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The rise of behavioural economics has prised loose the abstract constructs of subjective expected utility theory, beliefs and utility functions, bringing them to life as separate, measurable objects. The first of these objects, beliefs, forms the common thread that connects the chapters of this dissertation, binding the pieces into a coherent whole. The central themes explored in the three chapters of this dissertation include belief formation, the measurement of beliefs, and the mapping from beliefs into behaviour. Chapter 1 offers an overview of the three papers. Chapter 2 studies the descriptive accuracy of Bayes’ statistical rule for understanding belief updating. In particular, we present experimental evidence testing whether a commonly hypothesised deviation from Bayes’ rule, the “good-news, bad-news” effect, extends to belief updating in the domain of financial decision making. We find no evidence of asymmetric updating in this domain. Chapter 3 considers individuals who face a decision problem, and can inform their choice by observing the outcomes of others who have faced a similar decision in the past. However, these outcomes comprise a selected dataset, as outcomes are observed conditional on a specific choice having been made. We analyse the degree to which neglect of the selection leads to suboptimal choices. We find evidence that behaviour deviates substantially from the predictions of the rational model, but is consistent with the Jehiel (2016) model of selection neglect agents. Chapter 4 investigates the influence of an exogenous shift in an individual’s confidence in her own abilities on stylised career choices. We present experimental evidence demonstrating that a treatment designed to stimulate an upward shift in average confidence levels: (i) has a substantially larger impact on the beliefs and choices of low ability individuals; (ii) leads to a large increase in suboptimal incentive scheme choices; and (iii) does not lead to a commensurate increase in effort provision.
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