An illustrated guide to context effects

Abstract

Three context effects pertaining to stochastic discrete choice have attracted a lot of attention in Psychology, Economics and Marketing: the similarity effect, the compromise effect and the asymmetric dominance effect. Despite this attention, the existing literature is rife with conflicting definitions and misconceptions. We provide theorems relating different variants of each of the three context effects, and theorems relating the context effects to conditions on discrete choice probabilities, such as random utility, regularity, the constant ratio rule, and simple scalability, that may or may not hold for any given discrete choice model. We show how context effects at the individual level may or may not aggregate to context effects at the population level. Importantly, we offer this work as a guide for researchers to sharpen empirical tests and aid future development of choice models.