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Abstract:
Do individuals have unbiased beliefs, or are they over- or underconfident? Overconfident individuals may fail to prepare optimally for the future, and economists who infer preferences from behavior under the assumption of unbiased beliefs will make mistaken inferences. This paper documents overconfidence in a new domain, prospective memory, using an experimental design that is more robust to potential confounds than previous research. Subjects chose between smaller automatic payments and larger payments they had to remember to claim at a six-month delay. In a large sample of college and MBA students at two different universities, subjects make choices that imply a forecast of a 76% claim rate, but only 53% of subjects actually claimed the payment.

overconfidence, memory, prospective memory, beliefs

Abstract:
In complex insurance contracts, individuals can use sophisticated strategies to avoid out-of-pocket expenses. Sophistication and expected claims are affected by similar factors, creating a systematic positive or negative correlation between them. Depending on this correlation, sophistication can lead to advantageous or adverse selection, and selection may differ between the intensive and extensive margin. Responding to sophistication, insurers may distort contracts by making them excessively simple or complex, to reduce or magnify enrollees' ability to game the system. I show two sophisticated prescription drug-related behaviors each reduce out-of-pocket prescription drug costs by half and are strongly associated with expected claims.

insurance, sophistication, asymmetric information, health care, prescription drugs, contract design, adverse selection, advantageous selection, household decision making

Abstract:
Evidence on loss aversion and the endowment effect suggests that people evaluate outcomes with respect to a reference point. Yet little is known about what determines reference points. This experiment shows that expectations determine reference points. We endow subjects with an item and randomize the probability they will be allowed to trade it for an alternative. Subjects that are less likely to be able to trade are more likely to choose to keep their item, as predicted when reference points are determined by expectations, but not when reference points are determined by the status quo or when preferences are reference-independent.

reference points, loss aversion, endowment effect, experimental economics