ABSTRACT. The standard theory of choice -based on value maximization-associates with each option a real value such that, given an offered set, the decision maker chooses the option with the highest value. Despite its simplicity and intuitive appeal, there is a growing body of data that is inconsistent with this theory. In particular, the relative attractiveness of x compared to y often depends on the presence or absence of a third option z, and the “market share” of an option can actually be increased by enlarging the offered set. We review recent empirical findings that are inconsistent with value maximization and present a context-dependent model that expresses the value of each option as an additive combination of two components: a contingent weighting process that captures the effect of the background context, and a binary comparison process that describes the effect of the local context. The model accounts for observed violations of the standard theory and provides a framework for analyzing context-dependent preferences.
KEY WORDS decision making; consumer choice; independence of irrelevant alternatives
The theory of rational choice assumes that preference between options does not depend on the presence or absence of other options. This principle, called independence of irrelevant alternatives, is essentially equivalent to the assumption that the decision maker has a complete preference order of all options, and that -given an offered set - the decision maker always selects the option that is highest in that order. Despite its simplicity and intuitive appeal, experimental evidence indicates that this principle is often violated (see Huber et al. 1982, Simonson and Tversky 1992).
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