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  • January 2021
  • Article
  • Review of Economic Studies

A Model of Relative Thinking

By: Benjamin Bushong, Matthew Rabin and Joshua Schwartzstein
  • Format:Print
  • | Pages:30
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Abstract

Fixed differences loom smaller when compared to large differences. We propose a model of relative thinking where a person weighs a given change along a consumption dimension by less when it is compared to bigger changes along that dimension. In deterministic settings, the model predicts context effects such as the attraction effect, but predicts meaningful bounds on such effects driven by the intrinsic utility for the choices. In risky environments, a person is less likely to exert effort in a money-earning activity if he had expected to earn higher returns or if there is greater income uncertainty. In intertemporal consumption, relative thinking induces a tendency to overspend and for a person to act more impatient if infrequently allotted large amounts to consume than if frequently allotted a small amount to consume, or especially the greater the uncertainty in future consumption utility.

Keywords

Relative Thinking; Econometric Models; Behavior; Cognition and Thinking

Citation

Bushong, Benjamin, Matthew Rabin, and Joshua Schwartzstein. "A Model of Relative Thinking." Review of Economic Studies 88, no. 1 (January 2021): 162–191.
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About The Authors

Matthew Rabin

Negotiation, Organizations & Markets
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Joshua R. Schwartzstein

Negotiation, Organizations & Markets
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More from the Authors
  • Deepa Bachu: Design Thinking at Pensaar By: Thomas Graeber and Joshua Schwartzstein
  • Representation and Extrapolation: Evidence from Clinical Trials By: Marcella Alsan, Maya Durvasula, Harsh Gupta, Joshua Schwartzstein and Heidi L. Williams
  • Channeled Attention and Stable Errors By: Tristan Gagnon-Bartsch, Matthew Rabin and Joshua Schwartzstein
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