Description. This course is an introductory course to behavioral economics. ...
The second objective is to outline how behavioral insights help to explain
seeming.
Behavioral Economics Class: Ural State University (Ekaterinburg, Russia), Department of Economics, Spring 2010, compulsory for 4th year B.A. students Instructor: Natalia Shestakova email to
[email protected], course web-page http://home.cerge-ei.cz/Shestakova/Teaching Сlasses (22 hours): Tue – 19:30-21:00, room 215 Wed – 14:30-16:00, room 232 Office Hours: Mon – 12:00-14:00, office 216 or by appointment
Grading: Class experiments – 30 points Home assignment – 20 points Essay/ Research proposal – 30 points Final exam – 20 points Bonus – 10 points for participation in paid experiments
Description This course is an introductory course to behavioral economics. It is intended mainly for BA students in their last year of studies and open for all other interested students. The course has two main objectives. The first one is to review the main evidence on violations of classical economic assumptions that has been provided by recent psychological and experimental-economics research. For better understanding of the nature of these violations, a series of class experiments will be conducted. The second objective is to outline how behavioral insights help to explain seeming anomalies in such fields of economics as Game Theory, Finance, Labor Markets, and Industrial Organization.
Requirements
Conduct class experiment: to understand the violations of standard economic assumptions, we will have a series of class experiments. Each experiment will be organized by a group of four students. The expected procedure is the following: ◦ prepare instructions and experimental tasks prior to the class based on assigned papers and consultations with me ◦ at the beginning of the class, conduct the experiment ◦ after the experiment is conducted, two members of the group analyze the data and prepare a summary of the results, other two members describe the effects that have been tested for and discuss possible outcomes ◦ you present the summary of the results and conclude During preparation, you should pay attention to the following aspects: ◦ сlear instructions ◦ possibility to identify the effects (or their absence) using collected data ◦ subjects' incentives to reveal their true preferences ◦ role of experience Solve formal problems: we will cover few alternative models of decision-making and you will be given a home assignment to apply these models for solving formal problems Think carefully about possible applications of behavioral economics: write a 6-8 pages long essay/ research proposal regarding possible applications of class material
Topics for class experiments You will find definitions of the effects that you have to test for (Experiment 1-3) and descriptions of
the games (Experiment 4-5) in the articles assigned to your group. Note that you are not constrained by these articles and can use any available materials when you will be preparing your experiment. 20/04: Framing, anchoring & preference reversal In this experiment you should check whether the named three effects are present. Also test for the endowment effect and loss-aversion, either in addition to the above effects, or as a substitution for one of them. 27/04: Do people choose according to the EUT? There are several violations of the EUT documented in many experiments. Choose at least three of them to check yourself whether they are present: common ratio effect, common consequence effect, reflection effect, fourfold pattern of risk attitude. 04/05: Do people discount exponentially? With regard to intertemporal choice, present-biased preferences have been widely observed. Other two important anomalies in the intertemporal choice are sign effect and magnitude effect. You should carefully test for the presence of these effects. 11/05: Other regarding preferences It has been shown that people care not only about their own welfare. In particular, they are willing to give up part of their welfare for punishing those who are selfish and to reward those who behaved “nicely” to them. You should test for the presence of these effects using ultimatum, dictator and trust games. 18/05: Cognitive limitations Not surprisingly, human cognitive abilities are limited. Use a beauty contest game to see how deep into the game students in our class think. * DM = decision-maker, EUT = expected utility theorem
Readings Unfortunately, there are no established textbooks on behavioral economics. However, the following will be used as references: 1. Camerer C. F., Loewenstein G., and Rabin M. (editors) Advances in Behavioral Economics. [ABE] 2. Diamond P., Vartiainen H. (editors) Behavioral Economics and Its Applications [BEA] 3. Camerer C. F. Behavioral Game Theory [BGT] There will be a list of papers assigned to each topic. They will be available from the class web-page.
Course Outline Introduction (Lecture 1) Compulsory readings: [ABE] Chapter 1: Camerer & Loewenstein, “Behavioral Economics: Past, Present, Future” “Getting into” readings: Kahneman. 2003. “Maps of Bounded Rationality: Psychology for Behavioral Economics” Nobel prize lecture. Or, check video: http://nobelprize.org/mediaplayer/index.php?id=531 Ariely. 2008. Predictably Irrational. - many examples of experiments and their practical implications, more can be found here: http://www.predictablyirrational.com/ Thaler & Sunstein. 2008. Nudge. - policy recommendations based on behavioral economics, more can be found here: http://nudges.org/ Hertwig & Ortmann. 2001. “Experimental Practices in Economics: A Methodological Challenge for Psychologists.” - explaining why you should follow certain rules when designing an experiment
Anomalies in preferences (Lecture 2) • class experiment: framing, anchoring, and preference reversal • potential explanations of observed anomalies • applications Compulsory readings: [ABE] Chapter 1: Camerer & Loewenstein, “Behavioral Economics: Past, Present, Future.” Tversky & Kahneman. 1991. "Loss aversion in riskless choice: A reference dependent model." “Getting into” readings: Madrian & Shea. 2001. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior."
Decision-Making under Risk and Uncertainty (Lectures 3-4) • •
expected utility model class experiment: common consequence, common ratio, reflection effects and fourfold pattern of risk attitude • prospect theory model • priority heuristic Compulsory readings: [ABE] Chapter 4: Starmer, “Developments in Nonexpected-Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk.” Brandstatter, Hertwig, Gigerenzer. 2006. "The Priority Heuristic: Making Choices without TradeOffs." Background readings: MWG Chapter 6. "Choice under Uncertainty."
Intertemporal Choice (Lectures 5-6) • •
discounted utility model class experiment: common difference and absolute magnitude effects, gains-losses and delay-speedup asymmetries • alternative models of intertemporal choice • application: addiction Compulsory readings: [ABE] Chapter 6: Frederick, Loewenstein, O'Donoghue, “Time Discounting and Time Preference: A Critical Review.”
Behavioral Game Theory (Lectures 7-8) • class experiment: other regarding preferences • fairness concerns Readings: Ruffle 1998 “More Is Better, But Fair Is Fair: Tipping in Dictator and Ultimatum Games.” Cox 2004 “How to Identify Trust and Reciprocity.”
Cognitive Limitations (Lecture 9) • • •
class experiment: cognitive limitations multistep reasoning role of learning
