Controlling for the Compromise Effect Debiases Estimates of Risk Preference Parameters

Jonathan P. Beauchamp, Daniel J. Benjamin, Christopher F. Chabris, David I. Laibson

NBER Working Paper No. 21792
Issued in December 2015, Revised in October 2016
NBER Program(s):Aging

The compromise effect arises when options near the "middle" of a choice set are more appealing. The compromise effect poses conceptual and practical problems for economic research: by influencing choices, it distorts revealed preferences, biasing researchers' inferences about deep (i.e., domain general) preferences. We propose and estimate an econometric model that disentangles and identifies both deep preferences and the context-dependent compromise effect. We demonstrate our method using data from an experiment with 550 participants who made choices over lotteries from multiple price lists. Following prior work, we manipulate the compromise effect by varying the middle options of each multiple price list and then estimate risk preferences without modelling the compromise effect. These naïve parameter estimates are not robust: they change as the compromise effect is manipulated. To eliminate this bias, we incorporate the compromise effect directly into our econometric model. We show that this method generates robust estimates of risk preference parameters that are no longer sensitive to compromise-effect manipulations. This method can be applied to other settings that exhibit the compromise effect.

download in pdf format
   (1027 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21792

Users who downloaded this paper also downloaded* these:
Elango, García, Heckman, and Hojman w21766 Early Childhood Education
Kenkel, Mathios, and Wang w21790 Menthol Cigarette Advertising and Cigarette Demand
Steckel and Senney w21809 Historical Origins of a Major Killer: Cardiovascular Disease in the American South
Alpert, Lakdawalla, and Sood w21714 Prescription Drug Advertising and Drug Utilization: The Role of Medicare Part D
Reinhart and Trebesch w21805 The International Monetary Fund: 70 Years of Reinvention
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us