In Short:

Limited consideration is indispensable for credible inference and welfare analysis of choice under risk in field environments.

Abstract

We develop and estimate a model of choice under risk in which limited consideration, alongside heterogeneous risk preferences, is a key determinant of observed behavior. Using 322,448 household–policy observations from a U.S. auto insurer over nearly two decades—spanning liability limits and collision/comprehensive deductibles—we show that preference-only models, whether expected utility or behavioral extensions, cannot jointly rationalize key empirical patterns. Our framework combines a reference dependent utility specification with flexible probability distortions and a stochastic consideration-set mechanism in which alternatives enter consideration with alternative specific probabilities that may depend on observables and preferences. For liability choices, households exhibit extreme rankings: about 70% prefer more coverage to less, while 30% prefer the opposite. The rich dispersion in selected limits is explained primarily by heterogeneity in which alternatives are considered, not by expected-utility tradeoffs. Ignoring limited consideration leads to biased inference and distorted counterfactual predictions. For deductible choices, limited consideration explains distinctive joint patterns and is systematically correlated with preferences. Finally, we show that a parsimonious latent two-type structure linking consideration and preferences across contexts accounts for observed cross-coverage correlations that would otherwise be interpreted as preference instability. Overall, the results demonstrate that limited consideration is indispensable for credible inference and welfare analysis of choice under risk in field environments.

About the author

Levon Barseghyan

professor, school of government and policy

Levon Barseghyan’s work, both theoretical and empirical, is aimed at uncovering mechanisms that shape economic behavior and how such behavior is affected by market structure, economic policies and political institutions.