Frieder Neunhoeffer - On Subscription Traps and Pigeonholing - REBEW3 22.06.20
Channel: University of Reading Seminars
Date: 25/06/2020

Insurances profit by common probability overestimation of extreme events in the same way as subscription providers play on clients' overestimation regarding the utilization frequency of their services. The present paper analyzes this cognitive bias by means of an inter-temporal choice experiment and finds evidence for violation of the dominance principle in a specific choice context. If the choice menu includes a short subscription explicitly implying one-time use, it is preferred over longer subscriptions luring with a superior price-value ratio. Once the short subscription is extended, other simple comparative criteria come ostensibly to the fore - referred to pigeonholing - and fade pure acquisition utility into the background. The two-dimensional framework in most leading theories in choice under risk precludes explanation of such behavioral contradiction, stemming from a third dimension of subscription length. We propose a new model which captures the effect of pigeonholing, hinging on the conception of transaction utility (Thaler, 1985) and salience theory (Bordalo, Gennaioli, and Shleifer, 2012).