Effect of choice on beliefs and markets

How does choice affect beliefs? with Gergely Hajdu

People tend to think more favorably about a product when they own it compared to when they do not own it. Going beyond the effect of ownership, we study in the lab how choosing a product affects beliefs about the values of products in the choice set. Using a between-subject design, we compare a person who chooses a product from a binary choice set to a person who receives the same product exogenously. To deal with the endogeneity in choices, we construct information that is both sufficiently clear to make choices predictable and sufficiently unclear to leave room for belief distortion. We find that making a choice increases the difference in beliefs between the two alternatives, and the effect is driven by pessimism about non-chosen products: participants who do not choose a product believe it is worse than participants who do not receive it, while beliefs about chosen and received products are similar. When participants choose a product but their attention is shifted towards product evaluation, pessimism disappears, suggesting that the effect of choice is driven by attention. As choices are often made under uncertainty, the mechanism we identify may play a role in a potentially wide range of settings. Our findings also have policy implications: active choice policies may be more effective tools than opt-out defaults

How does choice affect learning? with Gergely Hajdu

After purchasing a product, people usually receive information and update their beliefs about both chosen and non-chosen products. This, in turn, can affect future buying and selling decisions. In this paper, we study how choosing a product – as opposed to simply receiving it – affect learning about products after the choice has been made. We design an experiment where participants learn about the fundamental quality of financial investments by observing price changes in multiple rounds. Using a between-subject design, we compare beliefs of participants who choose some of the investments themselves (Choice condition) to participants who receive investments exogenously (Allocation condition). We find that learning is stickier after making a choice: participants respond less to price changes in the Choice condition than in the Allocation condition. This result holds for both own and non-owned investments and for both good news and bad news. We also show that participants in the Choice condition do not pay more attention to the investments; neither when they choose, nor after they have made the choice. We estimate a structural model and demonstrate that learning is not significantly different from the Bayesian benchmark after exogenous product allocation, while it is too sticky after making a choice.

Motivated beliefs and market outcomes

People tend to hold optimistic beliefs about their own future outcomes. In this paper I analyze the effect of optimistic belief distortions on competition between firms. I extend the standard Hotelling model by allowing consumers to distort their beliefs about the quality of products. As consumers subjective utility is affected only by their beliefs about the product they end up purchasing, belief distortion is asymmetric: consumers become more optimistic about products that they are more likely to buy. The asymmetry in beliefs increases perceived product differentiation and results in weaker competition and higher equilibrium prices. This result is consistent with the observation that high prices and markups can persist in markets with many sellers and fairly homogeneous products. The model identifies a novel channel through which product heterogeneity influences competition. If the products are similar then mistakes in product choice are less costly. Thus, consumers can pick any of the products and become very optimistic about its quality. As a result, belief distortion is more asymmetric that leads to weaker competition. The model predicts prices to be high when the products are similar (because belief distortion is asymmetric) or when products are highly differentiated (standard effect), while prices are lowest for intermediate levels of product heterogeneity.

Drawing insight from football data

Performance evaluation in football: outcomes vs underlying performance

How do people evaluate others' performance when the output depends on luck as well? Football is an ideal setting to study this question because its low scoring nature introduces a lot of randomness into the final results: a team playing well means that they have a higher chance of winning but it does not guarantee a win at all. In this exercise I look at player ratings given by sport magazine journalists to disentangle the effect of actual scores and underlying performance (measured by expected goals) on the evaluations. Using data from all games in the German Bundesliga between 2017 and 2021 I find that actual scores play a more important role in determining influence player ratings than underlying performance. This result holds for defenders and attackers, while goalkeepers' ratings depend equally on actual scores and expected goals. Although the expected goals metric became more popular in recent years, its importance does not increase over time.