Kader, Gavin; (2019) Essays in behavioural economics using revealed preference theory and decision theory. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis comprises three chapters that provide insights into consumer rationality and consideration sets using revealed preference theory, and a decision theoretic approach to status quo bias. Chapter 1 studies the presence of consideration sets through the lens of economic rationality from the perspective of revealed preference theory. In addition, I propose a new index of rationality (GAV Index) to accompany two commonly used measures (CCEI & MPI), which are applied to a scanner panel dataset and a simulated dataset. Under minimal restrictions, I detect the effects of exogenous consideration set formation on a household's ability to make rational bundle choices. There are also several key demographic factors that correlate well with rationality. This remains true when controlling for the (average) size of the consideration sets households use; these results suggest that a simpler decision-making process with fewer goods can lead to choices that are more rational. Overall, the use of consideration sets as a behavioural heuristic can seemingly benefit consumers by enhancing their decision-making process. Chapter 2 semi-parametrically estimates costs associated with consideration sets using revealed preference theory. The theorem provided ensures there are testable implications of a parsimonious model of consideration sets. Cost of consideration can be estimated in proportion to expenditure and is heterogeneous across consumers. Using the Stanford Basket Dataset, the model cannot reject the use of consideration sets in the presence of suitable restrictions. On average, the average consideration set cost is approximately 2% of monthly expenditure. Additionally, there appears to be a strong link between the consumer's cost of consideration and rationality level. Chapter 3 proposes a choice theory that explains status quo bias (SQB) with the concept of just-noticeable differences (JNDs). SQB comes from an inclination to choose a default option/current choice when decision-making, whereas a JND is the minimal stimulus required to perceive change. JND utility can be considered a general representation of SQB; it is shown that the SQB representation of Masatlioglu & Ok (2005) is a special case. As such, an agent will only move away from a current choice position if there exist other alternatives that are noticeably better, otherwise, the agent does not shift away, hence leading to a bias towards the status quo.

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