BEHAVIOURAL THEORY: Behavioural Theory and Economic Applications

Duration: 
December, 2012 to November, 2017
Funding: 
EU FP7 - ERC Starting Grant
Research Area: 

This proposal outlines projects to develop robust and portable theories studying the impact of psychological phenomena in economic settings. The proposed work falls in three broad research agendas. My first main agenda is to formally model and economically apply a simple observation: that when people make decisions, they do not focus equally on all attributes of their available options, and overweight the attributes they focus on. I will build a set of portable models of focusing in attribute-based choice and risky choice based on the idea that a person focuses more on attributes in which her options differ more. I will also use the framework to develop novel, focus-based, theories of intertemporal choice and social preferences, as well as analyse the implications of focusing for product design, principal-agent relationships, and other economic questions.My second main agenda is to explore some implications for market outcomes, welfare, and policy of the possibility that consumers misperceive certain aspects of products. I will investigate the circumstances that facilitate the profitable deception of consumers; firms' incentives for "innovating" deceptive products, including novel financial products aimed at exploiting investors; how firms' ability to distinguish naive and sophisticated consumers affects the consequences of deception; whether learning on the part of consumers will help them to avoid making mistakes; and how regulators and other observers can detect consumer mistakes from market data. Two further projects apply the model of reference-dependent utility I have developed in earlier work to understand the pricing and advertising behaviour of firms. I will also aim to disseminate some of my work, along with other cutting-edge research in psychology and economics, in a Journal of Economic Literature survey on "behavioural Contract Theory".