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The Effect of Cognitive Biases and Visceral Factors on Economics Decisions

  • Author(s): Ashton, Lydia MT
  • Advisor(s): Villas-Boas, Sofia
  • et al.
Abstract

This work presents new evidence of effects that cognitive biases and visceral factors, particularly hunger, have on economic decisions. In Chapter 1, I test whether individuals display inattention to the decimal digits of a price (i.e. left-digit bias). Using data from a unique experiment conducted by Chetty et al. (2009), who find that tax-salience decreases demand, I find that if tax-salience shifts the price left-most digit upwards the decrease in demand is larger. This study presents new evidence on left-digit bias and also suggests that this is the main channel through which tax salience affects consumers' decisions. In Chapter 2, I motivate a new research agenda by drawing parallel evidence from psychology, economics, and neuroscience, and posing the question: does cognitive-fatigue and hunger affect time preferences? Using data from a novel laboratory experiment, I find that hunger and cognitive-fatigue exacerbate impatience. On one hand, cognitive-fatigue appears to decrease attention and increase the use of heuristics, resulting on a higher degree of utility curvature. On the other hand, hunger has a larger effect on impatience when monetary rewards are immediate, resulting in present-biased preferences. These results show that present bias is a visceral response activated when sooner rewards are immediate, and can help explain why the poor tend to make more shortsighted economic decisions.

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