Research

Most choices are based on information about the available options. A large body of research documents, however, that the same information is often perceived and evaluated differently depending on the prevailing context. Moreover, seemingly identical contextual information, such as previously seen products or job applicants, have been shown to exert opposing influences on perceptions of the same information about a “target” product or job applicant. Inspired by insights from neuroscience and psychophysics, I propose a unifying framework that can parsimoniously reconcile the seemingly contradictory influences of contextual information. This framework generates a novel set of predictions for how properties of the contextual information and the target, such as the perceived uncertainty in both and the perceived discrepancy between them, can be manipulated to affect perceptions and decisions. The framework yields testable implications for a wide range of decision domains, such as the perceived attractiveness of products and services, the evaluation of job applicants, the perceived acceptability of wages, or the perceived trustworthiness of politicians. Based on an experiment on risky investment decisions, I document how decisions can be changed as predicted by the framework through appropriately manipulating several properties of the context and the target.  

In many markets, firms increase product complexity through add-on features, which can make the evaluation and comparison of products difficult and thus increase buyers’ search cost. Does this product obfuscation limit buyers’ search behavior and induce them to buy overpriced products? And if so, why does competition not eliminate obfuscated products? We show – based on competitive experimental markets – that if add-ons merely complicate the products without generating additional surplus, obfuscation via product complexity indeed becomes fragile because buyers display an aversion against complex products. However, in the presence of surplus-enhancing add-ons, obfuscation via product complexity becomes a stable market feature that severely constrains the depth and breadth of buyers’ search. Sellers anticipate and take advantage of this by making unfavorable product features less visible and selling add-ons persistently above marginal cost. Even the most favorably priced product in the market is offered above marginal cost, and buyers persistently fail to find the best product such that inferior products have a good chance of being bought, leading to enduring price dispersion. Surplus-enhancing obfuscation opportunities are the causal driver of persistent profits and price dispersion because if we remove these opportunities, overall prices quickly converge to marginal cost. 

Ambiguous prospects are ubiquitous in social and economic life, but the psychological foundations of behavior under ambiguity are still not well understood. One of the most robust empirical regularities is the strong correlation between attitudes towards ambiguity and compound risk which suggests that compound risk aversion may provide a psychological foundation for ambiguity aversion. However, compound risk aversion and ambiguity aversion may also be independent psychological phenomena, but what would then explain the strong correlation between attitudes towards compound risk and ambiguity? We tackle these questions by training a treatment group’s ability to reduce compound to simple risks, and analyzing how this affects their compound risk and ambiguity attitudes in comparison to a control group who is taught something unrelated to reducing compound risk. We find that aversion to compound risk disappears almost entirely in the treatment group, while the aversion towards both artificial and natural sources of ambiguity remains high and is basically unaffected by the teaching of how to reduce compound lotteries. Moreover, similar to previous studies, we observe a strong correlation between compound risk aversion and ambiguity aversion, but this correlation only exists in the control group while in the treatment group it is rather low and no longer significant. These findings suggest that compound risk aversion and ambiguity aversion do not share the same psychological foundations: while compound risk aversion is primarily generated by a form of bounded rationality – the inability to reduce compound lotteries – ambiguity aversion is unrelated to this inability, suggesting that ambiguity aversion may be a genuine preference in its own right. 

Previous literature notes that more equal societies seem to be associated with higher social capital that potentially contributes to better economic outcomes such as reduced transaction costs and increased efficiency in economic exchange. However, previous evidence on the relationship between inequality and social capital is correlational. In this study, we implement an experiment in which groups are exogenously exposed to redistribution policies that generate variation in group equality, allowing us to, within the setting of the laboratory, causally explore the impact of group inequality on group social capital. Each group’s social capital is mainly measured by cooperativeness, trust, and trustworthiness within the groups, and we also complement our analyses by eliciting group members’ own beliefs, distributional preferences, and attitudes towards other members. We find that groups with progressive redistribution policies feel significantly more cohesive with other members, but groups with regressive redistribution policies care significantly less about other members’ payoffs. However, social capital measured by group members’ trust, trustworthiness, and cooperation are not significantly affected by redistributive policies. 

A rapidly growing literature has been attempting to measure the strength of inequity aversion preferences as accurately as possible. We vary two factors that might affect the accuracy of the measurement of inequity aversion preference, i.e., choice sets with different underlying inequity aversion strength ranges and with different relative income inequities while absolute income inequities remain fixed. We find that unidirectional changes in the choice sets for disadvantageous and advantageous inequity aversion preferences significantly bias the measured strength of both preferences in the same directions of the changes and that the variance in inequity aversion increases with the range of choice sets. Moreover, a decrease in relative income inequity raises the measured strength of advantageous inequity aversion but does not affect disadvantageous inequity aversion preference.

Economic preferences lie at the heart of economic analyses. Preferences are typically inferred from observed behavior, but observable behavior is often systematically distorted by cognitive biases and bounded rationality. A potentially pervasive form of such distortion is attenuation bias in behavior, where individuals may respond too weakly to economic fundamentals solely because they are uncertain about which choice is optimal given their preferences. This raises a fundamental challenge: how can we empirically assess the extent to which observable behavior reflects true preferences or some attenuation bias, and how can we recover knowledge about individuals’ true preferences when observable behavior may be attenuated to an unknown extent? This paper proposes a novel method that addresses these challenges. Under mild assumptions, the method bounds the direction and magnitude of the bias and the underlying preference; and under stronger but plausible assumptions, the method delivers a unique inference of the bias and the true preference. Evidence from two experiments confirms the validity and generalizability of the method. First, in an induced-value experiment that approximates product demand decisions, results show that observable demand curves are substantially distorted by attenuation bias, which, if overlooked, can imply non-trivial mis-assessment of welfare. Instead, the demand curve recovered by the proposed method approximates the induced true demand curve much better than the observable demand curves. Second, in a contingent valuation experiment where people evaluate policy programs targeting major socio-economic outcomes, results show that observable valuations are highly insensitive to the scope of the program – a pattern known as “scope neglect”. Applying the proposed method demonstrates that scope neglect is largely attributable to attenuation bias and that the recovered elasticities of valuation to both the scope and the impact size of policy programs are likely much higher than indicated by usually observable valuations.