Memory and Reference Prices: an Application to Rental Choice
Simonsohn and Loewenstein (SL 2006) present evidence that a household moving from one US city to another tends to pay a rent level that is closer to the city of origin, relative to comparable locals. Building on “Memory, Attention, and Choice” (BGS 2019), we show that these effects emerge from the interaction between memory and attention. In our model, memory is a database of experiences such as rents. The current rent cues recall of past rents, giving rise to a rental norm. A large discrepancy between the current rent and the memory-based norm surprises and attracts the mover’s attention, distorting choice. Thus, when rents in Pittsburgh cue recall of rent experiences in San Francisco, they look surprisingly cheap by comparison, leading the household to spend more. We revisit the SL evidence in light of the model. Besides generating the basic SL findings, our model yields two new predictions, which we test and confirm using 20 additional years of data.
We are grateful to Linh To for exceptional research assistance. Gennaioli thanks the European Research Council for Financial Support under the ERC Consolidator Grant (GA 647782). Shleifer thanks the Sloan Foundation and the Pershing Square Venture Fund for Research on the Foundations of Human Behavior for financial support. The authors have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, 2019. "Memory and Reference Prices: An Application to Rental Choice," AEA Papers and Proceedings, vol 109, pages 572-576. citation courtesy of