Prof. Dr. Henrik Orzen
Lehrstuhl für Volkswirtschaftslehre, Business Economics
L7, 3-5, 68131 Mannheim, Germany
Tel. +49/621/181-1890
[email protected]
http://orzen.vwl.uni-mannheim.de
Sekretariat:
Frau Yvonne Reiter
Tel. +49/621/181-1895
Fax. +49/621/181-1893
[email protected]
Biases in economic decision making
Block seminar – Fall 2015
This seminar introduces students to a range of empirical and experimental findings that
indicate systematic biases in human decision making. While our brains can perform
many complex tasks, there is evidence that humans tend to commit specific cognitive
errors in certain types of situations. Sometimes, such evidence is debated
controversially in the literature. Several topics from this area will be discussed in the
seminar.
A general introduction to a number of biases and heuristics is provided in
Tversky, A., and D. Kahneman (1974). Judgment under Uncertainty: Heuristics and
Biases, Science, 185(4157), 1124-1131.
Criteria for assessment are active participation, a presentation, a handout and a seminar
paper. The deadline for submitting the seminar paper is 27 November 2015.
The following provides a list of topics, together with some relevant literature. Note: All
articles are available electronically on campus through the university’s library services.
1. The availability heuristic
 Tversky, A., and D. Kahneman (1973). Availability: A Heuristic for Judging
Frequency and Probability, Cognitive Psychology, 5(2), 207-232.
 Sedlmeier, P., R. Hertwig and G. Gigerenzer (1998). Are Judgments of the
Positional Frequencies of Letters Systematically Biased due to Availability? Journal of Experimental Psychology: Learning, Memory, and Cognition,
24(3), 754-770.
 Sunstein, C.R. (2006). The Availability Heuristic, Intuitive Cost-Benefit Analysis,
and Climate Change. Climatic Change, 77(1-2), 195-210.
Universität Mannheim ∙ Lehrstuhl für VWL, Business Economics ∙ Prof. Dr. Henrik Orzen
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2. Anchoring
 Johnson, E.J., and D.A. Schkade (1989). Bias in Utility Assessments: Further
Evidence and Explanations, Management Science, 35(4), 406-424.
 Ariely, D., G. Loewenstein and D. Prelec (2003). “Coherent Arbitrariness”: Stable
Demand Curves without Stable Preferences, Quarterly Journal of Economics,
118(1), 73-106.
 Beggs, A., and K. Graddy (2009). Anchoring Effects: Evidence from Art Auctions,
American Economic Review, 99(3), 1027-1039.
3. The conjunction fallacy
 Tversky, A., and D. Kahneman (1983). Extensional Versus Intuitive Reasoning:
The Conjunction Fallacy in Probability Judgment, Psychological Review, 90(4),
293-315.
 Zizzo, D.J., S. Stolarz-Fantino, J. Wen, E. Fantino (2000). A Violation of the
Monotonicity Axiom: Experimental Evidence on the Conjunction Fallacy. Journal
of Economic Behavior & Organization, 41(3), 263-276.
 Charness, G., E. Karni and D. Levin (2010). On the Conjunction Fallacy in
Probability Judgment: New Experimental Evidence regarding Linda, Games and
Economic Behavior, 68(2), 551-556.
4. The false consensus effect
 Ross, L., D. Greene and P. House (1977). The “False Consensus Effect”: An
Egocentric Bias in Social Perception and Attribution Processes, Journal of
Experimental Social Psychology, 13(3), 279-301.
 Engelmann, D., and M. Strobel (2000). The False Consensus Effect Disappears if
Representative Information and Monetary Incentives are Given, Experimental
Economics, 3(3), 241-260.
 Engelmann, D., and M. Strobel (2012). Deconstruction and Reconstruction of an
Anomaly, Games and Economic Behavior, 76(2), 678-689.
5. The confirmation bias
 Jones, M., and R. Sugden (2001). Positive Confirmation Bias in the Acquisition of
Information, Theory and Decision, 50(1), 59-99.
 Jones, M.K. (2008). Positive Confirmation in Rational and Irrational
Learning, Journal of Socio-Economics, 37(3), 1029-1046.
 Christandl, F., D Fetchenhauer and E. Hoelzl (2011). Price perception and
confirmation bias in the context of a VAT increase, Journal of Economic
Psychology, 32(1), 131-141.
Universität Mannheim ∙ Lehrstuhl für VWL, Business Economics ∙ Prof. Dr. Henrik Orzen
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6. Endowment effect and status-quo bias
 Samuelson, W., and R. Zeckhauser (1988). Status Quo Bias in Decision Making,
Journal of Risk and Uncertainty, 1(1), 7-59.
 Kahneman, D., J.L. Knetsch and R.H. Thaler (1991). Anomalies: The Endowment
Effect, Loss Aversion, and Status Quo Bias, Journal of Economic Perspectives, 5(1),
193-206.
 Hartman, R.S., M.J. Doane, and C.-K. Woo (1991). Consumer Rationality and the
Status Quo, Quarterly Journal of Economics, 106(1), 141-162.
 Ert, E., and I. Erev (2008). The Rejection of Attractive Gambles, Loss Aversion,
and the Lemon Avoidance Heuristic, Journal of Economic Psychology, 29(5), 715723.
7. Hyperbolic discounting
 Loewenstein, G., and D. Prelec (1992). Anomalies in Intertemporal Choice:
Evidence and an Interpretation, Quarterly Journal of Economics, 107(2), 573-597.
 Rubinstein, A. (2003). “Economics and Psychology”? The Case of Hyperbolic
Discounting, International Economic Review, 44(4), 1207-1216.
 Benhabib, J., A. Bisin and A. Schotter (2010). Present-Bias, Quasi-Hyperbolic
Discounting, and Fixed Costs, Games and Economic Behavior, 69(2), 205-223.
8. Escalation of commitment and sunk cost fallacy
 Staw, B.M. (1976). Knee-deep in the big muddy: a study of escalating commitment
to a chosen course of action, Organizational Behavior and Human Performance,
16(1), 27-44.
 Kogut, C.A. (1990). Consumer Search Behavior and Sunk Costs, Journal of
Economic Behavior & Organization, 14(3), 381-392.
 Camerer, C.F., and R.A. Weber (1999). The Econometrics and Behavioral
Economics of Escalation of Commitment: A Re-Examination of Staw and Hoang’s
NBA Data, Journal of Economic Behavior & Organization, 39(1), 59-82.
9. Money illusion
 Fehr, E., and J.-R. Tyran (2001). Does Money Illusion Matter? American Economic
Review, 91(5), 1239-1262.
 Fehr, E., and J.-R. Tyran (2007). Money Illusion and Coordination Failure, Games
and Economic Behavior, 58(2), 246-268.
 Shafir, E., P. Diamond and A. Tversky (1997). Money Illusion. Quarterly Journal of
Economics, 112(2), 341-374.
Universität Mannheim ∙ Lehrstuhl für VWL, Business Economics ∙ Prof. Dr. Henrik Orzen
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10. Overconfidence
 Camerer, C., and D. Lovallo (1999). Overconfidence and Excess Entry: An
Experimental Approach, American Economic Review, 89(1), 306-318.
 Moore, D.A., and D.M. Cain (2007). Overconfidence and underconfidence: When
and why people underestimate (and overestimate) the competition,
Organizational Behavior and Human Decision Processes, 103(2), 197-213.
 Moore, D.A., and P.J. Healy (2008). The Trouble with Overconfidence, Psychological Review, 115(2), 502-517.
11. The self-serving bias
 Babcock, L., G. Loewenstein, S. Issacharoff and C. Camerer (1995). Biased
Judgments of Fairness in Bargaining, American Economic Review, 85(5), 13371343.
 Babcock, L., and G. Loewenstein (1997). Explaining Bargaining Impasse: The Role
of Self-Serving Biases. Journal of Economic Perspectives, 11(1), 109-126.
 Offerman, T. (2002). Hurting Hurts More than Helping Helps, European Economic
Review, 46(8), 1423-1437.
12. Illusion of control
 Hayashi, N., E. Ostrom, J. Walker and T. Yamagishi (1999). Reciprocity, Trust, and
the Sense of Control, Rationality and Society, 11(1), 27-46.
 Fellner, G., W. Güth and B. Maciejovsky (2004). Illusion of Expertise in Portfolio
Decisions: An Experimental Approach. Journal of Economic Behavior &
Organization, 55(3), 355-376.
 Charness, G., and U. Gneezy (2010). Portfolio Choice and Risk Attitudes: An
Experiment, Economic Inquiry, 48(1), 133-146.
 Gino, F., Z. Sharek and D.A. Moore (2011). Keeping the illusion of control under
control: Ceilings, floors, and imperfect calibration, Organizational Behavior and
Human Decision Processes, 114(2), 104–114.
13. The gambler’s fallacy
 Croson, R., and J. Sundali (2005). The Gambler’s Fallacy and the Hot Hand:
Empirical Data from Casinos, Journal of Risk and Uncertainty, 30(3), 195-209.
 Suetens, S., and J.-R. Tyran (2012). The Gambler's Fallacy and Gender, Journal of
Economic Behavior & Organization, 83(1), 118-124.
 Huber, J., M. Kirchler and T. Stöckl (2010). The Hot Hand Belief and the Gambler’s
Fallacy in Investment Decisions Under Risk, Theory and Decision, 68(4), 445-462.
 Tversky, A., and D. Kahneman (1971). Belief in the Law of Small Numbers,
Psychological Bulletin, 76(2), 105-110.
Universität Mannheim ∙ Lehrstuhl für VWL, Business Economics ∙ Prof. Dr. Henrik Orzen
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14. On the interpretation of biases in decision making: Gigerenzer’s critique
 Gigerenzer, G. (1991). How to Make Cognitive Illusions Disappear: Beyond
‘Heuristics and Biases’, European Review of Social Psychology, 2(1), 83-115.
 Kahneman, D., and A. Tversky. (1996). On the Reality of Cognitive Illusions,
Psychological Review, 103(3), 582-591.
 Gigerenzer, G. (1996). On Narrow Norms and Vague Heuristics: A Reply to
Kahneman and Tversky, Psychological Review, 103(3), 592-596.
 Gigerenzer, G., and D.G. Goldstein (1996). Reasoning the Fast and Frugal Way:
Models of Bounded Rationality, Psychological Review, 103(4): 650-669.
 Vranas, P.B.M. (2000). Gigerenzer’s Normative Critique of Kahneman and
Tversky, Cognition, 76(3), 179-193.
 Samuels, R., S. Stich, and M. Bishop (2002). Ending the Rationality Wars: How to
Make Disputes about Human Rationality Disappear, in: R. Elio (ed.), Common
Sense, Reasoning, and Rationality, 236-268, Oxford University Press.