Willpower and compromise effect

This paper provides a behavioral foundation for modeling willpower as a limited cognitive resource that bridges the standard utility maximization and Strotz models. Using the agent's ex ante preferences and ex post choices, we derive a representation that captures key behavioral traits of willpower-constrained decision making. We use the model to study the pricing problem of a profit-maximizing monopolist who faces consumers with limited willpower. We show that the optimal contract often consists of three alternatives and that the consumer's choices reflect a form of the "compromise effect," which is induced endogenously

Behavioral implications of shortlisting procedures

We consider two-stage “shortlisting procedures” in which the menu of alternatives is first pruned by some process or criterion and then a binary relation is maximized. Given a particular first-stage process, our main result supplies a necessary and sufficient condition for choice data to be consistent with a procedure in the designated class. This result applies to any class of procedures with a certain lattice structure, including the cases of “consideration filters,” “satisficing with salience effects,” and “rational shortlist methods.” The theory avoids background assumptions made for mathematical convenience; in this and other respects following Richter’s classical analysis of preference-maximizing choice in the absence of shortlisting

Reasons and Means to Model Preferences as Incomplete

Literature involving preferences of artificial agents or human beings often assume their preferences can be represented using a complete transitive binary relation. Much has been written however on different models of preferences. We review some of the reasons that have been put forward to justify more complex modeling, and review some of the techniques that have been proposed to obtain models of such preferences

State dependent choice

We propose a theory of choices that are influenced by the psychological state of the agent. The central hypothesis is that the psychological state controls the urgency of the attributes sought by the decision maker in the available alternatives. While state dependent choice is less restricted than rational choice, our model does have empirical content, expressed by simple "revealed preference" type of constraints on observable choice data. We demonstrate the applicability of simple versions of the framework to economic contexts. We show in particular that it can explain widely researched anomalies in the labour supply of taxi drivers

Prospect theory and tax evasion: a reconsideration of the Yitzhaki puzzle

The standard expected utility (EUT) model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). Recent literature shows cases in which incorporating prospect theory (PT) does and does not overturn the Puzzle. In a general environment that nests both PT and EUT preferences, we provide a detailed study of how the elements of PT affect the Puzzle. PT does not always reverse the Puzzle, hence we give and interpret conditions for when it does and does not. When allowing for stigma and/or variable audit probability, PT reverses the Puzzle in the same way and with the same limitations as does EUT, if equally augmented

Revealed Attention

The standard revealed preference argument relies on an implicit assumption that a decision maker considers all feasible alternatives. The marketing and psychology literatures, however, provide wellestablished evidence that consumers do not consider all brands in a given market before making a purchase (Limited Attention). In this paper, we illustrate how one can deduce both the decision maker\u27s preference and the alternatives to which she pays attention and inattention from the observed behavior. We illustrate how seemingly compelling welfare judgments without specifying the underlying choice procedure are misleading. Further, we provide a choice theoretical foundation for maximizing a single preference relation under limited attention