Description: Micro/Macro Workshop: Songfa Zhong (National University of Singapore)

Location: Virtual

Contact Person: Jian Li

Tite: "Narrowly Rational"

Abstract: We examine whether choice behavior can be rationalized across settings. In an experiment, we compare portfolio allocations between two equiprobable Arrow securities in one setting, and between one safe asset and one risky asset, which delivers either a positive payoff or nothing in another setting. We find that subjects are narrowly rational; that is, their choice data are internally consistent within each setting but inconsistent across settings. We observe that a diversification heuristic—the tendency to choose allocation at the midpoint of the given budget line⎯may underpin the observed inconsistency. We explore the underlying mechanisms in two additional experiments and show that the inconsistency across settings can be reduced by framing the two settings similarly but not by further decreasing the likelihood of the securities to a low level. Our study contributes to the literature on revealed preference analysis and heuristic-based decision-making.