| Abstract : | Agents' rationality has been the cornerstone for the development of economic theory. It is the common foundation upon which economic research has produced valuable results.Still, lately there is increased interest regarding the validity of the rationality assumption from the point of view of psychology. Behavioral economics is now a growing field elaborating on the assumptions made in economic models regarding agents' preferences and decision-making processes. Intuition and evidence stemming from empirical or experimental studies show that people may misunderstand statistical significance, update their beliefs in a non-Bayesian way, overestimate the significance of vivid stories as opposed to \dry" statistical data, are prone to time-inconsistent choices, use mental shortcuts to simplify complex market situations or base their evaluations on relevant or irrelevant reference points.Bounded rationality models are developed in order to examine whether the addition of richer behavioral assumptions alters the conclusions of the traditional approach or leads to better explanations in cases where models with full rationality fail to do so. Focusing on the field of Industrial Organization, this thesis aims firstly to provide an introduction to bounded rationality models and give a brief description of the major biases that have been introduced to different market settings.The main focus is the case of reference-dependent preferences. Agents usually evaluate outcomes by comparing them to reference points, such as their initial endowment or the status quo. They also exhibit loss aversion; losses loom larger than equal gains and that affects agents' choices. Starting from Kahneman and Tversky's (1979) Prospect Theory, this thesis describes the empirical findings linked to reference dependence and loss aversion and presents the different models proposed to capture these notions, leading up to the model of K}oszegi and Rabin (2006), which is used by most recent papers with loss averse agents. Applications of this model are discussed in various market settings so as to give insight to the effects of loss aversion in consumer behavior. Monopolistic and competitive markets, oligopolies with differentiated products, price discriminating strategies and optimal contracts are some of the environments that have been combined with reference dependence and loss aversion. The results of incorporating loss aversion in Industrial Organization settings include price stickiness, kinked demand curves and pricing strategies that consist of regular prices and sales, as well as the optimality of simple over more complex contracts.
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