Turning on Dimensional Prominence in Decision Making: Experiments and a Model

Abstract

Could introducing a tiny interest rate on positive balances of checking accounts affect investment decisions? We suggest, counterintuitively, that it might decrease allocations to checking accounts and increase riskless investments with higher returns. This violation of monotonicity is a potential outcome of a novel behavioral phenomenon that we formalize and investigate experimentally. It posits that even a small interest rate highlights or turns on the safe gains dimension, bumping up its decision weight while shrouding other considerations, such as liquidity. Consequently, choices may shift from the most liquid option, the checking account, to safe investments with superior returns. Our exploration of this phenomenon covers three different choice environments: investment decisions, social preferences, and choice under uncertainty. This paper was accepted by Yan Chen, behavioral economics and decision analysis.