Essays in behavioral and neuro-economics

This thesis examines foundational questions in behavioral economics—also called psychology and economics—and the neural foundations of varied sources of utility. We have three primary aims: First, to provide the field of behavioral economics with psychological theories of behavior that are derived from neuroscience and to use those theories to identify novel evidence for behavioral biases. Second, we provide neural and micro foundations of behavioral preferences that give rise to well-documented empirical phenomena in behavioral economics. Finally, we show how a deep understanding of the neural foundations of these behavioral preferences can feed back into our theories of social preferences and reference-dependent utility.

The first chapter focuses on classical conditioning and its application in identifying the psychological underpinnings of a pricing phenomenon. We return to classical conditioning again in the third chapter where we use fMRI to identify varied sources of utility—here, reference dependent versus direct utility—and cross-validate our interpretation with a conditioning experiment. The second chapter engages social preferences and, more broadly, causative utility (wherein the decision-maker derives utility from making or avoiding particular choices).

A theoretical and empirical study of addiction

Consumption of addictive substances poses a challenge to economic models of rational, forward-looking agents. This dissertation presents a theoretical and empirical examination of consumption of addictive goods.

The theoretical model draws on evidence from psychology and neurobiology to improve on the standard assumptions used in intertemporal consumption studies. I model agents who may misperceive the severity of the future consequences from consuming addictive substances and allow for an agent's environment to shape her preferences in a systematic way suggested by numerous studies that have found craving to be induced by the presence of environmental cues associated with past substance use. The behavior of agents in this behavioral model of addiction can mimic the pattern of quitting and relapsing that is prevalent among addictive substance users.

Chapter 3 presents an empirical analysis of the Becker and Murphy (1988) model of rational addiction using data on grocery store sales of cigarettes. This essay empirically tests the model's predictions concerning consumption responses to future and past price changes as well as the prediction that the response to an anticipated price change differs from the response to an unanticipated price change. In addition, I consider the consumption effects of three institutional changes that occur during the time period 1996 through 1999.