Incorporating Context Effects into a Choice Model

Abstract

There is substantial evidence that people make decisions that deviate strikingly and systematically from the predictions of the standard random utility model (RUM) (McFadden 2001). The evidence is especially apparent in the large body of literature documenting context effects. Context effects mean that consumer choices are partly driven by the context provided by the set of alternatives (Chakravarti and Lynch 1983; Payne 1982; Prelec, Wernerfelt, and Zettelmeyer 1997; Ratneshwar, Shocker, and Stewart 1987). Context effects are in line with the view on decision making that utilities are constructed in a specific choice context rather than recalled (Bettman, Luce, and Payne 1998; Payne, Bettman, and Johnson 1992).