Arad_and_Maltz__2022_ (copy)

Turning on Dimensional Prominence in Decision Making

Authors and Contact Information

• Ayala AradColler School of Management, Tel Aviv University, IsraelContact: aradayal@tauex.tau.ac.il

• Amnon MaltzDepartment of Economics, University of Haifa, IsraelContact: amaltz@econ.haifa.ac.il

Abstract

• Research Focus: Effects of introducing a small interest rate on checking accounts on investment decisions.

• Key Finding: A tiny interest rate can lead to decreased checking account allocations and increased risk-free investments with higher returns.

• Behavioral Insight: Small interest rates may draw attention to safe gains, impacting decision weight and obscuring liquidity considerations.

Introduction

• Investment Scenario: Upon receiving a $2,000 bonus, individuals choose between three options:

  • Checking account (0% interest)

  • Savings plan (4% interest)

  • Stock (50% chance of +14% or -5%)

• Key Question: How would the introduction of a 2% or 0.1% interest rate on the checking account alter choices?

Main Concepts

• Liquidity vs. Safe Gains: When checked without interest, a checking account is valued for liquidity. Introducing interest shifts focus to safe gains, enhancing its decision weight.

• Behavioral Implications: With this shift, individuals may increasingly opt for savings plans over the checking account due to heightened prominence of the safe gains dimension.

The Turning-on Dimensions (ToD) Model

• Model Explanation:

  1. Dimension Activation: Certain options' dimensions can be turned on or off, influencing decision making.

  2. Weighting Dimensions: The number of instances where dimensions are active determines their decision weight.

  3. Uniform Application: Decision weights apply uniformly to all options in the choice set.

• Predictive Power: The ToD model can predict preference shifts in response to small changes in option attributes.

Experimental Context

• Study Overview: Examination of behavioral trends in investment settings, societal preferences, and uncertain choices across three studies.

Study 1: Investment Decisions

• Design: Participants choose between checking account interest rates (0% vs 2%) and investment options.

• Findings:

  • 2% interest rate reduces checking account choice from 23% to 11%, while savings plan choice increases by 15%.

  • Highlighted dimension: Safe gains gained precedence over liquidity when an interest rate is introduced.

Study 2: Social Preferences

• Design: Participants rank monetary allocations between themselves and others, assessing how equality affects preferences.

• Findings: Equal allocation choices shift preference towards options that minimize inequality due to the activation of the inequality dimension.

Study 3: Framing Effects

• Design: Varying framing in lottery choices influences the prominence of associated dimensions.

• Findings:

  • Mentioning certain dimensions can amplify their weight in decision-making frameworks, leading to preference reversals based on context.

Comparison with Existing Models

• Salience and Focusing Models: Previous models based on dimensional variance struggle to explain findings; ToD effectively illustrates the non-monotonic aspects of decision-making influenced by dimension activation.

• Applications of ToD: Potential implications for banking, contract designs, and decision-making infrastructures sensitive to consumer behavior.

Conclusion

• The study underscores the importance of activated dimensions in influencing consumers' economic decisions, particularly regarding risk and returns. The ToD model presents an important development that integrates existing theories while offering new insights into behavior in financial contexts.