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We argue that “narrow framing, ” whereby an agent who is offered a new gamble evaluates that gamble in isolation, may be a more important feature of decisionmaking than previously realized. Our starting point is the evidence that people are often averse to a small, independent gamble, even when the gamble is actuarially favorable. We find that a surprisingly wide range of utility functions, including many nonexpected utility specifications, have trouble explaining this evidence, but that this difficulty can be overcome by allowing for narrow framing. Our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle. (JEL D81, G11) Economists, and financial economists in particular, have long been interested in how people evaluate risk. In this paper, we try to shed new light on this topic. Specifically, we argue that a feature known as “narrow framing ” may play a more important role in decision-making under

Under prospect theory, three components influence the risk attitude of a decision maker: the utility function, the probability weighting function, and loss aversion. Loss aversion reflects the observed behavior of decision makers' being more sensitive to losses than to gains, resulting in a utility function that is steeper for losses than for gains. Much of the empirically observed risk aversion is due to loss aversion. This paper proposes an index of loss aversion. It also demonstrates how the degree of loss aversion of two decision makers can be compared and how its influences on comparative risk aversion can be examined. The main result characterizes comparative loss aversion in terms of preferences.

The importance of ethical behavior to an organization has never been more apparent, and in recent years researchers have generated a great deal of knowledge about the management of individual ethical behavior in organizations. We review this literature and attempt to provide a coherent portrait of the current state of the field. We discuss individual, group, and organization-al influences and consider gaps in current knowledge and obstacles that limit our understanding. We conclude by offering directions for future research on behavioral ethics in organizations.

We use Kőszegi and Rabin’s (2006) model of reference-dependent utility, and an extension of it that applies to decisions with delayed consequences, to study preferences over monetary risk. Because our theory equates the reference point with recent probabilistic beliefs about outcomes, it predicts specific ways in which the environment influences attitudes toward modest-scale risk. It replicates “classical” prospect theory—including the prediction of distaste for insuring losses—when exposure to risk is a surprise, but implies first-order risk aversion when a risk, and the possibility of insuring it, are anticipated. A prior expectation to take on risk decreases aversion to both the anticipated and additional risk. For large-scale risk, the model allows for standard “consumption utility ” to dominate reference-dependent “gain-loss utility, ” generating nearly identical risk aversion across situations. (JEL D81) Daniel Kahneman and Amos Tversky’s (1979) prospect theory, and the literature building from it, provide theories of risk attitudes based on a

Records of over half a million participants in more than 600 401(k) plans indicate that participants tend to allocate their contributions evenly across the funds they use, with the tendency weakening with the number of funds used. The number of funds used, typically between three and four, is not sensitive to the number of funds offered by the plans, which ranges from 4 to 59. A participant’s propensity to allocate contributions to equity funds is not very sensitive to the fraction of equity funds among offered funds. The paper also comments on limitations on inferences from experiments and aggregate-level data analysis. HOW MUCH AND HOW TO SAVE FOR RETIREMENT is one of the most important financial decisions made by most people. Defined contribution (DC) pension plans, such as the popular 401(k) plans, are important instruments of such savings. By 2001 year-end, about 45 million American employees held 401(k) plan accounts with a total of $1.75 trillion in assets (Holden and VanDerhei (2001)). An important characteristic of these plans is that the participant has responsibility over his savings among a plan’s various funds. How responsibly do the participants behave? In particular, how sensitive are participants ’ choices to possible framing effects associated with the menu of choices they are offered? To explore these questions, this paper analyzes a data set recently provided by the Vanguard Group consisting of records of more than half a million participants in about 640 DC plans. These plans offer between 4 and 59 funds in which participants can invest. All plans offer at least one stock fund, 635 plans

Abstract We document two widespread biases in how consumers perceive the costs and benefits of borrowing and saving, and explore the implications of these biases for household finance. Payment/interest bias is the systematic tendency to underestimate a loan interest rate given other loan terms. Future value bias is the systematic tendency to underestimate a future value given a present value, time horizon and periodic rate of return. We show that these biases may have a single cognitive source: exponential growth bias, the pervasive tendency to linearize exponential functions. Most importantly we show that these biases seem to affect household decisions and outcomes. Conditional on a rich set of household characteristics, a household-level metric of payment-interest bias is strongly correlated with borrowing, savings, portfolio choice, wealth and delegation. There is only weak evidence that our measure of bias merely proxies for broader financial sophistication. In all the results suggest that exponential growth bias represents a new class of behavioral biases that should be modeled in theoretical and empirical work on household finance. JEL codes: D1, D9, G11

Behavioral economics uses evidence from psychology and other disciplines to create models of limits on rationality, willpower and self-interest, and explore their implications in economic aggregates. This paper reviews the basic themes of behavioral economics: Sensitivity of revealed preferences to descriptions of goods and procedures; generalizations of models of choice over risk, ambiguity, and time; fairness and reciprocity; non-Bayesian judgment; and stochastic equilibrium and learning. A central issue is what happens in equilibrium when agents are imperfect but heterogeneous; sometimes firms “repair ” limits through sorting, but profitmaximizing firms can also exploit limits of consumers. Frontiers of research are careful formal theorizing about psychology and studies with field data. Neuroeconomics extends the psychological data use to inform theorizing to include details of neural circuitry. It is likely to support rational choice theory in some cases, to buttress behavioral economics in some cases, and to suggest different constructs as well.

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Seeming public apathy over climate change is often attributed to a deficit in comprehension. The public knows too little science, it is claimed, to understand the evidence or avoid being misled1. Widespread limits on technical reasoning aggravate the problem by forcing citizens to use unreliable cognitive heuristics to assess risk2. We conducted a study to test this account and found no support for it. Members of the public with the highest degrees of science literacy and technical reasoning capacity were not the most concerned about climate change. Rather, they were the ones among whom cultural polarization was greatest. This result suggests that public divisions over climate change stem not from the public’s incomprehension of science but from a distinctive conflict of interest: between the personal interest individuals have in forming beliefs in line with those held by others with whom they share close ties and the