Alves, Pedro
(2016)
Essays on consumer learning and behavioural economics.
PhD thesis, London School of Economics and Political Science.
Abstract
From its inception, behavioural economics’ mission has been to bring deeper psychological insights into economics. Relying mostly on experimental data, this field became notorious for providing evidence of the shortcomings of standard economic models in predicting human behaviour. These findings motivated a first generation of behavioural models, which tried to systematise this departure from standard economics. However, these initial attempts were widely criticised for their methods (these models were argued to lack the tractability, systematic approach and level of generality desired by economic science) and for their lack of relevance for economic phenomena (markets, evolution and arbitrage would drive away behavioural biases). This criticism motivated a second wave of behavioural models, which augmented neo-classical frameworks with psychologically realistic behavioural assumptions. This approach allowed this field to establish a link to previous results of economics and address criticisms about the relevance of behavioural findings in markets.
A further step in the direction of linking behavioural models and standard theory is to introduce learning to behavioural models. While this concept has been largely absent from behavioural economics’ analysis of markets for technical reasons, its presence is necessary for two reasons. First, learning is commonly used to dismiss (behaviourally motivated) consumer mistakes, so it is crucial to study whether existing results of this literature will be robust to this variation. Second, in a world which is constantly evolving, learning in itself is an important driver of economic phenomena and, hence, should not be dismissed by this field.
In this thesis, I augment previous behavioural models by studying their existence in environments with consumer learning. By extending static behavioural problems to dynamic environments with learning, I am able to explain puzzles in the areas of technology adoption and contract theory. In chapter 1, I propose that status considerations – a feature of consumers’ preferences overlooked by classical theory – can have positive effects in society whenever they are considered in an environment with active learning (i.e., experimentation). In chapter 2 and 3, I show that when naıve of behavioural consumers (who lack self-awareness about their preferences) can learn, pricing methods in subscription contracts, which were previously unexplained by standard contract theory, can be shown to be the optimal response of firms trying to prevent consumer learning.
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