Cursed Consumers and the Effectiveness of Consumer Protection Policies, with Alessandro Ispano
Forthcoming at the Journal of Industrial Economics
We model firms' quality disclosure and pricing in the presence of cursed consumers, who fail to be sufficiently skeptical about undisclosed quality. We show that neither competition nor the presence of sophisticated consumers necessarily protect cursed consumers from being exploited. Exploitation arises if markets are vertically differentiated, if there are few cursed consumers, and if average product quality is high. Three common policy measures aimed at consumer protection, i.e. mandatory disclosure, third party disclosure and consumer education may all increase exploitation and decrease welfare. Even where these policies improve overall welfare, they often lead to a reduction in consumer surplus.
Learning about One's Self, with Yves Le Yaouanq
Pre-analysis plan, Mapping of PAP into WP
VoxEU article and podcast
Journal of the European Economic Association, 2022, 20.5, p. 1791–1828
To better understand why naiveté about present bias is so prevalent and persistent, we investigate people's (in)ability to learn from their past behavior. Participants in our experiment repeatedly decide how much to work on an unpleasant task and are asked to predict their future effort. We find that participants are naively present biased at first, but update their beliefs once they gain experience with the task. Moreover, our methodology allows us to establish that the amount of updating we observe would eliminate naiveté in the long run. A treatment in which we vary the nature of the task after an initial experience shows that learning is unencumbered by a change in environment. Taken together, our results suggest that persistent naiveté results neither from a fundamental inferential bias nor from an inability to transport newly acquired self-knowledge to new settings. However, participants exhibit another bias: they underestimate their future learning, which may lead to underinvestment in experimentation and a failure to activate self-regulation mechanisms.
Self-persuasion: Evidence from International Debating Competitions, with Egon Tripodi and Joël van der Weele
American Economic Review, 2022, 112.4, p. 1118-46.
Press: Süddeutsche Zeitung
Laboratory evidence shows that when people have to argue for a given position, they persuade themselves about the position’s factual and moral superiority. Such self-persuasion limits the potential of communication to resolve conflict and reduce polarization. We test for this phenomenon in a field setting, at international debating competitions that randomly assign experienced and motivated debaters to argue one side of a topical motion. We find self-persuasion in factual beliefs and confidence in one’s position. Effect sizes are smaller than in the laboratory, but robust to a one-hour exchange of arguments and a ten-fold increase in incentives for accuracy.
Spin Doctors: An Experiment on Vague Disclosure, with Marvin Deversi and Alessandro Ispano
European Economic Review, 2021, 193
Unfavorable news are often delivered under the disguise of vagueness. But are people sufficiently naive to be fooled by such positive spin? We use a theoretical model and a laboratory experiment to study the strategic use of vagueness in a voluntary disclosure game. Theory predicts that, when facing a possibly naive receiver, the sender uses messages that clearly separate her from worse but not from better types. Senders in the experiment adopt this strategy and some (naive) receivers are systematically misled by it. Imposing precise disclosure leads to less, but more easily interpretable, disclosure. Both theory and experimental data further suggest that imposing precision improves overall information transmission and is especially beneficial to naive receivers. Our results have implications for the rules that govern the disclosure of quality-relevant information by firms, the disclosure of research findings by scientists, and testimonies in a court of law.
Gender differences in social interactions, with Guido Friebel, Marie Lalanne, Bernard Richter and Paul Seabright
Journal of Economic Behaviour & Organization, 2021, 183, p. 33-45
We study how the random assignment of new students to introductory-week groups shapes subsequent friendship networks. Both women and men report being much more likely to be friends with same-gender students with whom they were (randomly) assigned in a group during their first week on campus, and the effect is much stronger for women. When students from the same cohort play a repeated trust game in the experimental laboratory, their behavior helps explain what we observed in the field. Women display more stability and less flexibility than men in their interactions with individuals with whom they had previously played. This difference is enough to generate homophily in the observational data even though subjects show no intrinsic preference for same-gender interaction.
Deception and Self-Deception, with Joël van der Weele
Nature Human Behavior, 2019, 3, p. 1055-1061
Supplementary Information, Data, Codes and Materials.
Media: ABC News, Phys.org, MSN, FAZ, Folia, WirtschaftsWoche; Blog posts: Nature Research, FehrAdvice, Psychology Today, Darwinian Business; Podcasts: BAdW.
There is ample evidence that the average person thinks he or she is more skillful, more beautiful, and kinder than others and that such overconfidence may result in substantial personal and social costs. To explain the prevalence of overconfidence, social scientists usually point to its affective benefits, like those stemming from a good self-image or reduced anxiety about an uncertain future. An alternative theory, first advanced by evolutionary biologist Robert Trivers, posits that people self-deceive into higher confidence in order to more effectively persuade or deceive others. We conduct two experiments (combined N=688) to test this strategic self-deception hypothesis. After performing a cognitively challenging task, half of our subjects are informed that they can earn money if, during a short face-to-face interaction, they convince others of their superior performance. We find that the privately elicited beliefs of the group that was informed of the profitable deception opportunity exhibit significantly more overconfidence than the beliefs of the control group. To test whether higher confidence ultimately pays off, we experimentally manipulate subjects' confidence by means of a noisy feedback signal. We find that an exogenous shift in confidence does make subjects more persuasive in subsequent face-to-face interactions. Overconfidence emerges from these results as the product of an adaptive cognitive technology with important social benefits, rather than some deficiency or bias.
Motivated health risk denial and preventative health care investments
Journal of Health Economics, 2019, 65, p. 78-92
People deny health risks, invest too little in disease prevention, and are highly sensitive to the price of preventative health care, especially in developing countries. Moreover, private sector R&D spending on developing-country diseases is almost non-existent. To explain these empirical observations, I propose a model of motivated belief formation, in which an agent's decision to engage in health risk denial balances the psychological benefits of reduced anxiety with the physical cost of underprevention. I use the model to study firms' price-setting behavior and incentive to innovate. I also show that tax-funded prevention subsidies are welfare enhancing.
Cooperating over losses and competing over gains: a social dilemma experiment, with Alessandro Ispano
Games and Economic Behavior, 2017, 105, p. 329 -348
Evidence from studies in international relations, the politics of reform, collective action and price competition suggests that economic agents in social dilemma situations cooperate more to avoid losses than in the pursuit of gains. To test whether the prospect of losses can induce cooperation, we let experimental subjects play the traveler's dilemma in the gain and loss domain. Subjects cooperate substantially more over losses. Furthermore, our results suggest that this treatment effect is best explained by reference-dependent risk preferences and reference-dependent strategic sophistication. We discuss the implications of our results and relate our findings to other experimental games played in the loss domain.
Anticipatory Anxiety and Wishful Thinking, with Jan Engelmann, Maël Lebreton, Nahuel Salem, Joël van der Weele
Revise and resubmit at the American Economic Review
Across five experiments (N=1,720), we test whether people engage in wishful thinking to alleviate anxiety about adverse future outcomes. Participants perform pattern recognition tasks in which some patterns may result in an electric shock or a monetary loss. Diagnostic of wishful thinking, participants are less likely to correctly identify patterns that are associated with a shock or loss. Wishful thinking is more pronounced under more ambiguous signals and only reduced by higher accuracy incentives when participants' cognitive effort reduces ambiguity. Wishful thinking disappears in the gain domain, indicating that negative emotions are important drivers of the phenomenon.
Correcting Consumer Misperceptions about CO2 Emissions, with Taisuke Imai, Davide Pace and Joel van der Weele
Policy makers put great emphasis on the role of information about carbon emissions in achieving sustainable decisions by consumers. We conduct two studies to understand the optimal targeting of such information and its effects. First, we conduct an incentivized and representative survey among US consumers (N = 1,022) to investigate awareness of climate impact and willingness to mitigate it. We find a large variation in the perceptions of the carbon emissions of different consumption behaviors, with an overall tendency to underestimate these emissions. We also find a positive but highly concave willingness to mitigate climate impact. We combine elicited misperceptions and willingness to mitigate in a structural model that delivers sharp predictions about where to best target information campaigns. In an experiment with actual consumption decisions (N = 2,081), we then test for the effect of CO2 information on the demand for beef, a product predicted to be a productive target for information. Correcting misperceptions has no effect on the demand for beef, both in absolute terms and compared to a predictably less productive target of information, i.e. the demand for poultry. Our dataset allows us to hone in on the underlying reason for this null effect.
Selling dreams: Endogenous optimism in lending markets, with Luc Bridet
Revise and resubmit at the American Economic Journal: Micro
We propose a simple model of borrower optimism in competitive lending markets with asymmetric information. Borrowers in our model engage in self-deception to arrive at a belief that optimally trades off the anticipatory utility benefits and material costs of optimism. Lenders' contract design shapes these benefits and costs. The model yields three key results. First, the borrower's motivated cognition increases her material welfare, regardless of whether or not she ends up being optimisitic in equilibrium. Our model thus helps explain why wishful thinking is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.