A long-standing puzzle is how overconfidence can persist in settings characterized by repeated feedback. This paper studies managers who participate repeatedly in a high-powered tournament incentive system, learning relative performance each time. Using reduced form and structural methods we...

The article presents a model that analyzes the optimal strategy of multi-product firms when consumers are affected by reference prices. Generally, the stronger the consideration of reference prices is, the more intensified the competition is and the lower are the prices and profits. In some...

Experimental evidence suggests that consumers are affected by reference prices and by relative price differences ("relative thinking"). A linear-city model of two retailers that sell two goods suggests how this consumer behavior affects firm strategy and market outcomes. A simple model analyzes...

Experimental evidence suggests that consumers are affected by reference prices and by relative price differences (“relative thinking”). A linear-city model of two retailers that sell two goods suggests how this consumer behavior affects firm strategy and market outcomes. A simple model...

Multiplicative growth processes that are subject to random shocks often have a skewed distribution of outcomes. In a number of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate skewness or ignore it completely. Participants...

Whether consumers are aware of potentially adverse product effects is key to private and social incentives to disclose information about undesirable product characteristics. In a monopoly model with a mix of aware and unaware consumers, a larger share of unaware consumers makes information...

Bryan Caplan's book The Myth of the Rational Voter (2007) supports the idea that voters indulge in holding irrational beliefs about economic policy because the cost of doing so to the individual is negligible. As a consequences, socially and economically destructive policies receive widespread...

I analyze a general model of consumer behavioral biases and firms' equilibrium reactions to them, in which I nest several different biases such as self-control issues, overconfidence, and inattention to salient prices, among others. I show that, absent other market failures, the existence of a...

Nudge and boost are two competing approaches to applying the psychology of reasoning and decision making to improve policy. Whereas nudges rely on manipulation of choice architecture to steer people towards better choices, the objective of boosts is to develop good decision-making competences....

Behavioral economics (BE) examines the implications for decision-making when actors suffer from biases documented in the psychological literature. This article considers how such biases affect regulatory decisions. The article posits a simple model of a regulator who serves as an agent to a...