Jonathan P. Beauchamp
Department of Economics
Cambridge, MA 02138
NBER Working Papers and Publications
|December 2015||Controlling for the Compromise Effect Debiases Estimates of Risk Preference Parameters|
with Daniel J. Benjamin, Christopher F. Chabris, David I. Laibson: w21792
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 na...