A theory of narrow thinking

Abstract

Unlike in standard models, decision makers often narrowly bracket and make each decision in isolation. I develop a new approach, which I term narrow thinking, to systematically model narrow bracketing. The definition of narrow thinking is that different decisions are based on different, non-nested, information. As a result, the narrow thinker makes each decision with imperfect knowledge of other decisions and faces difficulties coordinating her multiple decisions. The narrow thinker effectively cares less about her other decisions when making each decision. The main application of narrow thinking is to provide a smooth model of mental accounting without requiring the decision maker to have explicit budgets. My approach generates unique predictions about how the degree of mental accounting depends on expenditure shares and cognitive limitations. It also illustrates how narrow bracketing and mental accounting can be explained by the same underlying friction.