Impressionable Rational Choice: Revealed-Preference Theory with Framing Effects

Abstract

Revealed preference is one of the most influential ideas in economics. It is, however, not clear how it can be generally applied in cases where agents' choices depend on arbitrary changes in the decision environment. In this paper, we propose a generalization of the classic rational choice theory that allows for such framing effects. Frames are modeled as different presentations (e.g., visual or conceptual) of the alternatives that may affect choice. Our main premise is that framing effects are neutral (i.e., independent of labeling the alternatives). An agent exhibiting these neutral framing effects who is otherwise rational, is called impressionable rational. We show that our theory encompasses many familiar behavioral models such as status-quo bias, satisficing, present bias, framing effects resulting from indecisiveness, certain forms of limited attention, categorization bias, and the salience theory of choice, as well as hybrid models. Moreover, in all these models, sufficiently rich choice data allow our theory to identify the correct underlying preferences without invoking each specific cognitive process. Additionally, we introduce a falsifiable axiom that completely characterizes the behavior of agents who are impressionable rational.