Narrow bracketing and dominated choices
Matthew Rabin and Georg Weizsäcker show that a person who evaluates decisions one at a time can choose a combination of options that is stochastically dominated, even in a simple pair of independent binary decisions, unless the person's risk preferences are of the constant absolute risk aversion kind. They calculate the monetary cost of the mistake in terms of the decision maker's own preferences. A real-stakes laboratory experiment replicates the pair of decisions in Tversky and Kahneman's 1981 paper and finds that a substantial share of participants chose dominated combinations, and a survey of hypothetical large-stakes choices finds a higher share. Violation rates vary little with personal characteristics, and the estimates imply that average preferences are prospect-theoretic and that most people bracket narrowly.
Matthew Rabin and Georg Weizsäcker show that a person who evaluates decisions one at a time can choose a combination of options that is stochastically dominated, even in a simple pair of independent binary decisions, unless the person's risk preferences are of the constant absolute risk aversion kind. They calculate the monetary cost of the mistake in terms of the decision maker's own preferences. A real-stakes laboratory experiment replicates the pair of decisions in Tversky and Kahneman's 1981 paper and finds that a substantial share of participants chose dominated combinations, and a survey of hypothetical large-stakes choices finds a higher share. Violation rates vary little with personal characteristics, and the estimates imply that average preferences are prospect-theoretic and that most people bracket narrowly.
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Rabin, M., & Weizsäcker, G. (2009). Narrow bracketing and dominated choices. American Economic Review, 99(4), 1508-1543. doi:10.1257/aer.99.4.1508 https://doi.org/10.1257/aer.99.4.1508