Experiments on consumer preferences and decision making

Abstract

Consumers are not as rational as assumed by conventional economic theories. The present thesis reports three studies of consumers’ bounded rationality. It has three chapters. In Chapter 1, I investigate the effects of a range of different types of anchor on WTP and WTA valuations of familiar consumer products, elicited through individuals’ buying or selling decisions at given prices. I find anchoring effects only when the anchor value is framed as a plausible price for the good for which the individual is a potential buyer or seller. Anchoring effects are stronger for WTA than for WTP. I conclude that anchoring effects can affect market behaviour, but that not all anchors are equally effective. In Chapter 2, I demonstrate a set of three experiments and find that consumers are likely to stick to defaults and achieve suboptimal outcomes. I unpack two key psychological reasons why they do this \n- complexity (in terms of non-linearity, number and bundling of tariffs) and consumer inattention. The complexity induced by product bundling, non-linearity and number of tariffs has an important role, but this is overstated if the explanatory power of inattention is neglected. I show that a ‘smart nudge’ policy of automatically switching default tariffs can be used to exploit inattention-based consumer inertia to achieve better consumer outcomes. In Chapter 3, I report an experiment in which participants faced purchasing decisions involving complexity and common standards. The majority of participants employed the "dominance editing" (DE) heuristic. However, for cognitively constrained participants, the DE heuristic is less efficient than an alternative shortlisting heuristic - the "largest common standard" (LCS).

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