Reference-dependent choice bracketing

Abstract

I derive a model of choice bracketing from two behavioral axioms in an expected utility framework. The first behavioral axiom establishes a link between narrow bracketing and correlation neglect. The second behavioral axiom identifies the reference point as the connector between broad and narrow preferences. The narrow bracketer is characterized by an inability to process changes from the reference point in different dimensions simultaneously. As a result, her tradeoffs between dimensions are distorted. She evaluates dimensions in isolation, implying a disregard for how they affect one another. When evaluating a dimension, she remains anchored to the reference point in the respective other dimension. This implies that she mistakenly perceives preference interactions in relation to the reference point. I present applications to portfolio choice, consumption bundle choice, and an exchange economy.