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"Grubb, Michael"
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Overconfident Consumers in the Marketplace
The term overconfidence is used broadly in the psychology literature, referring to both overoptimism and overprecision. Overoptimistic individuals overestimate their own abilities or prospects. In contrast, overprecise individuals place overly narrow confidence intervals around forecasts, thereby underestimating uncertainty. These biases can lead consumers to misforecast their future product usage, or to overestimate their abilities to navigate contract terms. In consequence, consumer overconfidence causes consumers to systematically misweight different dimensions of product quality and price. Poor choices based on biased estimates of a product's expected costs or benefits are the result. For instance, overoptimism about self-control is a leading explanation for why individuals overpay for gym memberships that they underutilize. Similarly, overprecision is a leading explanation for why individuals systematically choose the wrong calling plans, racking up large overage charges for exceeding usage allowances in the process. Beyond these market effects of overconfidence, this paper addresses three additional questions: What will firms do to exploit consumer overconfidence? What are the equilibrium welfare consequences of consumer overconfidence for consumers, firms, and society? And what are the implications of consumer overconfidence for public policy?
Journal Article
Cellular Service Demand: Biased Beliefs, Learning, and Bill Shock
Following FCC pressure to end bill shock, cellular carriers now alert customers when they exceed usage allowances. We estimate a model of plan choice, usage, and learning using a 2002-2004 panel of cellular bills. Accounting for firm price adjustment, we predict that implementing alerts in 2002-2004 would have lowered average annual consumer welfare by $33. We show that consumers are inattentive to past usage, meaning that bill-shock alerts are informative. Additionally, our estimates imply that consumers are overconfident, underestimating the variance of future calling. Overconfidence costs consumers $76 annually at 2002-2004 prices. Absent overconfidence, alerts would have little to no effect.
Journal Article
Selling to Overconfident Consumers
Consumers may overestimate the precision of their demand forecasts. This overconfidence creates an incentive for both monopolists and competitive firms to offer tariffs with included quantities at zero marginal cost, followed by steep marginal charges. This matches observed cellular phone service pricing plans in the United States and elsewhere. An alternative explanation with common priors can be ruled out in favor of overconfidence based on observed customer usage patterns for a major US cellular phone service provider. The model can be reinterpreted to explain the use of flat rates and late fees in rental markets, and teaser rates on loans. Nevertheless, firms may benefit from consumers losing their overconfidence.
Journal Article
Failing to Choose the Best Price: Theory, Evidence, and Policy
Both the \"law of one price\" and Bertrand's (J Savants 67:499-508, 1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and/or show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include: simplifying the choice environment, for instance by restricting price to be a scalar; advising consumers of their expected costs under each option; or choosing on behalf of consumers.
Journal Article
Consumer Inattention and Bill-Shock Regulation
For many goods and services such as electricity, health care, cellular phone service, debit-card transactions, or those sold with loyalty discounts, the price of the next unit of service depends on past usage. As a result, consumers who are inattentive to their past usage but are aware of contract terms may remain uncertain about the price of the next unit. I develop a model of inattentive consumption, derive equilibrium pricing when consumers are inattentive, and evaluate bill-shock regulation requiring firms to disclose information that substitutes for attention. When inattentive consumers are sophisticated but heterogeneous in their expected demand, bill-shock regulation reduces social welfare in fairly-competitive markets, which may be the effect of the Federal Communication Commission's recent bill-shock agreement. If some consumers are attentive while others naively fail to anticipate their own inattention, however, then bill-shock regulation increases social welfare and can benefit consumers. Hence, requiring zero-balance alerts in addition to the Federal Reserve's new opt-in rule for debit-card overdraft protection may benefit consumers.
Journal Article
Emission budgets and pathways consistent with limiting warming to 1.5 °C
The Paris Agreement has opened debate on whether limiting warming to 1.5 °C is compatible with current emission pledges and warming of about 0.9 °C from the mid-nineteenth century to the present decade. We show that limiting cumulative post-2015 CO
2
emissions to about 200 GtC would limit post-2015 warming to less than 0.6 °C in 66% of Earth system model members of the CMIP5 ensemble with no mitigation of other climate drivers. We combine a simple climate–carbon-cycle model with estimated ranges for key climate system properties from the IPCC Fifth Assessment Report. Assuming emissions peak and decline to below current levels by 2030, and continue thereafter on a much steeper decline, which would be historically unprecedented but consistent with a standard ambitious mitigation scenario (RCP2.6), results in a likely range of peak warming of 1.2–2.0 °C above the mid-nineteenth century. If CO
2
emissions are continuously adjusted over time to limit 2100 warming to 1.5 °C, with ambitious non-CO
2
mitigation, net future cumulative CO
2
emissions are unlikely to prove less than 250 GtC and unlikely greater than 540 GtC. Hence, limiting warming to 1.5 °C is not yet a geophysical impossibility, but is likely to require delivery on strengthened pledges for 2030 followed by challengingly deep and rapid mitigation. Strengthening near-term emissions reductions would hedge against a high climate response or subsequent reduction rates proving economically, technically or politically unfeasible.
If CO
2
emissions after 2015 do not exceed 200 GtC, climate warming after 2015 will fall below 0.6 °C in 66% of CMIP5 models, according to an analysis based on combining a simple climate–carbon-cycle model with estimated ranges for key climate system properties.
Journal Article
Behavioral Consumers in Industrial Organization: An Overview
This paper overviews three primary branches of the industrial organization literature with behavioral consumers. The literature is organized according to whether consumers: (1) have non-standard preferences; (2) are overconfident or otherwise biased such that they systematically misweight different dimensions of price and other product attributes; or (3) fail to choose the best price due to suboptimal search, confusion comparing prices, or excessive inertia. The importance of consumer heterogeneity and equilibrium effects are also highlighted along with recent empirical work.
Journal Article
Higher cost of finance exacerbates a climate investment trap in developing economies
Finance is vital for the green energy transition, but access to low cost finance is uneven as the cost of capital differs substantially between regions. This study shows how modelled decarbonisation pathways for developing economies are disproportionately impacted by different weighted average cost of capital (WACC) assumptions. For example, representing regionally-specific WACC values indicates 35% lower green electricity production in Africa for a cost-optimal 2 °C pathway than when regional considerations are ignored. Moreover, policy interventions lowering WACC values for low-carbon and high-carbon technologies by 2050 would allow Africa to reach net-zero emissions approximately 10 years earlier than when the cost of capital reduction is not considered. A climate investment trap arises for developing economies when climate-related investments remain chronically insufficient. Current finance frameworks present barriers to these finance flows and radical changes are needed so that capital is more equitably distributed.
Access to low cost finance is vital for developing economies’ transition to green energy. Here the authors show how modelled decarbonization pathways for developing economies are disproportionately impacted by different weighted average cost of capital (WACC) assumptions.
Journal Article
Manipulating the reliability of target-color information modulates value-driven attentional capture
Previously rewarded stimuli slow response times (RTs) during visual search, despite being physically non-salient and no longer task-relevant or rewarding. Such value-driven attentional capture (VDAC) has been measured in a training-test paradigm. In the training phase, the search target is rendered in one of two colors (one predicting high reward and the other low reward). In this study, we modified this traditional training phase to include pre-cues that signaled reliable or unreliable information about the trial-to-trial color of the training phase search target. Reliable pre-cues indicated the upcoming target color with certainty, whereas unreliable pre-cues indicated the target was equally likely to be one of two distinct colors. Thus reliable and unreliable pre-cues provided certain and uncertain information, respectively, about the magnitude of the upcoming reward. We then tested for VDAC in a traditional test phase. We found that unreliably pre-cued distractors slowed RTs and drew more initial eye movements during search for the test-phase target, relative to reliably pre-cued distractors, thus providing novel evidence for an influence of information reliability on attentional capture. That said, our experimental manipulation also eliminated
value-dependency
(i.e.
,
slowed RTs when a high-reward-predicting distractor was present relative to a low-reward-predicting distractor) for both kinds of distractors. Taken together, these results suggest that target-color uncertainty, rather than reward magnitude, played a critical role in modulating the allocation of value-driven attention in this study.
Journal Article