Abstract: Risky consumption generates information when uncertainty is resolved. This paper axiomatically characterizes the consumption–information trade-off even when the analyst does not observe an agent’s future problems. A subjective future menu underpins the agent’s willingness to sacrifice current consumption for future information. By carefully separating objective risk from subjective risk, we decompose the certainty equivalent of an act into a standard risk premium and a novel information premium. To facilitate applications, we introduce an Arrow–Debreu–Pratt parameterization that yields a tractable model, capturing risk aversion and information incentives with a single coefficient for each. Finally, we show that heterogeneity in risk-taking may arise from differing opportunities to capitalize on information, rather than being solely attributable to differences in risk aversion.

Abstract: Dynamic Limited Consideration (DLC) provides a theoretical foundation that captures how bounded rationality “mistakes” are corrected over time. When a future choice contradicts a past choice from the same menu, this observed correction provides evidence for bounded rationality and uniquely identifies preferences. Conventional, static WARP violations are sufficient but not necessary for limited consideration, whereas a novel notion of dynamic WARP violations are both sufficient and necessary. A stochastic extension uniquely identifies the distribution of preferences in a heterogeneous population where agents differ in both preference and attention. Well-known attention structures such as attention filters and shortlisting are self-preserving under DLC.

(previously circulated as "Ordered Reference Dependent Choice")

Abstract: This paper proposes a unified framework of bounded rationality where context-dependent departures from structural/parametric models are explained by an ordered set of preferences. A meta-framework generalizes canonical axioms, captures context effects through endogenous reference formation, and is applied to risk, time, and social preferences. When reference points are fixed, canonical models (e.g., expected utility and exponential discounting) hold; otherwise, “non-standard” behaviors arise as preference parameters (e.g., CARA coefficients, discount factors) change monotonically along a reference order. The framework links structural violations to basic rationality violations, even though these assumptions are typically regarded as independent building blocks in decision theory.

Additional materials:

1. An Analysis of Avoidable Risk Expected Utility (Download)
2. An Analysis of Ordered Reference Dependent Utility (Download)

We study how risk preferences may be subject to context effect specific to the risk domain—the amount of avoidable risk at any given time. Avoidable risk is captured by the riskiness of the safest option in a choice set, which induces set-dependent risk preferences. In a laboratory experiment, we find that adding safer options systematically increases risk aversion, even when the added options are not themselves chosen. By contrast, adding riskier options does not result in detectable change in risk attitude. Our finding suggests that context effect specialized to the risk domain may overwhelm those that are generally applicable in all types of choice domains (such as the compromise effect) when it comes to studying context-dependent risk preferences.