space prior to evaluating the utility of any given menu. Thus, the decision maker behaves as if his domain of choice is the full space of menus. In this paper, we model decision-makers who behave as if they do not control the menu (i.e. the constraints) they are given, and hence evaluate each menu as a context-dependent choice problem. Menu preferences that exhibit this context-dependence are called local menu preferences . We give a definition of context-dependence and provide an axiomatic model of context-dependent menu choice that encompasses both prefer- ence for flexibility and temptation preference. Keywords : Menu Choice, Preference for Flexibility, Preference for Commitment, Context Effects. * This paper is a revised version of chapters 2 and 3 of my doctoral dissertation, written at the University of California, Berkeley. I am deeply grateful to my advisor, Chris Shannon, for her guidance and support. I would also like to thank David Ahn, Bob Anderson, Andrea Cann, Amanda Friedenberg, Botond K˝oszegi, Bob Powell, and Ed Schlee for their many helpful comments and suggestions. Any errors are my own. A previous draft of the paper was circulated under the title “Discrete Models of Unforeseen Contingencies.” † Mailing address: Department of Economics, W.P. Carey School of Business, P.O. Box 873806, Tempe, AZ 85287-3806; E-mail address: [email protected] 1 Introduction The constraints that restrict a decision-maker’s (DM) world of choices can influence his preferences over those objects of choice. Take the example of career choice where the constraints facing a DM (his interests, abilities and financial resources) restrict his set of feasible career options to the following: { doctor, lawyer, economist } . How- ever, if the DM was a foot taller and more agile his choice set would become { doctor, lawyer, economist, professional athlete } . How does the decision-maker evaluate his actual choice set? One approach is that he might counterfactually speculate what his preferences would be if he actually was a foot taller, in which case becoming an athlete is a feasible option. Using these fictional preferences, he then reasons deductively and eliminates choices from the actual choice set that would not be cho- sen in the fictional choice set. Decision-makers who engage in such counterfactual speculation take an “If the world was my oyster...” approach to decision-making. Aspeculation take an “If the world was my oyster....
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localmenupreferences - A Theory of Local Menu Preferences...

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