The purpose of this dissertation is to examine aspects of the representational and computational influences on Bayesian reasoning as they relate to reference dependence. Across three studies, I explored how dependence on the initial problem structure influences the ability to solve Bayesian reasoning tasks. Congruence between the problem and question of interest, response errors, and individual differences in numerical abilities was assessed. The most consistent and surprising finding in all three experiments was that people were much more likely to utilize the superordinate value as part of their solution rather than the anticipated reference class values. This resulted in a weakened effect of congruence, with relatively low accuracy even in congruent conditions, as well as a different pattern of response errors than what was anticipated. There was consistent and strong evidence of a value selection bias in that incorrect responses almost always conformed to values that were provided in the problem rather than errors related to computation. The one notable exception occurred when no organizing information was available in the problem, other than the instruction to consider a sample of the same size as that in the problem. In that case, participants were most apt to sum all of the subsets of the sample to yield the size of the original sample (N). In all three experiments, higher numerical skills were generally associated with higher accuracy, whether calculations were required or not.

This thesis investigates the choices under risk in the framework of non-expected utility theories. One of the key contributions of this thesis is providing an approach that allows for a complete characterisation of Cumulative Prospect Theory (CPT) preferences without prior knowledge of the reference point. The location of the reference point that separates gains from losses is derived endogenously, thus, without any additional assumptions on the decision maker’s risk behaviour. This is different to the convention used in the literature, according to which, the reference point is preselected. The problem arising from imposing the location of the reference point is that the underlying preference conditions might not be alligned with the predictions made by the model. Consequently, it is difficult to verify such a model or to test it empirically. The present contribution offers a set of normatively and descriptively appealing preference conditions, which enable the elicitation of the reference point from the decision maker’s behaviour. Since these conditions are derived using objective probabilities, they can also be applied to settings such as health or insurance, where the continuity of the utility function is not required. As a result, the obtained representation theorem is not only the most general foundation for CPT currently available, but it also provides further support for the use of CPT as a modelling tool in decision theory and fi…nance. Another contribution that this thesis can be credited with is an application of rank-dependent utility theory (RDU) to the problem of insurance demand in the monopoly market affected by adverse selection. The present approach extends the classical model of Stiglitz (1977) by accounting for an additional component of heterogeneity among consumers, the heterogeneity in risk perception. Speci…fically, consumers employ distinctive probability weighting functions to assess the likelihood of risky events. This aspect of consumers’' behaviour highlights the importance that the probabilistic risk attitudes within the RDU framework, such as optimism and pessimism, have for the choice of insurance contract. The analysis yields a separating equilibrium, with full insurance for a sufficiently pessimistic decision maker. An important implication of this result is that any low-risk individual who sufficiently overestimates his probability of loss will induce the uninformed insurer to o¤er him full coverage, thereby, affecting the high-risk type adversely. This outcome is consistent with the recent empirical puzzle regarding the correlation between ex-post risk and insurance coverage, according to which, agents with low exposure to risk receive a larger amount of compensation. By providing an explanation of this pattern of individual behaviour, the current work demonstrates that theory and practice of insurance demand can be reconciled to a greater extent. The paper also provides a behavioural rationale for policy intervention in the market with RDU agents, where the initial distortions in contracts due to unobservable risks are aggravated by the non-linear weighting of probability of a risky event.

Kapitel 1: Im Rahmen des Erwartungsnutzenmodells leite ich ein theoretisches Modell von choice bracketing aus zwei verhaltensökonomischen Axiomen ab. Das erste etabliert einen direkten Zusammenhang zwischen narrow bracketing und correlation neglect. Das zweite identifiziert den Referenzpunkt als den Ort, an dem broad und narrow Präferenzen miteinander verbunden sind. In meinem Modell ist der narrow bracketer durch die Unfähigkeit, Veränderungen vom Referenzpunkt in unterschiedlichen Dimensionen gleichzeitig zu verarbeiten, charakterisiert. Kapitel 2: Warum geben Menschen, wenn man sie fragt, präferieren aber, nicht gefragt zu werden, und nehmen sogar, wenn sich die Gelegenheit ergibt? Wir zeigen, dass Axiome wie Separabilität, narrow bracketing, und scaling invariance diese scheinbar widersprüchlichen Beobachtungen vorhersagen. Insbesondere implizieren diese Axiome, dass die Interdependenz von Präferenzen (“Altruismus”) ein Ergebnis des Interesses für das Wohlbefinden anderer im Gegensatz zu ihren bloßen Auszahlungen ist. Hierbei wird das Wohlbefinden durch die referenzabhängige Wertfunktion aus der Prospekttheorie erfasst. Kapitel 3: Wir untersuchen, wie sich fake news auf den Informationsfluss zwischen Nachrichtenportalen und  ökonomischen Agenten auswirkt. Wir erweitern das klassische cheaptalk- Modell um Unsicherheit über die Präferenzen des sender (Nachrichtenportal). Es gibt zwei Typen von Nachrichtenportalen. Ein fake-news-Portal möchte im Agenten unabhängig vom wahren Zustand eine maximale Erwartung wecken. Ein legitimes Nachrichtenportal möchte die Wahrheit offenbaren. Wir zeigen, dass jedes informative perfekte Bayesianische Gleichgewicht durch einen Schwellenwert charakterisiert ist. Während der Agent alle Zustände unter dem Schwellenwert unterscheiden kann, ist es ihm unmöglich, Zustände über dem Schwellenwert zu unterscheiden. / Chapter 1: I derive a theoretical model of choice bracketing from two behavioral axioms in an expected utility framework. The first behavioral axiom establishes a direct link between narrow bracketing and correlation neglect. The second behavioral axiom identifies the reference point as the place where broad and narrow preferences are connected. In my model, the narrow bracketer is characterized by an inability to process changes from the reference point in different dimensions simultaneously. Chapter 2: Why do people give when asked, but prefer not to be asked, and even take when possible? We show that standard behavioral axioms including separability, narrow bracketing, and scaling invariance predict these seemingly inconsistent observations. Specifically, these axioms imply that interdependence of preferences (“altruism”) results from concerns for the welfare of others, as opposed to their mere payoffs, where individual welfares are captured by the reference-dependent value functions known from prospect theory. The resulting preferences are non-convex, which captures giving, sorting, and taking directly. Chapter 3: We present a theoretical model to investigate how the presence of fake news affects information transmission from media outlets to economic agents. In a standard cheap talk framework we introduce uncertainty about the sender’s (media outlet’s) preferences. There are two types of media outlets. A fake news outlet wants to push the agent’s belief to the maximum irrespective of the state of the world. A legitimate outlet wants to reveal the true state to the agent. We show that any informative perfect Bayesian equilibrium of our game is characterized by a threshold value. While the agent can perfectly separate amongst states below the threshold value, there is no separation amongst states above the threshold value. We determine the unique most informative threshold value for a general class of equilibria.

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