Decision making under pressure : a behavioural economics perspective

This research investigates the decision making process of individuals from revealed preferences in extreme environments or life-and-death situations, from a behavioral economics perspective. The empirical analysis of revealed behavioral preferences shows how the individual decision making process can deviate from the standard self-interested or “homo economicus” model in non-standard situations. The environments examined include: elite athletes in FIFA World and Euro Cups; climbing on Everest and the Himalaya; communication during 9/11 and risk seeking after the 2011 Brisbane floods. The results reveal that the interaction of culture and environment has a significant impact on the decision process, as social behaviors and institutions are intimately intertwined, which govern the processes of human behavior and interaction. Additionally, that risk attitudes are not set and that immediate environmental factors can induce a significant shift in an individuals risk seeking behaviors.

A behavioural economics inquiry into inequality in education: Three empirical essays

This thesis investigates behavioural processes for inequality in education and solutions to mitigate such effects, applying conceptual and methodological insights from behavioural and experimental economics. It explores relative age differences in economic preferences of young individuals, the influence of stereotypes and positive discrimination on performance, and evaluates a program that offers strong encouragement for educational achievement of indigenous high school students.

Applications of behavioural economics to tax evasion

The paper reviews recent models that have applied the techniques of behavioural economics to the analysis of the tax compliance choice of an individual taxpayer. The construction of these models is motivated by the failure of the Yitzhaki version of the Allingham–Sandmo model to predict correctly the proportion of taxpayers who will evade and the effect of an increase in the tax rate upon the chosen level of evasion. Recent approaches have applied non-expected utility theory to the compliance decision and have addressed social interaction. The models we describe are able to match the observed extent of evasion and correctly predict the tax effect but do not have the parsimony or precision of the Yitzhaki model.

Determinants of biosecurity behaviour of British cattle and sheep farmers: a behavioural economics analysis

The paper analyses the impact of a priori determinants of biosecurity behaviour of farmers in Great Britain. We use a dataset collected through a stratified telephone survey of 900 cattle and sheep farmers in Great Britain (400 in England and a further 250 in Wales and Scotland respectively) which took place between 25 March 2010 and 18 June 2010. The survey was stratified by farm type, farm size and region. To test the influence of a priori determinants on biosecurity behaviour we used a behavioural economics method, structural equation modelling (SEM) with observed and latent variables. SEM is a statistical technique for testing and estimating causal relationships amongst variables, some of which may be latent using a combination of statistical data and qualitative causal assumptions. Thirteen latent variables were identified and extracted, expressing the behaviour and the underlying determining factors. The variables were: experience, economic factors, organic certification of farm, membership in a cattle/sheep health scheme, perceived usefulness of biosecurity information sources, knowledge about biosecurity measures, perceived importance of specific biosecurity strategies, perceived effect (on farm business in the past five years) of welfare/health regulation, perceived effect of severe outbreaks of animal diseases, attitudes towards livestock biosecurity, attitudes towards animal welfare, influence on decision to apply biosecurity measures and biosecurity behaviour. The SEM model applied on the Great Britain sample has an adequate fit according to the measures of absolute, incremental and parsimonious fit. The results suggest that farmers’ perceived importance of specific biosecurity strategies, organic certification of farm, knowledge about biosecurity measures, attitudes towards animal welfare, perceived usefulness of biosecurity information sources, perceived effect on business during the past five years of severe outbreaks of animal diseases, membership in a cattle/sheep health scheme, attitudes towards livestock biosecurity, influence on decision to apply biosecurity measures, experience and economic factors are significantly influencing behaviour (overall explaining 64% of the variance in behaviour).

Topics in Behavioural Economics - Information and Fairness. Revised edition

This thesis dwells upon topics in behavioural economics: information and fairness, with five research papers. The first two contributions are concerned with the extension of standard auction formats with information acquisition strategies. The third paper addresses global games framed as a speculative attack and tests theoretical predictions for risk and ambiguity. The fourth contribution deals with disclosing conflicts of interest, where one player has a monetary incentive to deceive. The last paper extends a standard model of social preferences with a second fairness dimension and studies how economic agents distort fairness norms exhibiting a self-serving bias effect.

The economics of credence goods: An experimental investigation of the role of verifiability, liability, competition and reputation in credence goods markets

Credence goods markets are characterized by asymmetric information between sellers and consumers that may give rise to inefficiencies, such as under- and overtreatment or market break-down. We study in a large experiment with 936 participants the determinants for efficiency in credence goods markets. While theory predicts that either liability or verifiability yields efficiency, we find that liability has a crucial, but verifiability only a minor effect. Allowing sellers to build up reputation has little influence, as predicted. Seller competition drives down prices and yields maximal trade, but does not lead to higher efficiency as long as liability is violated.

Behavioural biases and information disclosure laws relating to residential property sales : narrowing the gap between existing laws and calls for future reforms

Market failures involving the sale of complex merchandise, such as residential property, financial products and credit, have principally been attributed to information asymmetries. Existing legislative and regulatory responses were developed having regard to consumer protection policies based on traditional economic theories that focus on the notion of the ‘rational consumer’. Governmental responses therefore seek to impose disclosure obligations on sellers of complex goods or products to ensure that consumers have sufficient information upon which to make a decision. Emergent research, based on behavioural economics, challenges traditional ideas and instead focuses on the actual behaviour of consumers. This approach suggests that consumers as a whole do not necessarily benefit from mandatory disclosure because some, if not most, consumers do not pay attention to the disclosed information before they make a decision to purchase. The need for consumer policies to take consumer characteristics and behaviour into account is being increasingly recognised by governments, and most recently in the policy framework suggested by the Australian Productivity Commission

Economics of maritime disasters : essays on the Titanic and Lusitania

This work seeks to fill some of the gap existing in the economics and behavioural economics literature pertaining to the decision making process of individuals under extreme environmental situations (life and death events). These essays specifically examine the sinking’s of the R.M.S. Titanic, on 14th April of 1912, and the R.M.S. Lusitania, on 7th May 1915, using econometric (multivariate) analysis techniques. The results show that even under extreme life and death conditions, social norms matter and are reflected in the survival probabilities of individuals onboard the Titanic. However, results from the comparative analysis of the Titanic and Lusitania show that social norms take time to organise and be effective. In the presence of such time constraints, the traditional “homo economicus” model of individual behaviour becomes evident as a survival of the fittest competition.

Behavioural evidence for social preferences

A central topic in economics is the existence of social preferences. Behavioural economics in general has approached the issue from several angles. Controlled experimental settings, surveys, and field experiments are able to show that in a number of economic environments, people usually care about immaterial things such as fairness or equity of allocations. Findings from experimental economics specifically have lead to large increase in theories addressing social preferences. Most (pro)social phenomena are well understood in the experimental settings but very difficult to observe 'in the wild'. One criticism in this regard is that many findings are bound by the artificial environment of the computer lab or survey method used. A further criticism is that the traditional methods also fail to directly attribute the observed behaviour to the mental constructs that are expected to stand behind them. This thesis will first examine the usefulness of sports data to test social preference models in a field environment, thus overcoming limitations of the lab with regards to applicability to other - non-artificial - environments. The second major contribution of this research establishes a new neuroscientific tool - the measurement of the heart rate variability - to observe participants' emotional reactions in a traditional experimental setup.

Incentivising private health insurance through the income tax regime : Capitalising on behavioural models

The Australian income tax regime is generally regarded as a mechanism by which the Federal Government raises revenue, with much of the revenue raised used to support public spending programs. A prime example of this type of spending program is health care. However, a government may also decide that the private sector should provide a greater share of the nation's health care. To achieve such a policy it can bring about change through positive regulation, or it can use the taxation regime, via tax expenditures, not to raise revenue but to steer or influence individuals in its desired direction. When used for this purpose, tax expenditures steer taxpayers towards or away from certain behaviour by either imposing costs on, or providing benefits to them. Within the context of the health sector, the Australian Federal Government deploys social steering via the tax system, with the Medicare Levy Surcharge and the 30 percent Private Health Insurance Rebate intended to steer taxpayer behaviour towards the Government’s policy goal of increasing the amount of health provision through the private sector. These steering mechanisms are complemented by the ‘Lifetime Health Cover Initiative’. This article, through the lens of behavioural economics, considers the ways in which these assorted mechanisms might have been expected to operate and whether they encourage individuals to purchase private health insurance.

Essays on Misplanning Wealth and Health: A Behavioural Approach

The dissertation consists of three essays on misplanning wealth and health accumulation. The conventional economics assumes that individual's intertemporal preferences are exponential (exponential preferences, EP). Recent findings in behavioural economics have shown that, actually, people do discount near future relatively heavier than distant future. This implies hyperbolic intertemporal preferences (HP). Essays I and II concentrate especially on the effects of a delayed completion of tasks, a feature of behaviour that HP enables. Essay III uses current Finnish data to analyse the evolvement of the quality adjusted life years (QALYs) and inconsistencies in measuring that. Essay I studies the existence effects of a lucrative retirement savings program (SP) on the retirement savings of different individual types having HP. If the individual does not know that he will have HP also in the future, i.e. he is the naïve, for certain conditions, he delays the enrolment on SP until he abandons it. Very interesting finding is that the naïve retires then poorer in the presence than in the absence of SP. For the same conditions, the individual who knows that he will have HP also in the future, i.e. he is the sophisticated, gains from the existence of SP, and retires with greater retirement savings in the presence than in the absence of SP. Finally, capabilities to learn from past behaviour and about intertemporal preferences improve possibilities to gain from the existence but an adequate time to learn must be then guaranteed. Essay II studies delayed doctor's visits, theirs effects on the costs of a public health care system and government's attempts to control patient behaviour and fund the system. The controlling devices are a consultation fee and a deductible for that. The deductible is effective only for a patient whose diagnosis reveals a disease that would not get cured without the doctor's visit. The naives delay their visits the longest while EP-patients are the quickest visitors. To control the naives, the government should implement a low fee and a high deductible, while for the sophisticates the opposite is true. Finally, if all the types exist in an economy then using an incorrect conventional assumption that all individuals have EP leads to worse situation and requires higher tax rates than assuming incorrectly but unconventionally that only the naives exists. Essay III studies the development of QALYs in Finland 1995/96-2004. The essay concentrates on developing a consistent measure, i.e. independent of discounting, for measuring the age and gender specific QALY-changes and their incidences. For the given time interval, use of a relative change out of an attainable change seems to be almost intact to discounting and reveals that the greatest gains are for older age groups.

Efficient methods for empirical tests of behavioral economics theories in laboratory and field experiments

In the quest for a descriptive theory of decision-making, the rational actor model in economics imposes rather unrealistic expectations and abilities on human decision makers. The further we move from idealized scenarios, such as perfectly competitive markets, and ambitiously extend the reach of the theory to describe everyday decision making situations, the less sense these assumptions make. Behavioural economics has instead proposed models based on assumptions that are more psychologically realistic, with the aim of gaining more precision and descriptive power. Increased psychological realism, however, comes at the cost of a greater number of parameters and model complexity. Now there are a plethora of models, based on different assumptions, applicable in differing contextual settings, and selecting the right model to use tends to be an ad-hoc process. In this thesis, we develop optimal experimental design methods and evaluate different behavioral theories against evidence from lab and field experiments.

We look at evidence from controlled laboratory experiments. Subjects are presented with choices between monetary gambles or lotteries. Different decision-making theories evaluate the choices differently and would make distinct predictions about the subjects' choices. Theories whose predictions are inconsistent with the actual choices can be systematically eliminated. Behavioural theories can have multiple parameters requiring complex experimental designs with a very large number of possible choice tests. This imposes computational and economic constraints on using classical experimental design methods. We develop a methodology of adaptive tests: Bayesian Rapid Optimal Adaptive Designs (BROAD) that sequentially chooses the "most informative" test at each stage, and based on the response updates its posterior beliefs over the theories, which informs the next most informative test to run. BROAD utilizes the Equivalent Class Edge Cutting (EC²) criteria to select tests. We prove that the EC² criteria is adaptively submodular, which allows us to prove theoretical guarantees against the Bayes-optimal testing sequence even in the presence of noisy responses. In simulated ground-truth experiments, we find that the EC² criteria recovers the true hypotheses with significantly fewer tests than more widely used criteria such as Information Gain and Generalized Binary Search. We show, theoretically as well as experimentally, that surprisingly these popular criteria can perform poorly in the presence of noise, or subject errors. Furthermore, we use the adaptive submodular property of EC² to implement an accelerated greedy version of BROAD which leads to orders of magnitude speedup over other methods.

We use BROAD to perform two experiments. First, we compare the main classes of theories for decision-making under risk, namely: expected value, prospect theory, constant relative risk aversion (CRRA) and moments models. Subjects are given an initial endowment, and sequentially presented choices between two lotteries, with the possibility of losses. The lotteries are selected using BROAD, and 57 subjects from Caltech and UCLA are incentivized by randomly realizing one of the lotteries chosen. Aggregate posterior probabilities over the theories show limited evidence in favour of CRRA and moments' models. Classifying the subjects into types showed that most subjects are described by prospect theory, followed by expected value. Adaptive experimental design raises the possibility that subjects could engage in strategic manipulation, i.e. subjects could mask their true preferences and choose differently in order to obtain more favourable tests in later rounds thereby increasing their payoffs. We pay close attention to this problem; strategic manipulation is ruled out since it is infeasible in practice, and also since we do not find any signatures of it in our data.

In the second experiment, we compare the main theories of time preference: exponential discounting, hyperbolic discounting, "present bias" models: quasi-hyperbolic (α, β) discounting and fixed cost discounting, and generalized-hyperbolic discounting. 40 subjects from UCLA were given choices between 2 options: a smaller but more immediate payoff versus a larger but later payoff. We found very limited evidence for present bias models and hyperbolic discounting, and most subjects were classified as generalized hyperbolic discounting types, followed by exponential discounting.

In these models the passage of time is linear. We instead consider a psychological model where the perception of time is subjective. We prove that when the biological (subjective) time is positively dependent, it gives rise to hyperbolic discounting and temporal choice inconsistency.

We also test the predictions of behavioral theories in the "wild". We pay attention to prospect theory, which emerged as the dominant theory in our lab experiments of risky choice. Loss aversion and reference dependence predicts that consumers will behave in a uniquely distinct way than the standard rational model predicts. Specifically, loss aversion predicts that when an item is being offered at a discount, the demand for it will be greater than that explained by its price elasticity. Even more importantly, when the item is no longer discounted, demand for its close substitute would increase excessively. We tested this prediction using a discrete choice model with loss-averse utility function on data from a large eCommerce retailer. Not only did we identify loss aversion, but we also found that the effect decreased with consumers' experience. We outline the policy implications that consumer loss aversion entails, and strategies for competitive pricing.

In future work, BROAD can be widely applicable for testing different behavioural models, e.g. in social preference and game theory, and in different contextual settings. Additional measurements beyond choice data, including biological measurements such as skin conductance, can be used to more rapidly eliminate hypothesis and speed up model comparison. Discrete choice models also provide a framework for testing behavioural models with field data, and encourage combined lab-field experiments.

PRESENTATION. Experimental and behavioral economics. Theory, tools and topics

This note presents the special issue on Experimental and Behavioral Economics. The volume includes some recent contributions from these correlated disciplines –empirical the former and theoretical the latter– and their potential contribution to the intersection of Economics with Psychology and Sociology. The project “El papel de la comparación social en las decisiones económicas bajo incertidumbre” (Junta de Andalucía, P07-SEJ-03155)” provided us with inspiration and financial support to publish this volume.

Economics and psychology in the twenty-first century

This paper begins by exploring four different possible forms of relationship between economics and psychology, which have different connotations in terms of the relative status of the two disciplines. It then focuses on the future for one of these, psychological economics. After setting out the hardcore axioms and positive and negative heuristics of a research programme in psychological economics, it explores institutional and psychological barriers to the success of such a research programme in the context of both research and teaching.