Topics in Behavioral-Economics Theory

Project Information

Topics in Behavioral

Grant agreement ID: 788918

DOI

10.3030/788918

Project closed

EC signature date 25 July 2018

Start date 1 November 2018

End date 31 October 2023

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 1 656 145,00

EU contribution

€ 1 656 145,00

Coordinated by

FORSCHUNGSINSTITUT ZUR ZUKUNFT DERARBEIT GMBH
Germany

Periodic Reporting for period 4 - Topics in Behavioral (Topics in Behavioral-Economics Theory)

Reporting period: 2022-07-01 to 2023-10-31

Summary of the context and overall objectives of the project

The project spans a diverse set of specic topics in the theoretical parts of behavioral economics. Much of the work is best described as basic research: the team developed broadly applicable models of decisionmaking that incorporate psychologically realistic assumptions about individuals, and that can be used by ourselves and others to study the implications of psychological phenomena for economic outcomes. We have developed a framework for understanding heuristics individuals and households use to simplify their budgeting and spending decisions, a model of “insecurity” about one’s self-esteem and its effects on decisions, a novel account of prejudice, and a new framework for thinking about markets when consumers care about the externalities they cause (i.e. they are “socially responsible”).

The other part of project is more applied: we have used psychologically realistic models to shed light on important economic issues regarding markets and organizations. Here, the main agenda of the research team has been understanding economic issues related to consumer protection, a major form of existing intervention in markets that has not been much addressed by our profession so far. We have studied the role of regulation when consumers have limited attention that they can devote to economic decisions; how consumer procrastination affects price competition between firms; and we have investigated the increasingly important phenomenon of “steering” in consumer retail markets (when an internet company such as Google or Facebook suggests, or otherwise directs a consumer’s attention toward, products based on information about the consumer). This research promises to inform policymakers involved in the regulation of a number of markets.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

We have been fortunate enough to advance the research frontier more than outlined in the proposal, although on occasion not in the directions we expected.

Among the foundational projects described above, we have completed papers for all of them, and published three. One of these papers, joint with Filip Matejka, is published under the title “Choice Simplification: A Theory of Mental Budgeting and Naive Diversification” in the Quarterly Journal of Economics, a top journal in economics. A second paper titled “Fragile Self-Esteem,” joint with George Loewenstein and Takeshi Murooka, is published in the Review of Economic Studies, another top journal. Furthermore, I have completed three papers with Paul Heidhues and Philipp Strack on misspecified learning. "Convergence in Models of Misspecified Learning" has been published in Theoretical Economics, a top theory field journal. In addition, we have completed and submitted “Overconfidence and Prejudice” and “Misinterpreting Yourself” to top journals. Although two papers are not yet published, this research agenda has already generated a substantial follow-up literature in behavioral economics and theory.

Among the applied topics, we have also pushed the research agenda in multiple directions. One paper titled “Browsing versus Studying: A Pro-Market Case for Regulation,” joint with Paul Heidhues and Johannes Johnen, is published in the Review of Economic Studies, a top journal. We have nearly finished a new, related paper regarding the implications of limited attention for markets and regulation, this time focusing on situations with many markets. A paper on “Procrastination Markets,” joint with Paul Heidhues and Takeshi Murooka, is completed and ready to be submitted extremely soon. And a paper on “Steering Fallible Consumers,” joint with Paul Heidhues and Mats Köster, has been published in Economic Journal, an excellent general-interest journal.

Finally, with two new team members, Marc Kaufmann and Peter Andre, we have initiated an entirely new research agenda on social preferences in markets. This grew out of the proposal’s subproject on malicious contract design, originally conceived with Armin Falk and Paul Heidhues. With Professors Kaufmann and Andre, we realized that before studying contract design, it is important to study how a standard market as studied in economics affects individuals’ social motivations. We have encountered some exciting and challenging issues here that have not been addressed in the large literature on social preferences. A foundational paper titled “Understanding Markets with Socially Responsible Consumers” has received a strong revise-and-resubmit; it is likely to be published in the Quarterly Journal of Economics, a top journal. We have also begun work on new papers in this agenda, especially one on second-hand markets.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

During the project, the team has developed a number of major, novel methodologies. With Filip Matejka, we solve a model of rational inattention in which both the decisionmaker’s action and her information are multidimensional. We characterize the solution in general form, so that other researchers interested in studying such multidimensional rational-inattention problems can use it unchanged. Our approach involved importing methods from information theory to economics. Further, with Paul Heidhues and Philipp Strack, we provide a novel explicit characterization of long-run beliefs in general high-dimensional misspecified learning models with normal exogenous signals. Again, we solve the problem in general form, so that other researchers can take advantage of our result. Our proof uses tools from semi-definite programming, a part of linear programming. Finally, the agenda on socially responsible consumers with Marc Kaufmann and Peter Andre has led us back to the very foundations of general-equilibrium theory, and led us to revise some classical axioms regarding how general equilibrium works. Again, our solution concept is developed to be generally applicable, and we hope that it will be used by other researchers to study the many questions raised by social responsibility.

In addition, the specific insights in the papers that resulted from our project are major achievements in their own rights. These include developing an economic model of insecurity and fragile self-esteem, which are very common psychological phenomena; developing a novel model of prejudice; laying out a model of mental budgeting and naive diversification, which have been discussed since the very beginnings of behavioral economics, but have not been formalized; and identifying ways in which classical general-equilibrium theory, a huge literature, is incomplete or incorrect when it comes to the analysis of socially responsible consumers.