Memory and reference prices: an application to rental choice

Simonsohn and Loewenstein (SL 2006) present evidence that a household moving from one US city to another tends to pay a rent level that is closer to the city of origin, relative to comparable locals. Building on “Memory, Attention, and Choice” (BGS 2019), we show that these effects emerge from the interaction between memory and attention. In our model, memory is a database of experiences such as rents. The current rent cues recall of past rents, giving rise to a rental norm. A large discrepancy between the current rent and the memory-based norm surprises and attracts the mover’s attention, distorting choice. Thus, when rents in Pittsburgh cue recall of rent experiences in San Francisco, they look surprisingly cheap by comparison, leading the household to spend more. We revisit the SL evidence in light of the model. Besides generating the basic SL findings, our model yields two new predictions, which we test and confirm using 20 additional years of data.