Behavioral Economics - Syllabus
1st Term - Academic Year 2015/2016
Professor Luigi Mittone
[email protected]
Teaching Assistant Viola Saredi
[email protected]
Course Overview
The course aims to provide students with a grounding in the main areas of behavioral economics,
by focusing on behavioral implications of theoretical models and on experimental evidence in
economics. These main areas include bounded rationality, decision-making under risk and uncertainty, other regarding preferences, intertemporal decision-making, behavioral game theory,
emotions and libertarian paternalism. For each area, the focus will be on three points: (i) review of standard economic models and evidence that indicates that such models do not capture
some important behavioral aspects or anomalies; (ii) study of the behavioral models that have
been developed to capture these aspects; (iii) application of these models to different economic
fields, especially with respect to more recent contributions. In particular, lectures will deal with
the first two points, while the third one will be developed by means of assignments over the
semester.
Preparatory and General Readings
By and large, the course will be based on academic papers (which are available online) and
lecture notes (slides). However, besides the assigned reading list, there are some books that you
may find useful, if you are interested in getting a deeper knowledge about behavioral and experimental economics. The first is ’Advances in Behavioral Economics’ (2004) by Colin Camerer,
George Loewenstein and Matthew Rabin. The second is ’An Introduction to Behavioral Economics’ (2012) by Nick Wilkinson and Klaes. The third is ’Behavioral Game Theory’ (2003) by
Colin Camerer. Finally there is ’Handbook of Experimental Economics’ (1995) by John Kagel
and Alvin Roth.
Here you can also find the suggestion of some interesting readings: ’Gut Feelings’ (2008) by
Gerd Gigerenzer, ’Nudge’ (2009) by Richard Thaler and Cass Sustein, ’Predictably Irrational’
(2009) by Dan Ariely, ’The Upside of Irrationality’ (2010) by Dan Ariely, ’The Honest Truth
about Dishonesty’ (2013) by Dan Ariely, ’Thinking, Fast and Slow’ (2011) by Daniel Kahneman,
’The Power of Habit’ (2012) by Charles Duhigg, and ‘Foundations of Behavioral Economic
Analysis’ (2015) by Sanjit Dhami.
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Course Requirements and Assessment Method
Students will be expected to be familiar with Mathematics, Statistics, Microeconomics, and
Game Theory.
Assessment for Master Students
There will be a final written exam. The final grade will depend also on a classroom presentation
on one of the covered topics.
Assessment for PhD Students
There will be a final written exam. The final grade will depend also on homeworks: indeed,
students are expected to hand in an assignment (more details will be provided during the
course), and a research proposal. Such a proposal should include a brief and clear review of the
existing (and also recent) literature, a description of the novelty of the proposed work, research
questions, and research methodology. Proposals can be organized in groups.
Course Outline
The course will cover the following topics.
Introduction to Behavioral Economics
• Information about the structure of the course, and the assessment method
• What is Behavioral Economics? (Camerer and Loewenstein, 2004; Rabin, 1998; Rubinstein, 2005)
• Behavioral Economics and the Standard Economic Models (The Neoclassical Repairshop)
• Evaluating Economic Theories (Ho, Lim and Camerer, 2006)
• Behavioral Economics
– History and Evolution: the Neoclassical Approach. The Resurgence of Psychology.
Birth of Behavioral Economics as we know it (Kahneman and Tversky, 1979; Thaler,
1980)
– Methodology and Data Sources (Economics and Psychology); Introduction to Experimental Economics (Loewenstein, 1999; Hertwig and Ortmann, 2001; Guala and
Mittone, 2005); Introduction to Neuroeconomics
– Domains of interest
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Bounded Rationality
• The notion of Bounded Rationality (Simon, 1955, 1956, 1957, 1992)
– The emergence of bounded rationality
– Simon’s Bounded Rationality
• Does Bounded Rationality need to be understood?
– Ecological Bounded Rationality (Selten, 1998; Gigerenzer, Todd and the ABC Research Group, 1999; Gigenrenzer and Selten, 2001; Todd and Gigerenzer, 2003)
– Fast and Frugal Heuristics
• A formal model of Bounded Rationality
Models of Decision-making and Anomalies in Preferences
• Rationality Issue: Axioms and Assumptions under Standard Economic Models (SEM)
• Weaknesses of Standard Economic Models: Some Examples of Behavioral Phenomena in
the Lab (Kahneman and Tversky, 1974; Greter and Plott, 1979; Tversky and Kahneman,
1981; Tversky and Kahneman, 1986; Kahneman, Knetsch and Thaler, 1990; Kahneman,
Knetsch, and Thaler, 1991; Benartzi and Thaler, 1995; Shafir, Simonson and Tversky,
1993; Genesove and Mayer, 2001; Plott and Zeiler, 2005; Della Vigna, 2009)
– Failure of Transitivity, Reference Dependence (Context Effect, Loss Aversion, Endowment Effect, Anchoring Effect, Diminishing Sensitivity), Failure of Cancellation,
Failure of Invariance, and Failure of Dominance and Invariance
• Reason-based Choice (Shafir et al., 1993)
– Choice between equally valued alternatives
– Choosing to accept vs. choosing to reject
– Seeking option
– Adding option
• Biases in Judgment (Kahneman, 2003)
• The Architecture of Cognition (Kahneman, 2003)
• Heuristics: a comparison
• Some Examples of Behavioral Phenomena in the Field (Gilovich, Valolone and Tversky,
1985; Camerer, Babcock, Loewenstein and Thaler, 1997; Della Vigna and Malmendier,
2006; Leonard, Frederick and Ariely, 2006; Mazar and Ariely, 2006; Shampanier, Mazar
and Ariely, 2007)
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Decision-making Under Risk and Uncertainty
• Expected Utility Theory (Axioms)
• Anomalies in Expected Utility Theory: The Common Consequence Effect, The Common
Ratio/Certainty Effect
• Conventional alternatives to Expected Utility Theory (Starmer, 2000): Disappointment
Theory, Decision-Weighting Theories, Rank-dependent Utility
• Non-conventional alternatives to Expected Utility Theory (Starmer, 2000): Regret Theory
(Loomes and Sugden, 1982), Prospect Theory (Kahneman and Tversky, 1979, 2000)
• Prospect Theory
– Editing Phase and Comments
– Evaluation Phase
– Reference Point
– Loss Aversion
– Shape of the Utility Function
– Decision Weighting
• Decision From Description vs. Decision From Experience (Barron and Erev, 2003; Hertwig
et al., 2004; Hertwig and Erev, 2009)
Other-regarding Preferences
• The standard self-interest hypothesis.
• Evidence from the lab (Ultimatum Game, Gift Exchange Game, Trust Game, Public Good
Game). Possible interpretations: learning models? Social norms? (Camerer and Thaler,
1995).
• Social Preferences (Fehr and Schmidt, 2002; Engelmann and Strobel, 2004).
– Altruism (Andreoni and Miller, 2000) and quasimaximin preferences (Charness and
Rabin, 2000; Charness and Rabin, 2002).
– Relative income and envy (Bolton, 1991).
– Inequity Aversion (Fehr and Schmidt, 1999; Bolton and Ockenfels, 2000).
– Altruism and Spitefulness (Levine, 1998).
• Intention-based Reciprocity.
– Fairness Equilibrium (Rabin, 1993).
– Intentions in Sequential Games (Dufwenberg and Kirchsteiger, 1998).
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– Merging Intentions and Social Preferences (Falk and Fischbacher, 1999).
– Brief introduction to Guilt Aversion.
• Applications (Fehr and Gachter, 2000; Gneezy and Rustichini, 2000; Gneezy and List,
2006)
Intertemporal Decision-Making
• Introduction: Discounted Utility Model, Time Discounting, Time Preferences (Frederick
et al. 2002)
• Origins of Discounted Utility
• Discounted Utility Model: Integration of new alternatives; Utility independence; Consumption independence; Stationary instantaneous utitlity; Stationary discounting; Independence of discounting from consumption; Constant discounting and time consistency;
Diminishing marginal utility and positive time preferences
• Discounted Utility Anomalies (Loewenstein and Prelec, 2000; Mittone, Manzini and Mariotti, 2006).
– Sign Effect
– Magnitude Effect
– Delay-Speedup asymmetry
– Preference for Improving Sequences
– Date/delay effect
– Violations of independence and Preference for Spread
• Alternatives to Discounted Utility Model
– Model of Hyperbolic Discounting (time-inconsistent preferences)
∗ Quasi-hyperbolic Function (Laibson, 1998)
∗ Problems of Self-Awareness and Self-Control (Thaler and Shefrin, 1981; O’Donoghue
and Rabin, 1999, 2000): Some Examples
∗ Sub-Additivity (Read, 2003)
– Modifying the instantaneous utility function
∗ Habit formation models
∗ Reference-point models
∗ Models incorporating utility from anticipation. The value of waiting: savoring
and dread (Loewenstein, 1987; Loewenstein and Prelec, 1991).
∗ Visceral influences
– More radical models
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∗ Construal Level Theory (Liberman and Trope, 2003; Sagristano et al., 2002)
∗ Projection bias (Loewenstein, O’Donoghue and Rabin, 2003)
∗ Mental accounting models (Thaler, 1985; Prelec and Loewenstein, 1998): choicebracketing (Read, Loewenstein, and Rabin, 1999)
∗ Dual-Self Models
Libertarian Paternalism (Thaler and Sunstein, 2003; Thaler and Sunstein, 2008; Della Vigna, 2009)
• Consumption Decisions
• Health (Johnson and Goldstein, 2003)
• Retirement Saving (Benartzi and Thaler, 2004)
• Labor (Gneezy and List, 2006)
Behavioral Game Theory (Camerer, 2002 and ’Behavioral Game Theory: Predicting Human
Behavior in Strategic Situations’ in ’Advances in Behavioral Economics’ by Camerer)
• Introduction: What is Game Theory good for?
• From Game Theory (GT) to Behavioral Game Theory (BGT)?
• Experimental Regularities
– Dictator, Ultimatum, and Trust Games
– Mixed Strategies
– Bargaining
– Dominance-Solvable Games
– Coordination
Emotions and Decision-making
• What are Emotions (Elster, 1998)
• Visceral Factors (Loewenstein, 1996)
• Emotions and Economics (Elster, 1996; Loewenstein, 2000)
Conclusions and Criticisms
• Criticisms (Pesendorfer, 2006; Levine, 2012)
• Conclusions (Wilkinson and Klaes, 2012, Ch.10)
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References
Papers marked with # are compulsory readings: they are the required readings for PhD
and Class-Only master students. You are expected to read these papers. The rest of the
list includes recommended readings, which will not explicitly required for exam preparation.
The shorter reading list for Take-Home master students will be published in a
separate document (which will be available on Comunità Online as well). Anyhow, it will be a
subgroup of the # compulasory reading list.
Benartzi S. and Thaler R.H. (1995). Myopic Loss Aversion and the Equity Premium Puzzle.
The Quarterly Journal of Economics, 110(1), 73-92.
[#] Bolton G. and A. Ockenfels (2000). ERC: A Theory of Equity, Reciprocity, and Competition, American Economic Review, 90(1), 166-193.
[#] Camerer, C. (2011). The promise and success of lab-field generalizability in experimental economics: A critical reply to Levitt and List. Available at SSRN 1977749.
Camerer C.F., Babcock L., Loewenstein G. and Thaler R. (1997). Labor Supply of New
York City Cab Drivers: One Day at a Time. Quarterly Journal of Economics, 112(2), 407-441.
[#] Camerer C.F. and Loewenstein G. (2004). Behavioral economics: Past, present, future.In C.F. Camerer, G. Loewenstein, and M. Rabin, editors, Advances in Behavioral Economics. Princeton University Press.
[#] Croson R., and Sundali J. (2005). The gambler’s fallacy and the hot hand: Empirical
data from casinos. Journal of risk and uncertainty, 30(3), 195-209.
[#] DellaVigna S. (2009). Psychology and economics: Evidence from the field. Journal of
Economic Literature, 47(2), 315-372.
[#] DellaVigna S. and Malmendier U. (2006). Paying Not to Go to the Gym. American
Economic Review, 96(3), 694-719.
[#] De Martino B., Kumaran D., Seymour B., and Dolan R.J. (2006). Frames, biases, and
rational decision-making in the human brain. Science, 313(5787), 684-687.
Egidi M. (2005). From bounded rationality to behavioral economics. Social Science Research Network.
[#] Elster J. (1996). Rationality and the Emotions. The Economic Journal, 106(438), 13861397.
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[#] Elster J. (1998). Emotions and Economic Theory. Journal of Economic Literature,
36(1), 47-74.
[#] Engelmann D. and Strobel M. (2004). Inequality Aversion, Efficiency, and Maximin
Preferences in Simple Distribution Experiments, American Economic Review, 94 (4), 857-869.
[#] Falk, A., and Heckman, J. J. (2009). Lab experiments are a major source of knowledge
in the social sciences. Science, 326(5952), 535-538.
[#] Fehr E. and K. Schmidt (1999). A Theory of Fairness, Competition and Cooperation,
The Qaurterly Journal of Economics, 114(3), 817-868.
[#] Friedman D. (1998). Monty Hall’s three doors: Construction and deconstruction of a
choice anomaly. American Economic Review, 933-946.
Genesove D. and Mayer C. (2001). Loss Aversion and Seller Behavior: Evidence from the
Housing Market. The Quarterly Journal of Economics, 116(4), 1233-1260.
Gigerenzer G. and R. Selten Eds. (2001), Bounded Rationality. The adaptive toolbox.
Cambridge, Massachusetts, MIT Press.
Gigerenzer G., P.M. Todd, and the ABC Research group (1999) Simple heuristics that make
us smart, New York: Oxford University Press.
Gilovich T., Vallone R., and Tversky A. (1985). The Hot Hand in Basketball: On the Misperception of Random Sequences. Cognitive Psychology, 17, 295-314.
Gneezy U. and List J.A. (2006). Putting behavioral economics to work: Testing for giftexchange in labor markets using field experiments. Econometrica, 74(5), 1365-1384.
[#] Grether D.M. and Plott C.R. (1979). Economic Theory of Choice and Preference Reversal Phenomenon. The American Economic Review, 69(4), 623-638.
Guala F. and Mittone L. (2005). Experiments in economics: External validity and the robustness of phenomena. Journal of Economic Methodology, 12(4), 495-515.
[#] Hertwig R. and Ortmann A. (2001). Experimental practices in economics: A methodological challenge for psychologists? Behavioral and Brain Sciences, 24(3), 383-451.
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Hoechtl W., Sausgruber R., and Tyran J.R. (2012). Inequality aversion and voting on redistribution. European economic review, 56(7), 1406-1421.
[#] Ho T.H., Lim N., and Camerer C.F. (2006). Modeling the Psychology of Consumer and
Firm Behavior with Behavioral Economics. Journal of Marketing Research, 43(3), 307-331.
Johnson E.J. and Goldstein D. (2003). Do defaults save lives? Science, 302.
[#] Kahneman D. (2003). Maps of bounded rationality: Psychology for behavioral economics. American Economic Review, 93(5), 1449-1475.
Kahneman D., J. Knetsch, and R. Thaler (1990). Experimental Tests of the Endowment
Effect and the Coase Theorem, Journal of Political Economy, 98(6), 1325-48.
[#] Kahneman D., J. Knetsch, and R. Thaler (1991). Anomalies: The Endowment Effect,
Loss Aversion, and Status Quo Bias. The Journal of Economic Perspectives, 5(1), 193-206.
[#] Kahneman D. and Tversky A. (1974). Judgment under Uncertainty: Heuristics and
Biases. Science, New Series, 185(4157), 1124-1131.
[#] Kahneman D. and A. Tversky (1979) Prospect Theory: An Analysis of Decision under
Risk, Econometrica, 47(2), 263-292.
Leonard L., Frederick S. and Ariely D. (2006). Try It, You will Like It: The Influence
of Expectation, Consumption, and Revelation on Preferences for Beer. Psychological Science,
17(12), 1054-1058.
Levine D. (2012). Is Behavioral Economics Doomed? The Ordinary versus the Extraordinary.
[#] Liberman N., M. Sagristano and Y. Trope (2001). The effect of temporal distance on
level of mental construal. Journal of Experimental Social Psychology, 38, 523-534.
[#] Loewenstein G. (1987). Anticipation and the Valuation of Delayed Consumption. The
Economic Journal, 97, 666-684.
[#] Loewenstein G. (1996). Out of Control: Visceral Influences on Behavior. Organizational
Behavior and Human Decision Processes, 65(3), 272-292.
Loewenstein G. (1999). Experimental economics from the vantage point of behavioural economics. The Economic Journal, 109, F25-F34.
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[#] Loewenstein G. (2000). Emotions in Economic Theory and Economic Behavior. American Economic Review, 90(2), 426-432.
[#] Loewenstein G., O’Donoghue T. and Rabin M. (2003). Projection bias in predicting
future utility. The Quarterly Journal of Economics, 118(4), 1209-1248.
Loewenstein G. and Prelec D. (1991). Negative time preference. The American Economic
Review, 81(2), 347-352.
[#] Loewenstein G. and Prelec D. (2000). Anomalies in Intertemporal Choice. In D. Kahneman and A. Tversky editors, Choices, Values and Frames. Cambridge University Press.
Originally printed in The Quarterly Journal of Economics (1992), 107(2), 573-597.
Mazar N. and Ariely D. (2006). Dishonesty in Everyday Life and its Policy Implications.
Journal of Public Policy and Marketing, 25(1), 117-126.
Mittone L., Manzini P. and Mariotti M. (2006). Choosing monetary sequences: Theory and
experimental evidence. 1/2006 Working paper, 2006, CEEL.
[#] O’Donoghue T. and Rabin M. (2000). The economics of immediate gratification. Journal of Behavioral Decision Making, 13, 233-250.
Pesendorfer W. (2006). Behavioral Economics Comes of Age: A Review Essay on ‘Advances
in Behavioral Economics’. Journal of Economic Literature, 44(3).
[#] Plott C.R. and Zeiler K. (2005). The Willingness to Pay-Willingness to Accept Gap, the
Endowment Effect, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations. The American Economic Review, 95(3).
[#] Rabin M. (2013) An Approach to Incorporating Psychology into Economics, American
Economic Review, 103(3), 617-22.
Rabin M. (1998). Psychology and economics. Journal of Economic Literature, 36(1), 11-46.
Selten R. (1998). Aspiration adaptation theory. Journal of Mathematical Psychology, 42,
191-214.
[#] Shafir E., Simonson I., and Tversky A. (1993). Reason-based choice. Cognition, 49,
11-36.
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Shampanier K., Mazar N., and Ariely D. (2007). Zero as a Special Price: The True Value
of Free Products. Marketing Science, 26(6), 742-757.
[#] Shefrin H.M. and Thaler R.H. (1992). Mental Accounting, Saving, and Self-Control.
In G. Loewenstein and J. Elster: Choice over Time. New York: Russell Sage Foundation, pp.
287-330.
[#] Simon H.A. (1955). A behavioral model of rational choice. The Quarterly Journal of
Economics, 69(1),99-118.
Simon H.A. (1956) Rational choice and the structure of the environment, Psychological Review, 63(2), 129-138.
Simon H.A. (1992). Rational choice and the structure of the environment. In H.Simon,
M.Egidi, R.Marris, and R.Viale editors, Economics, Bounded Rationality and the Cognitive
Revolution. Edward Elgar.
[#] Thaler R.H. and Benartzi S. (2004). Save more tomorrow: Using behavioral economics
to increase employee saving. Journal of Political Economy, 112(S1), S164-S187.
Thaler R. and Shefrin H.M. (1981). An Economic Theory of Self-Control. Journal of Political Economy, 89(2), 392-406.
[#] Thaler R.H. and Sunstein C.R. (2003). Libertarian paternalism. American Economic
Review, 93(2), 175-179.
[#] Todd P.M. and Gigerenzer G. (2003). Bounding rationality to the world. Journal of
Economic Psychology, 24(2),143-165.
[#] Trope Y. and Liberman N. (2003). Temporal Construal. Psychological Review, 110(3),
403-421.
Tversky A. and D. Kahneman (1981). The Framing of Decisions and the Psychology of
Choice, Science, 211(4481).
Tversky A. and D. Kahneman (1986). Rational Choice and the Framing of Decisions, Journal of Business, 59(4), S251-S278.
Tversky A. and D. Kahneman(1991). Loss Aversion in Riskless Choice: A Reference- Dependent Model, Quarterly Journal of Economics, 106(4).
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[#] Tversky A. and Kahneman D. (1992). Adavnces in Prospect Theory: Cumulative Representation of Uncertainty, Journal of Risk and Uncertainty, 5(4), 297-323.
Tversky, A. and Thaler, R. H. (1990). Anomalies: Preference reversals. The Journal of
Economic Perspectives, 4(2), 201-211.
[#] Zizzo D. (2010) Experimenter Demand Effects in Economic Experiments, Experimental
Economics, 13, 75-98.
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