In the summer of 2003, David Cutler, Edward Glaeser, and Jesse Shapiro published the paper, “Why Have Americans Become More Obese?”1 In the paper, the authors explore changing trends in American weight and caloric intake over time and hypothesize as to the potential causes of these changes. In performing our tests, we hope to both replicate their results and update any analysis for the present.

Risky intertemporal choice is a fairly new topic in the realm of behavioral economics that involves examining the interactions between individuals’ time and risk preferences. Previous research has looked at the gains and mixed domain, but little to no research has been done in the loss domain. This study aims to fill this gap by examining how people respond to risky gambles in the loss domain given real world time delays. The thesis focuses on changes in attitudes towards risk caused by temporal distance rather than how people discount risky prospects. Based on Construal Level Theory we predict that there will be a greater focus on outcomes over probabilities in delayed gambles compared to immediate ones, and hence, individuals will become more risk-averse for delayed gambles that are in the loss domain. We conducted two experiments to test this prediction. Results revealed that while subjects in the immediate resolution group were significantly more risk-seeking than future resolution groups in both experiments, the difference in risk attitudes between two delayed resolutions depend on how big the difference between two delays is.

<p> People make many decisions with consequences that are delayed, rather than immediate. Of particular interest are decisions in which long-term gains must be balanced against short-term costs. Such time trade-offs can be advantageous or deleterious to the decision-maker: the decision to abstain from immediately entering the labor force and instead pursuing a lengthy education benefits the educated in the long-term although their short-term wages are lowered. In contrast, the decision to overeat increases the short-term enjoyment of food but decreases long-term health. A large body of research in psychology has shown that the ability to delay gratification and elect long-term over short-term gains leads to superior life outcomes. </p><p> Expanding on this tradition, my thesis examines time-tradeoffs in two domains: first, I examine the resolution of time-tradeoffs in settings in which people are asked to explicitly decide between short-term and long-term gains. This line of work is closely connected to economic models of decision-making that account for the role of time in shaping decisions. I then transition to examining the resolution of time-tradeoffs in settings in which time trade-offs are implicit. Specifically, I examine the way in which people explore unfamiliar environments in order to maximize information. Maximizing information represents a time-tradeoff because the goal of obtaining information generally requires the decision-maker to eschew known sources of short-term rewards in order to explore new options whose benefits will be reaped only in the long-term. </p><p> Collectively, I describe a large body of experiments that examine these two classes of decision-making and put forward two new models of decision-making, the ITCH model of intertemporal choice and the MaxInfo model of exploratory decision-making, that account for the data from these experiments and extend the state of the art.</p>

<p> A longstanding controversy in financial economics is whether investors' rational forces or their emotional responses govern the asset pricing of the financial markets. Some psychology researchers use dual- process models to understand peoples' information processing. The problem is that some investors allow cognitive biases which operate quickly and automatically in the <i> System 1</i> domain, to affect their decisions rather than respond deliberatively and rationally which are ascribed to the <i>System 2</i> domain. The purpose of this study was to explore how and why investors, when faced with extreme stress impelled during the 2008 Financial Crisis, yielded to either <i>System 1</i> or <i>System 2</i> axis decision-making. Without evaluating the role that cognitive biases play in information processing, investors will not understand why they make inauspicious automatic decisions or grasp the steps that could help avoid realized losses in their stock portfolio. This qualitative research consisted of a multiple-case study that included in-depth semi-structured interviews of 12 investors who had at least $1 million invested in stocks and bonds and triangulation data analysis. The research findings indicated that <i>stock market literacy</i> and risk profiling are foundations for sound investing. When faced with a financial crisis, some investors displayed cognitive biases such as nervousness, worry, and fear that led to myopic loss aversion that caused them to sell their entire stock portfolio or reallocated into more conservative, less risky bonds. Some investors with no emotions and higher <i>stock market literacy </i> considered the financial crisis as a blip in the long-term upward trend performance of stocks and viewed the financial crisis as an opportunity to buy more stocks. For those investors that displayed emotions because of the financial crisis, emotion regulation strategies helped them make more controlled and deliberative investment decisions. Nevertheless, the decisions made by investors may be satisficing because of peoples' bounded rationality, the inherent information processing limitation of the human mind. The specific role of emotion in the duality of information processing was undetermined because the crisis evolved over time rather than a singular event. It is possible that quantitative determination of <i>stock market literacy</i> and the application of Epstein's Rational-Experiential Questionnaire and personality tests including satisfaction questions could shed further information on the dual-process mechanisms.</p>

<p> Modern portfolio theory states that investments with greater beta, a common measure of risk, require greater returns from investors in order to compensate them for taking greater risk. Therefore, under the premise that market participants act rationally and therefore markets run efficiently, investments with higher beta should generate higher returns vis-&agrave;-vis investments with lower beta over the long run. In fact, many studies suggest that investments with lower beta actually generate equal to or higher returns relative to investments with higher beta. In looking at data for the S&P; 500 going back 22 years between 1990 and 2012, this study found that there was very low correlation between beta and returns. In fact, portfolios with very low risk generated commensurate to better returns versus portfolios with very high beta. Therefore, we find that beta appears to be a poor measure of risk as it relates to the stock market. In addition to beta and returns, this study looked at the fundamental characteristics of each company specifically corporate profitability and balance sheet leverage which are commonly used by investors in assessing the underlying quality of a company. We find that companies with higher levels of return on equity combined with lower levels of balance sheet leverage tend to outperform companies with lower levels of profitability and higher balance sheet leverage. As a result, we find a high correlation between balance sheet leverage, ROE and stock returns. This paper suggests that in fact, fundamental factors such as leverage and ROE tend to be better measures of risk vis-&agrave;-vis beta. One important final observation is the fact that while in general, companies with high ROEs and low leverage tend to outperform companies with low profitability and high leverage, portfolios of those companies with the highest ROE and lowest leverage and portfolios of those companies with the lowest ROE and highest leverage actually underperform on the whole other portfolios. In other words, portfolios of companies that exhibit the most extreme of characteristics in terms of ROE and leverage underperform portfolios of companies with more moderate characteristics. One plausible explanation for these observations is rooted in behavioral economic theory known as the favorite long shot bias and the opposite favorite long shot bias. The opposite favorite long shot bias suggests that market participants tend to "over-bet" an asset and/or an investment with high probability of a payoff but low overall return if the payoff occurs (ie the sure bet). In fact, market participants go so far to secure a payoff that they actually place a higher bet on the probability of success than the actual odds would suggest. In stock market terms, investors will tend to over-value the least-riskiest stocks to the point where risk and return is no longer favorable. Similar phenomenon can be observed in horse race betting and sports drafts. The favorite long shot bias is the inverse of the opposite favorite longshot bias. This theory suggests that market participants actually "over bet" an asset and/or an investment with the lowest probability of a payoff but with significant overall returns if the payoff occurs. Similar phenomenon takes place in the purchase of insurance to insure against large potential losses with small probabilities as well as lottery ticket purchases. We see the most striking evidence of this when looking at the returns of stocks with the highest ROEs and the lowest levels of debt/capital as of 1990. In that year, investors would have based their investments in stocks using current attributes at that time. We can see that stocks with the highest ROEs and lowest levels of debt/capital garner higher valuations relative to the broad stock market. We also see that stocks with the lowest ROEs and highest debt/capital also command premium valuations to the market as a whole. Therefore, risk-averse investors will tend to overvalue companies with the least risky prospects while risk loving investors will tend to overvalue companies with the riskiest prospects at the same time. As a result, we can see from looking at the future returns that companies that exhibit extreme characteristics in terms of ROE and debt/capital tend to underperform the broad market. Similar to high profile athletes and horse track betting, we find that investors tend to over-bet sure shot investments while simultaneously over-betting long shot investments.</p>

Risky intertemporal choice is a fairly new topic in the realm of behavioral economics that involves examining the interactions between individuals’ time and risk preferences. Previous research has looked at the gains and mixed domain, but little to no research has been done in the loss domain. This study aims to fill this gap by examining how people respond to risky gambles in the loss domain given real world time delays. The thesis focuses on changes in attitudes towards risk caused by temporal distance rather than how people discount risky prospects. Based on Construal Level Theory we predict that there will be a greater focus on outcomes over probabilities in delayed gambles compared to immediate ones, and hence, individuals will become more risk-averse for delayed gambles that are in the loss domain. We conducted two experiments to test this prediction. Results revealed that while subjects in the immediate resolution group were significantly more risk-seeking than future resolution groups in both experiments, the difference in risk attitudes between two delayed resolutions depend on how big the difference between two delays is.

Major League Baseball owners possess different types of functional background experience. I examine the financial and on-field effects of the functional and geographic background of owners in the MLB from 2001-2014. A functional background in entrepreneurship appeared to have an insignificant effect on a team’s payroll expense and on-field performance. However, teams owned by corporations appeared to have significantly lower payrolls than all other teams, a relationship that supports the theory that corporations are not concerned with their team’s on-field performance. The operating income of teams, with owners, who inherited the franchise from a family member or purchased the team using an inherited trust, was significantly higher than other teams. However, the number of team wins was negatively affected by owners, who inherited ownership. A personal tie between the owner and the team’s location was insignificant as a determinant of team payroll expense and team wins.

This dissertation investigates the role of reference-dependent preferences in different areas of application, both from an empirical/experimental and a theoretical perspective. Despite their common focus, all chapters are self-contained and can be read independently. In the first chapter, entitled "Does Loss Aversion Beat Procrastination? A Behavioral Health Intervention at the Gym", I analyze the implications of reference-dependent preferences in the domains of self-control and optimal incentive design. Financial incentives are a common tool to encourage overcoming self-control problems and developing beneficial habits. There are different means by which such incentives can be provided, yet, up to date there is little empirical evidence on the relative effectiveness of different incentive designs. I present the results of a field experiment that explores whether and how incentives that are economically equivalent but framed differently affect the likelihood of exercising at a gym. I find that framing incentives in terms of losses, meaning individuals lose cash incentives by not exercising, encourages more frequent visits to the gym than framing incentives in terms of financial gains. After removing these incentives, I observe habit formation in gym exercise only if incentives were framed as losses rather than gains. The findings are consistent with the concept of reference-dependent preferences and loss aversion and suggest that cost reductions and performance improvements can be achieved if opting to frame incentives in terms of losses. The second chapter, entitled "Salience-adjusted Expectation-based Reference Points: Theory and Experiment", studies the consequences of reference-dependent preferences in the domain of decision making under uncertainty. Recent theories of expectation-based reference-dependent preferences offer a structured approach of the formation of reference points, yet do not incorporate important context-specific characteristics. One implicit assumption is that individuals rationally form their reference point as expectations, by correctly predicting the probabilistic environment they are facing. A second assumption is that in subsequent unanticipated decisionmaking problems, individuals consider previously formed lagged expectations as their reference point. In an experimental setup, I demonstrate that specific contextual factors affect the composition of expectation-based reference points. First, while expectations are formed, outcomes that attract the moment of first focus receive a higher weight. Second, in subsequent unanticipated decision making under uncertainty, the outcomes of the choice set affect to which extent lagged expectations are considered as a reference point, depending on the associated intensity of gains and losses. Finally, apart from providing empirical evidence on the limitations of current theories of expectation-based reference-dependence, I present a theoretical extension that can overcome some of these limitations by allowing reference points to be contingent on salient contextual effects. In the third chapter, entitled "Competitive Persuasive Advertising under Consumer Loss Aversion", I examine the role of reference-dependent preferences in the domain of consumer choice. In particular, I analyze the effects of expectation-based loss aversion in imperfect competition when consumers’ gain-loss utility is susceptible to salience effects. I present a theoretical model in which consumers’ gain-loss utility associated with the expectation to buy the most salient products within their contextual environment is inflated upwards, whereas the gain-loss utility associated with the expectation to buy the least salient products is deflated downwards. Firms can strategically manage consumers’ gain-loss utility by investing in salience-enhancing activities, such as persuasive advertising. If consumers are initially aware of prices but uncertain about their individual match value from the purchase, persuasive advertising has strictly anticompetitive consequences. This is because it allows firms to mitigate consumers’ experienced losses from higher prices, which reduces competitivepressure. / Doctorat en Sciences économiques et de gestion / info:eu-repo/semantics/nonPublished

Consumer impulsivity accounts for a large percentage of purchases yet this aspect of personality is measured with a variety of instruments. Three studies were conducted to examine how measures of consumer impulsiveness relate to each other, other measures of trait level impulsivity, and a variety of decisions and judgments. These studies looked at the relationship between biases resulting from motivated reasoning and the trait of impulsiveness. Motivated reasoning and impulsiveness was considered within the context of consumer and other choice decisions. Consumer impulsivity was found to be related to both general measures of trait level impulsivity as well as containing a lot of content overlap among the three measures considered here. One measure was distinct and formed its own factor in a factor analysis suggesting it may be the most specific measure of consumer impulsivity. The other measures of consumer impulsivity overlapped quite a bit with general impulsivity. The Iowa Gambling Task was used to measure both choice behavior and anticipatory SCR, however no significant results were found. The cups task, a risky decision making task, was also administered and results mirrored classic findings such that participants were more risk averse in the domain of gains than losses. Additionally, both expected value and outcome magnitude influenced results. Individuals who scored higher on the UPPS urgency subscale made more risk advantageous choices when looking at sensitivity to expected value. The third task assessed differences in purchase time for hedonic and utilitarian items. Impulsive consumers reported they would purchase both hedonic and utilitarian items sooner than their less impulsive counterparts.

Thesis advisor: Michael Grubb / Thesis advisor: Lucas Coffman / What You Don’t Know Can’t Pass Through: Consumer Beliefs and Pass-through Rates I model consumer search with imperfect information about firms’ costs and test predictions about consumer beliefs and pass-through in the US residential mortgage market. In the model, when consumers are unaware of an increase in costs, a high price would be surprising and may induce additional search. In equilibrium, sellers do not pass though the entire change in costs, and average pass-though is decreasing in consumer uncertainty about costs. The model provides a unified explanation for a number of patterns in pass-through rates including incomplete pass-through (passthrough rates less than one), pass-through over-shifting (pass-through rates greater than one), and asymmetric pass-through (greater pass-through rates for cost increases than decreases). I test a novel prediction of this model using confidential Home Mortgage Disclosure Act data. I find that different components of the marginal cost of mortgage lending have different average pass-through rates. Widely known costs are passed through nearly completely while more obscure costs have much lower pass-through rates. This pattern is not explained by existing models of pass-through, as the standard determinants of pass-through are identical across all cost components of the same mortgage. People Don’t Demand Commitment Devices That Might Not Work Demand for costly commitment devices is rare. A possible explanation is that individuals are unaware of their present bias and their need for commitment. I run an experiment that successfully corrects subjects’ beliefs about their present bias and find that this increased awareness does not increase demand for commitment. These results, interpreted through the lens of a theoretical model of commitment demand, imply that low demand for commitment is not driven by a perceived lack of present bias, but rather subjects’ accurate belief that they may fail to follow through, even with the offered level of commitment. The Illusion of Competition with Michael Grubb Most existing models of price competition in the presence of search costs ignore the possibility that multiple products in a market are sold by the same firm. We develop a theoretical model of equilibrium price dispersion under costly consumer search over prices in the presence of jointly owned “brands.” We establish conditions on consumers’ search technology that determine consumer welfare implications and suggest antitrust remedies (e.g. post-merger consolidation of brands). / Thesis (PhD) — Boston College, 2023. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.