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Faculty of Law, Business & Economics

VWL VIII: International Competition Policy – Prof. Dr. Fabian Herweg

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Context-Dependent Choice under Risk

The project “Context-Dependent Choice under Risk” is a joint project of Professor Herweg (University of Bayreuth) and Professor Müller (University of Würzburg). The project is financed by the Deutsche Forschungsgemeinschaft (DFG), project number 440656074.

Already in the 1980s, due to the popularity of regret theory at that time, economists came to embrace the idea of context-dependent preferences for choice under risk. When making her choices, a decision maker's evaluation of a particular risky choice option is determined not solely by that option's attributes, but also by the attributes of the distinct choice options in decision maker's opportunity set. The interest in context-dependent risk preferences largely abated in the late 1990s because two major challenges were not satisfactorily met. First, with context-dependent risk preferences allowing for intransitivity of pairwise choices, no consensus emerged how to extend these theories beyond pairwise choice. Second, experimental studies documented behavior to be strongly influenced by the format of problem presentation, which was hard to reconcile with any of these theories. The recent introduction of salience theory all of a sudden revived the interest in context-dependent risk-preferences – without, however, addressing these two challenges. This seems disconcerting as by now it is understood that for pairwise choice salience theory (despite a different psychological underpinning) is a special case of regret theory. Our project contributes to meeting the challenge of extending context-dependent theories for choice under risk beyond pairwise choice by (i) systematically exploring choice behavior for rich (i.e. non-binary) choice sets in controlled laboratory experiments, (ii) theoretically identifying the overlap (or lack thereof) of predictions for rich choice sets under different context-dependent theories; (iii) identifying the psychological channel that underlies context-dependent risk preferences in order to provide guidance for welfare analysis; (vi) drawing out the implications of context-dependent risk preferences for incentive provision and insurance decisions with rich choice sets.

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