Essays in decision making

This thesis explores the impact of individual decision making on the functioning of firms and markets. The first chapter examines how deviations from strict rationality by individuals impact the market for consumer goods. A growing body of evidence documents individual behavior that is difficult to reconcile with standard models of rational choice, and firm behavior difficult to reconcile with rational markets. In this paper I present a boundedly rational model of choice that reconciles several behavioral anomalies, and provides micro-foundational support for some puzzling empirical regularities in firm behavior. If the evaluation of an alternative is costly, individuals may find it inefficient to compare all available alternatives. Instead, when faced with an unfeasibly large choice set, some individuals may compare groups of alternatives (i.e. categories) to reduce the choice set into a more manageable set of relevant alternatives. I call these individuals categorical considerers and develop a model in which these decision makers sequentially apply a single well-behaved preference relation at different levels of aggregation. I explore the implications of this model for both individual behavior and equilibrium firm behavior in market settings. Under certain conditions, the existence of categorical considerers in a market causes firms to utilize strategies different from what would be optimal in a market of fully rational consumers. This simple model generates predictions about behavior consistent with several new field experiments, and offers possible explanations for excess spatial product differentiation, brand name premiums, and product branding.