DP7112 A test of narrow framing and its origin

Author(s): Luigi Guiso

Publication Date: January 2009

Keyword(s): intuitive thinking , loss aversion , Narrow framing , reasoning , regret

JEL(s): D1 , D8

Programme Areas: Financial Economics , International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7112.asp.asp

I provide a test of narrow framing to explain why individuals turn down small positive expected value lotteries. Participants in a large survey have been asked whether they would accept a small lottery of winning 180 euros with probability of 1/2 or losing 100 euros with the same probability. To half of the sample, randomly selected, the lottery question was asked at the beginning of the interview; the other half made the decision immediately after they were asked to think about and report their subjective probability distribution of future earnings. Consistent with narrow framing, I find that individuals that were induced to bring their earnings risk to mind before facing the decision are significantly less likely to turn it down. Furthemore, only those who actually say they are uncertain about their incomes are less likely to reject the lottery. I show that attitudes towards regret and reliance on intuition rather than reasoning are likely to drive the tendency to frame choices narrowly.