Top PDF Essays in Behavioral Decision Theory

Essays in Behavioral Decision Theory

Essays in Behavioral Decision Theory

We study the role of perception in individual stochastic choice. Perception is captured through priority orders, which determine whether an alternative, or object of choice, is perceived sooner or later than other alternatives. The perception priority order could represent differences in familiarity, or salience, of the objects of choice. Our main contribution is to identify a perception priority order from an agent’s violations of independence from irrelevant alternatives (IIA), the rationality axiom behind Luce’s (1959) model of choice. We attribute any violation of Luce’s model to the role of perception, and use these violations to back out a perception order. Our model, a perception-adjusted Luce model (PALM) , reduces to Luce’s when perception plays no role, and uses perception to capture violations of Luce’s model. In PALM, an agent makes choices as if she were following a sequential pro- cedure. In the procedure, the agent considers different alternatives in sequence, following a perception priority order. The probability of choosing an alternative de- pends on the probability that no alternative that was considered, or perceived, before was chosen. The choice probability also depends on relative utility, just as in Luce’s model. The sequential nature of PALM allows us to explain well-known behavioral phenomena, such as the attraction and compromise effects, and the consequences of forced choice and choice overload (see Sections 4.4.1 and 4.5).
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Essays in Behavioral Decision Theory

Essays in Behavioral Decision Theory

Sacrificing dynamic consistency is something many economists are not willing to do. Indeed, DC has a very strong normative appeal; so strong that many consider it a property of rationality. However, it is not so clear that it is necessary for ratio- nal behavior. The willingness to revise one’s beliefs, especially if they were formed without compelling evidence or copious data, in the face of new information seems much more in line with rational belief evolution. DC only allows for revision after zero-probability events, which is actually quite restrictive. Ortoleva [52] axioma- tizes a model where a decision maker performs Bayesian updating if, according to prior beliefs, the observed event has a probability above some threshold. Otherwise the agent revises beliefs by updating a prior over priors and choosing a new prior according to a maximum likelihood rule.
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Essays in Consumption, Behavioral and Applied Microeconomics

Essays in Consumption, Behavioral and Applied Microeconomics

This dissertation consists of three self-contained chapters which broadly address issues related to individual and household decision making. The first essay investigates household budgeting and cash flow management decisions. Specifically, I focus on household consumption decisions when there is a mismatch between the frequency at which their income (pay) arrives and the frequency for which they make their consumption decisions. Exploiting monthly variation in income arising from bi-weekly pay schedules, I find that household expenditures respond significantly to such variation with the response coming almost entirely from durables. These responses cannot be explained by the presence of binding liquidity constraints. I consider several behavioral explanations including time inconsistency with sophistication, mental accounting, and a new model of budgeting heuristics in which individuals naively extrapolate their current income into the future. The second essay, joint with Judd Kessler and Katherine Milkman, explores public recognition in a charitable giving context and provides new empirical evidence on how public recognition can increase pro-social behavior. Using observational data on alumni giving to a large university, we find that the enactment of recognition programs for consecutive giving increased both the probability of giving and the dollar amount donated directly to the University. Furthermore, such recognition crowded in donations to other University priorities. Exploiting differences in the timing of various recognition programs, we find that while individual value public recognition generally, they value recognition more so when such recognition can be used to convey information regarding personal traits of the donor.
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Dealer’s Ordering Decision Behavior under Different Price Strategies: An Analysis Based on the Modern Behavioral Decision Theory

Dealer’s Ordering Decision Behavior under Different Price Strategies: An Analysis Based on the Modern Behavioral Decision Theory

3) Fully implement the relationship marketing strategies and increase dealer’s loyalty to enterprise. With the deepening of relationship marketing studies, it has indicated that Chinese culture is different from western culture. In terms of commercial relationship, western countries emphasizes on the reciprocity principle, while China emphasizes one’s position in the whole relationship network and different attitudes and behaviors for various positions. As one of the key components in social activities, enterprise marketing channel manage- ment is rooted in Chinese culture, which has Chinese characteristics. The relationship between enterprise and dealers or the cross-organizational private relationship between enterprise marginal personnel and dealers has a significant impact on bilateral cooperation. As one of the key components in channel relationship management, dealers play an important role in the whole channel ecosystem, and the bilateral relationship is essential and en- terprise should pay attention to it. Once enterprise establishes a close and firm cooperation with dealers, their loyalty to enterprise will gradually increase, which in turn diverts dealer’s ordering decision to the direction in favor of the enterprise and bilateral cooperation. Enterprise should communicate with dealer as much as possible, treat them as “one of its own members”, get some suggestions for reference, and achieve better effect in imple- menting promotion strategies on grounds of mutual benefit and win-win result, while implementing price strate- gies.
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Essays on the theory of conflict

Essays on the theory of conflict

In an effort to reduce information costs, voters use a partially-informative heuristic that economizes on the effort needed to reach a decision subject to the requirement that the heuristic is “generally” correct. This coincides with the findings of Lau and Redlawsk (2006: 138) who find voters are more inclined to use heuristics when candidate ideologies are similar. Assume the specific heuristic is a satisficing heuristic, in which each voter receives information until one of the candidates has passed a certain threshold, at which point the voter makes her decision. Specifically, assume each voter watches news segments until they have observed one of the candidates espouse her ideal point m more times than the other candidate times in a short enough time interval. As an illustrative (and entirely arbitrary) example, assume a pro-life voter watches the news every day, and if she hears a candidate state “I am against abortion” three more times than his opponent, she will believe the candidate with probability α i and
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Essays on microeconomic theory

Essays on microeconomic theory

in which investors update their beliefs about the managers’ skills while they also learn about the fund’s exposure to the market. The second inference in extreme markets is noisier for two reasons. The first is idiosyncratic risk and the second is that investors who are uncertain about risk loadings cannot perfectly adjust fund returns for the contribution of aggregate risk realizations. As a result it becomes harder for investors to judge the managers and update their beliefs, and this is what drives the documented result. The theory we propose differs from that of Franzoni and Schmalz (2017) because their model describes the fund’s loading on aggregate risk (β) as a preset fund specific exposure, whereas our model gives the ability for managers to strategically choose their investment decision. Also we further investigate how this investment decision will affect the managers’ decision if it is observable by the investors or not. Moreover the data source considered for their paper is the CPRSP Mutual Fund Database which is different from the Morningstar CISDM which we use for the empirical part, making it difficult to compare our results. Although the implementa- tion and the structure of their model is completely different to ours and does not imply the same predictions we are making, we conclude that the aggregate risk realizations matter for mutual fund investors and managers.
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Essays on auction theory

Essays on auction theory

In this section we assume a different selhng mechanism, the open ascending auction. More precisely, we assume th a t the auction procedure is as follows, a t every moment of tim e there are two types of bidders: active bidders and inactive bidders. Bidders are active until they manifest th a t they want to become inactive. Once a bidder has decided to become inactive her decision is irreversible. The identity of the active bidders is publicly observable during the auction. During the auction the price is publicly observable and increases continuously from zero. At each mom ent in tim e bidders can decide to become inactive. The price stops increasing whenever the number of active bidders is less th an or equal to the number of units for sale. In this case, each of the active bidders gets one unit. The rest of the units are random ly allocated (with equal probability) among the bidders th a t quit at th e last price. The price paid by all the winners is th e last price at which bidders quit.^^ As in the sealed bid auction we shall assume th a t there is neither an entry fee nor a reserve price.
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Two Essays in Behavioral Corporate Finance

Two Essays in Behavioral Corporate Finance

process. Hambrick, Cho, and Chen (1996) find delays in a firm’s response to competitors’ moves as the executive team becomes more heterogeneous. As with a heterogeneous team, disagreement causes long response times through excessive deliberation and personal frictions. Certain firms can sacrifice a bit of quality in their decisions but a slowdown is too costly. For example, Lehn, Patro, and Zhao (2009) find that firms with high growth opportunities endogenously choose smaller boards because they need a nimbler decision-making process to navigate the quickly changing investment environment. Larger boards can generate more information about the firm’s product market, compliance with regulations, and so forth, however, it lengthens the firm’s response time, which is critical for a high growth firm. Likewise, a firm in financial distress oftentimes needs to make quick decisions. In a study of firms experiencing negative earnings that later become profitable through voluntary restructuring, John, Lang, and Netter (1992) find that these firms cut their employment by about 5% and reduce their debt to assets ratio by 8% in the first year after negative earnings. Furthermore, managers in firms that file for Chapter 11 bankruptcy have only 180 days to obtain creditor and shareholder approval for their reorganization plan (Wruck 1990). In yet another context, Bernile, Bhagwat, and Yonker (2016) find that board diversity impairs firm value in times of high market volatility when quick decision-making is helpful. Note that here disagreement reduces firm value even if executives’ effort and implementation decisions don’t eventually get impaired as in Ha.
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Essays in banking theory

Essays in banking theory

In this paper we explicitly model the asset liquidation decision of financial in- stitutions under funding pressure in a duopoly settings, when multiple asset classes are available to adjust the portfolio. In the model, the ‘funding pressure’, which is the key market friction behind this phenomenon, is captured by a leverage con- straint: following an asset-price shock, the banking system may be forced to engage in systemic deleveraging to restore leverage targets by selling assets and repaying debt. 1 The relevance of this mechanism in propagating crises is convincingly demon- strated - both empirically and theoretically - in an influential paper by Adrian and Shin [2010]. The investment portfolio on banks’ balance sheets differ in ex-ante liq- uidity, measured as the market price impact following an asset sale during ‘normal times’. Equity-maximizer financial institutions adjust their portfolio by choosing to sell assets such that the impact on equity is minimized. In the presence of asset commonalities, if all banks end up selling the same asset class (‘commonality’), liq- uid assets suddenly may appear illiquid and can be sold only at a significant fire-sale discount, a phenomenon which was widely observed during the financial crisis. This endogenous determination of the fire-sale price has to be taken into consideration by rational financial institutions.
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Essays on behavioral responses to income taxes

Essays on behavioral responses to income taxes

A lump-sum tax is a tax which is levied based on some unchangeable characteristic of an individual. A simple lump-sum tax would be a head tax of the same size for all individuals, regardless of their income levels. By definition, lump-sum taxes do not induce any behavioral responses, and therefore do not distort economic decision- making. However, lump-sum taxes are rarely applied in actual tax systems, as they perform badly in implementing the equity and redistributional aspects of taxation. Also, there are only a few individual characteristics that are truly unchangeable, and it might be difficult for the government to correctly observe them for each individual. Therefore, most real-life tax systems comprise different types of distortive taxes, such as proportional and progressive income taxes in which the tax burden increases along with income. Nevertheless, non-distortive lump-sum taxes provide an intuitive theoretical benchmark when analyzing the excess burden caused by distortive taxes.
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Essays in applied economic theory

Essays in applied economic theory

This thesis consists of three independent and unrelated chapters. Each of them rep- resents an area of my research interests. The first chapter of this thesis contributes to the fascinating and growing literature of cheap talk. This literature studies the transmission of soft information; information not verifiable and which cannot be con- tracted upon. Crawford and Sobel (1982) provided a tractable working framework to analyze this issue. In their seminal paper a privately informed expert sends a message to an uninformed decision maker who then has to make a decision. They show that, if the interests of the two agents are not perfectly aligned, only coarse information can be transmitted in equilibrium. A natural reaction from the decision maker to this poor information transmission, would be to acquire some information by herself. Chapter 1 presents a model in which the decision maker has access to an imperfect and private source of information. The presence of this extra source of information has a twofold effect on the expert’s incentives to transmit information. On the one hand, more information allows the decision maker to choose better actions on average, reducing the implicit cost of being imprecise. This effect hampers com- munication. On the other hand, the extra information introduces uncertainty to the expert, since he is no longer certain of the decision maker’s reaction to his messages. A risk averse expert has an incentive to report more precise messages to reduce the variance of the decision maker’s actions. This effect favours communication. Chap- ter 1 provides some environments in which the first effect dominates the second and the access to information reduces (and sometimes prevents) the communication in equilibrium. More strikingly, the loss of communication can be such that, even if the decision maker has access to valuable information, the net welfare effect is negative; the decision maker should commit to acquiring no extra information.
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Essays on contract design in behavioral and development economics

Essays on contract design in behavioral and development economics

We then simulate the model using parameters estimated from the MIX Market (henceforth, MIX) dataset and existing research. The attempt to bridge theory and policy debates via quantitative analysis is a novel aspect of the paper. We initially expected that the monopolist’s ability to leverage borrowers’ social capital would have large welfare effects. We find that forcing the monopolist to use JL when he would prefer IL increases borrower welfare by a minimum of 12% and a maximum of 20%. Meanwhile, switching to a non-profit lender delivers a much larger wel- fare gain of between 54% and 73%. The qualitative sizes of these effects are robust to alternative parameter values. Secondly, we find that despite its effect on under- mining repayment incentives, competition delivers similar borrower welfare to the non-profit benchmark. Taking these results together suggests that regulators should be attentive to lenders with market power, but that fostering competition rather than heavy-handed regulation can be an effective antidote. Thirdly, we find that for our parameter values, the non-profit lender would offer JL to all borrowers, irrespec- tive of their level of social capital. The for-profit lenders, with and without market power, only switch to JL lending when borrowers have social capital worth around 15% of the loan size.
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Essays on microeconomic theory and behavioural economics

Essays on microeconomic theory and behavioural economics

private information setting in which the public player spies on the private player in both all-pay auction and Tullock contest (Tullock, 1967). The author shows that espionage is more common in a more discriminatory contest and can be discour- aged by the increasing probability of spying detection. The current paper does not consider detection of spying or double agent. Another closely related strand of lit- erature is the information acquisition in winner-pay auction literature (Miettinen, 2013; Shi, 2012; Persico, 2000; Matthews, 1984). In all-pay auctions, Morath and Münster (2013) considers players' incentive to acquire information about their own valuation, and the decision of information acquisition is binary. Alternatively, Fang and Morris (2006) from which the research idea of the current paper was originated shows a numerical example of acquiring information about the opponent in a rst price winner-pay auction. Built on Fang and Morris (2006), Tian and Xiao (2007) studies endogenous information acquisition on the opponent's valuation in the rst price auction. Finally, in the IO literature, spying/espionage are also considered in entrant deterrence (Barrachina et al., 2014; Solan and Yariv, 2004), in price and quantity competition in duopoly (Kozlovskaya, 2016; Wang, 2016; Whitney and Ga- isford, 1999), and in multi-market competitions (Billand et al., 2016).
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In Praise of Theory and Speculation : Essays and Commentaries

In Praise of Theory and Speculation : Essays and Commentaries

“... but when I said that nothing had been done I erred in one important matter. We had definitely committed ourselves and were halfway out of our ruts. We had put down our passage money— booked a sailing to Bombay. This may sound too simple, but is great in consequence. Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative (and creation), there is one elementary truth, the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one's favour all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamt would have come his way. I learned a deep respect for one of Goethe's couplets:
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At the Limits of History  Essays on Theory and Practice

At the Limits of History Essays on Theory and Practice

fiction, its truth would also disappear, since human beings discover truth only through appearance, through ‘picturing’ it. Here lies the aporia to which Jenkins’s deconstructive critique keeps returning: does historical truth produce correct transcriptions and credible representations of the past? Or does correct transcription (as transcription), credible representation (as re-presentation), produce what is called historical truth? Either way, argues Richard Rorty whose thinking Jenkins here endorses, epistemologically it comes down to ‘choosing objects to be compelled by’.(6) Decisive now is what constitutes knowledge, what informs a decision at a decisive moment: what makes factors compelling, what makes the decision they induce decisive. Thus in postmodernist thinking this ‘radical decisionism’, dispensing with ‘transcendental signifiers’, ‘deferring for ever total/totalitarian closures’ (pp.1 54, 246, 249), ensures its openness, the openness Jenkins here insists on and – with good reason – fully exploits.
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Two Essays in Business Cycle Theory

Two Essays in Business Cycle Theory

affected by the gains and losses in their wealth and not by the final state of their wealth. Second, when the agents experience an equal amount of gain and loss in their wealth, they are hurt significantly more by the loss than get pleasure from the gain. This attitude of the agents is termed as “loss aversion.” We believe these behavioral rules may turn out to be crucial in terms of measuring the cost of business cycles. For one thing, we concern about business cycles mainly because of the possible losses – either losses of consumption during a recession, or losses of wealth during inflation. For another, most would not deny that these losses concern us more than the gains during “good times.”
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Essays in Networks of Finance and Experimental Finance: A Behavioral View

Essays in Networks of Finance and Experimental Finance: A Behavioral View

The purpose of this paper is to examine the link between the outcomes of Initial Public Offerings (IPOs) and the personal social network of the Chief Executive Officer (CEO) leading the firm at the time of the IPO. We build on fast growing literature that deals with the importance of social ties – such as shared past employment, shared educational overlaps or joint top positions in social clubs – in finance. So far, financial research has documented both benefits and costs of such connections. Personal ties facilitate transfer of information among corporate decision makers, which leads to more efficient loan contracting (Engelberg, Gao, and Parsons, 2012), better analyst performance (Cohen, Malloy, and Frazzini, 2010), improved portfolio manager performance (Cohen, Frazzini, and Malloy, 2008), greater M&A synergies (Cai and Sevilir, 2012), and overall better corporate performance (Fracassi, 2014). On the other hand, inter-personal connections have been found to interfere with optimal corporate governance and monitoring of managers (Fracassi and Tate, 2012), to increase transaction costs (Cai, Walkling, and Yang, 2015), as well as to lead to collusion among contracting managers at the expense of investors (Ishii and Xuan, 2014).
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Essays on behavioral responses to social insurance and taxation

Essays on behavioral responses to social insurance and taxation

Moreover, when optimization requires costly attention, one may expect that the frequency of mistakes depends on the stake workers have in the decision. Retirement is generally a high-stake decision with large consequences in terms of lifetime consumption possibilities, but stakes vary across workers. For instance, some workers may have contributed to the public system only for part of their earnings career, or they may not be the main household earner. Table 1.8 shows that workers with higher stakes seem to be, if anything, more likely to bunch at statutory ages. The ratio of pension wealth to annual earnings, which proxies for the relative importance of public pensions for the worker, increases the probability of bunching at statutory ages. Married females, who tend to rely less on their own pension for old-age consumption, are less likely to bunch at statutory ages. Both effects also hold when focusing only on the NRA where mistakes may be particularly likely. Finally, another measure of stakes could be the size of the local incentive. For instance, if a kink is very small, choosing a “wrong” retirement age may not be very costly. This would imply that observed elasticities are increasing in kink sizes because it is more worthwhile to optimize at large kinks. Appendix figure 1.A6 shows binned scatterplots of observed elasticities vs. kink sizes. There is no evidence of larger responses at large kinks: across all types of discontinuities observed elasticities are flat or even decreasing with kink size. Appendix table 1.A3 reports results from corresponding regressions, confirming that observed elasticities do not increase with the kink size.
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Three Essays on Microeconomic Theory

Three Essays on Microeconomic Theory

erences, either by changing the order of the preference lists or by announcing that some acceptable agents are unacceptable. Even the NRMP and School Choice Programs in NYC and Boston, while widely acknowledged as a model of successful matching programs, can- not rule out such incentives for strategic misrepresentation. Indeed, the possibility of such manipulation is mostly unavoidable. Whenever there is more than one stable matching, at least one agent can profitably misrepresent her preferences (Roth and Sotomayor, 1990), and the conditions under which a preference profile contains a unique stable matching seem to be quite restrictive (Eeckhout, 2000; Clark, 2006). 4 Thus, markets are likely to have agents with an incentive to manipulate a stable matching mechanism. In addition, Pittel (1989) shows that the number of stable matchings tends to increase as the number of partici- pants becomes large. Accordingly, when market designers deal with large markets, concerns regarding strategic manipulation are heightened. As stable matching mechanisms are not incentive compatible, the mechanisms may be manipulated by participants, thereby not implementing the intended matchings. Moreover, each participant’s decision may become hard to make since she needs to best respond to other agents’ strategic manipulations.
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Essays in Behavioral Household Finance

Essays in Behavioral Household Finance

Bettinger et al. 2009) and retirement savings (Beshears et al. 2006a, 2006b) and such assistance can also be expected to increase enrollment in the TSP. However, the presence of potential behavioral effects should not completely undermine the case for financial literacy development. In this case, TSP enrollment still requires an active decision and comparison of the costs and benefits of making TSP contributions. Enrollment does not occur via a default rule change and individuals must take active steps to enroll. Since the decisions under consideration require some reflection and effort by students, behavioral assistance seems unable to account for the full effect. While AER program administrators might be results oriented and be primarily concerned with the total effects, Army administrators and other public policy-makers might desire more detailed information on the mechanism at work, both to tailor this course and design others in the future. Ideally, the two effects could be separately identified and measured. In the context of the PFMC, while there may have been variation in the enrollment assistance provided at each location, there is no reliable data on where and when this variation occurred. 28 Nonetheless, in this sample, the roles of human capital and behavioral assistance cannot be separated and the large program effects documented above should be thought of as the combination of human capital (financial literacy) development and assistance. Additional work is required to identify the effects of financial literacy separate from behavioral policy assistance. Chapter 2 of this dissertation explores the effects of the PFMC in the context of other financial behaviors where behavioral confounds are absent or less present.
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