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Traditional models of rational choice assume that preferences are complete, but the completeness axiom is neither normatively compelling nor psychologically plausible. Building on recent work in economics, we develop a rational analysis of decision making with incomplete preferences. The analysis sheds surprising light on a range of well-known behavioral “anomalies,” including the endowment effect, status quo maintenance, the sunk cost effect, and coherent arbitrariness. We propose a two-part division of rational choice theory—into preference theory and “implementation theory”—and show how conservative and coherently arbitrary policies can effectively implement incomplete preferences. The two-part normative framework motivates a psychological distinction between evaluation and implementation phases in decision making. We argue that the endowment effect and related phenomena, which have usually been attributed to loss aversion in the evaluation phase, are better explained by conservatism in the implementation phase. The rational analysis challenges the normative adequacy of expected utility theory and raises questions about the explanatory scope of prospect theory. It illustrates the rich interplay between psychological models of value structure and normative models of rational choice. 

Although all birth orders in the “birth sequence problem” are equiprobable, most participants judge the less representative order as less likely than the more representative order. But this well-known problem confounds representativeness with the direction in which birth orders are compared. We hypothesized and corroborated in three experiments (total N = 1,136) that participants pragmatically infer the birth orders’ relative prevalence from the direction of comparison. Experiment 1 found that participants judged the less representative sequence as more common when we reversed the comparison. Experiment 2 reproduced these results despite removing representativeness as a cue. In Experiment 3, participants preferred to place the relatively common sequence as the referent in an inverted “speaker” problem. Our results turn the iconic problem’s interpretation on its head: Rather than indicating flawed human cognition, the birth sequence problem illustrates people’s ability to adaptively extract subtle linguistic meaning beyond the literal content. 

Human decisions are context dependent in ways that violate classical norms of rational choice. However, these norms implicitly depend on idealized descriptive assumptions that are often unrealistic. We focus on one such assumption: that information is constant across contexts. Choice contexts often supply subtle cues—which may be embedded in frames, procedures, or menus—to which human decision makers can be highly sensitive. We review recent evidence that some important context effects reflect dynamically coherent belief and preference updating, in response to ecologically valid cues. This evidence paints a more nuanced picture of human rationality in natural choice environments and opens up prospects for nonpaternalistic forms of choice architecture.