Wenner, LM; (2016) Reference Points, Biased Beliefs, and Information Avoidance: Essays in Experimental Economics. Doctoral thesis , UCL (University College London).

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Abstract

This thesis consists of three papers that look at different aspects of how behavioural biases affect individual decision making as well as how they influence strategic interactions. They all make use of laboratory experiments to gain new insights into behaviour that departs from the paradigm of full rationality. Chapter 2 analyses the effects of reference prices on purchasing behaviour. Offering participants real consumption goods in the lab, I establish that comparisons between the actual purchase price and other possible price realisations affect purchase decisions. Consumers are more likely to buy goods when the price comparisons invoke feelings of making a ``gain'' rather than a ``loss''. Furthermore I show theoretically that such behaviour is in contrast to one of the most prominent papers that studies expectation-based reference points, namely Kőszegi and Rabin (2006). Chapter 3 analyses a market setting in which sellers interact with buyers that have biased beliefs about the characteristics of the product that is being sold. I study whether such buyers can be taken advantage of by sellers through the use of specifically designed pricing structures. Comparing seller profits to the case where they interact with unbiased buyers, however, there is no evidence of exploitation. Buyers are biased in their beliefs, but otherwise sophisticated enough to not suffer from exploitative pricing strategies. Chapter 4 focuses on the phenomenon that economic agents often prefer to actively avoid instrumental information even though this information comes free. It reports on a real-effort lab experiment where participants have the option to acquire information about their wage. Crucially, many participants engage in information avoidance and this has significant positive effects on their performance

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