Biased decisions: Three essays on decision making

My dissertation includes three essays that investigate the effects of cognitive biases on individual decisions and institutional design. I use both theoretical and empirical (experimental) analysis to better understand the impact of biases on behavior.;In my first essay, I theoretically investigate the impact of one specific bias, overconfidence, in an inventory decision problem (the newsvendor problem). I model the overconfident (overprecise) manager as one with an accurate belief of the mean of the demand distribution he faces, but with a biased belief about its variance. This research proposes and demonstrates how overconfidence can provide a consistent explanation for observed decisions.;In my second essay, I use experiments to disentangle several underlying causes of ordering bias. Participants in the experiment make decisions in a newsvendor environment, similar to what has been done in previous research. In addition, I measure individual's level of overconfidence, overplacement, risk aversion and their tendency to anchor. After comparing performance on these measures with their decisions, I find a strong and significant correlation between biased ordering and overconfidence measures, which explains almost half of the observed ordering mistakes. I further find that the explanatory power of overconfidence is robust to learning and other dynamic considerations, while other measures are not correlated with biased behavior.;The third essay demonstrates the impacts of biases introduced by institutions. I investigate the impact of a government-induced identity, hukou, in urban China on individuals' efforts in response to economic incentives to work. I run an experiment in elementary schools in China. I demonstrate that individual efforts by low status individuals are reduced when their identity is made public. This regularity can cause lasting and persistent economic inequality.