Essays in applied behavioral microeconomics

This dissertation presents empirical findings on the expectations formation process in the areas of performance evaluation, stock market valuation, and negotiations. In each of these areas, individuals appear to expect recent outcomes to continue and to overweight them while underweighting underlying base rates.; Employers often assess their employees' abilities in noisy environments and must judge how environmental factors, such as market conditions and employee task difficulty, affect performance. The first chapter examines the extent to which experimental subjects, acting as employers, adjust for task difficulty when assessing employee ability. Subjects valued employees who were observed performing easy tasks more highly than those who were observed performing more difficult tasks. This overvaluation persisted despite increased incentives for accurate assessments, increased feedback, and increased experience with the tasks. This finding suggests that the tendency to underweight task difficulty and other environmental factors may be prevalent in economic markets.; The second chapter presents empirical results showing that stock market expectations are positively correlated with recent market returns, indicating that expectations of future returns result from extrapolating past returns. Expectations are negatively correlated with subsequent returns on the market, suggesting that individuals overreact to patterns of past returns. However, there does not appear to be a causal relationship between expectations and future returns when they are estimated simultaneously. Expectations tend to be more positively correlated with past returns on larger stocks and more negatively correlated with future returns on smaller stocks. They are also negatively correlated with contemporaneous levels of the closed-end fund discount, suggesting that this discount reflects investor sentiment.; The third chapter presents an experiment that examines the role that bargaining strength plays in the relative skills attributed to negotiators. After completing a 4-way negotiation, subjects assessed the negotiating abilities of their group members. Subjects chose as their future partners those who were assigned greater bargaining power in the initial negotiation significantly more often than those who were assigned to weaker roles.