Abstract
Abstract We propose and axiomatize the categorical thinking model (CTM) in which the framing of the decision problem affects how agents categorize alternatives, that in turn affects their evaluation of it. Prominent models of salience, status quo bias, loss-aversion, inequality aversion, and present bias all fit under the umbrella of CTM. This suggests categorization is an underlying mechanism of key departures from the neoclassical model of choice. We specialize CTM to provide a behavioural foundation for the salient thinking model of Bordalo et al. (2013, Journal of Political Economy, 121, 803–843) that highlights its strong predictions and distinctions from other models.
Highlights
Categories shape how people perceive and react to the world
We propose and axiomatize the categorical thinking model (CTM) based on two key features of these examples: categorization depends on the context and affects how the decision maker
We show that a number of important models across different choice environments are special cases of CTM
Summary
Categories shape how people perceive and react to the world. A real estate agent shows clients a house in a worse neighbourhood before showing them the one the agent wants to sell, so that they categorize the target’s neighbourhood as a gain rather than a loss. While we initially consider exogenously specified categories, our framework has the advantage of allowing categories to be derived endogenously from choice behaviour.[1] We provide a method to identify the categorization based on the changes in trade-offs between attributes This allows our model to consider phenomena for which the psychology makes only partial category predictions, like salience. We apply our results to provide the first complete characterization of the observable choice behaviour equivalent to BGS, clarifying and identifying the nature of the assumptions used by it.[2] The first crucial step towards understanding the model is understanding its novel salience function that determines which attribute stands out for a given reference point.
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