Essays in behavioural economics

Abstract

This thesis analyses decision making through the lens of behavioural economics. The three essays within consider variants of adverse selection problems and psychological biases which can manifest from imperfections in an information structure. The predominant psychological theory is informed by the idea of bounded awareness; one’s tendency to make suboptimal decisions through overlooking important information. The first essay concerns the winner’s curse in bargaining. The second essay assesses bidding behaviour in an auction environment. The third essay considers disclosure decisions. The general findings are as follows: (i) Research on the winner’s curse grew significantly since 1980 and peaked in 2009. The seminal work of William Samuelson and Max Bazerman in 1985 extended the concept to a new domain of bilateral bargaining and inspired fifteen further experimental studies. I demonstrate that costless nonbinding signals complicate decision-making but that alternative forms of cheap talk do not statistically influence bidding strategies. Secondly, I show that individuals find it challenging to strategically avoid information, exhibiting difficulties in performing contingent reasoning in bargaining. (ii) Analysing bidding efficiencies in high stakes and competitive auctions, I find that 80% of thoroughbred foals sold realise negative returns. The scale of losses is amplified as winning bids increase. On average, once a winning bid increases above €20,000, the assets enter the domain of losses. Incompatible incentives between stakeholders and diversification strategies fail to explain the inefficiencies. Although multiple interpretations of the findings exist, the results are consistent with the winner’s curse hypothesis and incompatible with the idea of profit maximisation. (iii) Investigating the unravelling principle in the hospitality industry, I find that the strict equilibrium prediction does not occur. A partial unravelling result is reported. The major finding is that a downward linear relationship exists between TripAdvisor signals and voluntary disclosures by hotels. Low ranked hotels tend to hide ratings information. Higher rank hotels are more likely to make a voluntary disclosure when compared to the lowest ranked. This raises ethical questions if consumers have psychological blind spots.