Ph.d.-forsvar: Edward John Dorell Webb:" Attention and perception in decision-making and interactions"

This PhD thesis contains six related, but self-contained chapters studying the influence of attention and perception in economics. A variety of techniques are used, including eye-tracking, lab experiments and theoretical modelling.

The first two chapters consider attention, beginning with an eye-tracking experiment, joint work with Andreas Gotfredsen, Carsten S. Nielsen and Alexander Sebald, to test a prediction of salience theory. We find significant numbers of a certain type of preference reversal, in which a consumer tends to choose a low quality good with a low price level but a high quality good with a high price level, despite the price of the quality premium being held constant. Salience theory proposes attention as the driver behind this choice pattern. However, subjects' allocation of attention as measured by eye-tracking is inconsistent with salience theory.

In the second chapter, a new theory of warm glow attention is proposed, in which individuals allocate their attention to their environment to benefit themselves as much as possible, thus creating a “warm glow”. The power and versatility of the theory are demonstrated in several applications: endowment effects, spurious product differentiation, overconfidence, project overruns and slow technology adoption.

The following three chapters deal primarily with perception. In the first the effect of consumers with bounded perception have on a vertically differentiated duopoly with sequential quality choice is examined. Consumers are unable to tell the difference between goods of sufficiently similar quality, treating them as heterogeneous, analogous to Weber's law in psychophysics. It is found that the effects of bounded perception depend heavily on the cost structure of quality. The following chapter is in the same spirit, but with simultaneous choice of quality.

Two experiments on manipulating perception are presenting in the next chapter, which is joint work with Andreas Gotfredsen, Carsten S. Nielsen and Alexander Sebald. By visually representing experimental assets as “heat maps” of different coloured squares, it is possible to manipulate how similar they are. In two experiments we study the effect of similarity on willingness-to-pay and an experimental market.

In the final chapter, attention and perception are combined. A theory of dynamic inattention is proposed, in which individuals do not perfectly attend to all changes in their environment, thus leading to their perception of it being erroneous. Three applications are given: to portfolio design, to product shrinkage, and to medical screening programs.