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Decisions with endogenous frames

By Patricio Dalton and Sayantan Ghosal

Abstract

A frame is any payoff relevant preference parameter broadly defined to include psychological considerations such as reference points, beliefs, aspirations etc. An endogenous frame is a preference parameter that is, in turn, affected by chosen actions. We model decions in two ways. A standard decision problem is one where the chosen action is required to be optimal when the feedback effect from actions to frames is fully taken into account. An equilibrium decision is one where the chosen actions are optimal taking the frame as exogenous although actions and frames are required to be consistent. We show that an equilibrium decision problem is a reduced form representation of several distinctive types of decision making. We characterize the conditions under which equilibrium decisions are indistinguishable from standard decisions. When equilibrium decisions are distinguishable, they have properties normally associated with two-person normal form games although, in general, they cannot be obtained as reduced form representations of such games. We provide an existence result with incomplete preferences. We argue that decisions with endogenous frames give rise to novel implications for policy and welfare analysis

Topics: Choice, Frames, Emotions, Values, Aspirations, Reference Dependent Preferences
Year: 2007
OAI identifier: oai:CiteSeerX.psu:10.1.1.320.4316
Provided by: CiteSeerX
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