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Behavioral Economics

Course description

The area of “Behavioral Economics” analyzes how agents behave and models systematic deviations from the predictions of “standard (neoclassical) economic theory”. To do this the standard models are extended to accommodate empirical findings. Most of the models we will discuss try to incorporate judgment errors, limited cognitive reasoning, or preferences for fair behavior into the analysis. This course is concerned with the systematic modeling of human behavior and especially considers the (experimental) tests of these theories. While doing this we will also discuss several elements of proper experimental design as well as the basic features of field experiments. It is one aim of a Master’s program to qualify students to undertake independent scientific work. Being able to understand and critically assess the (current) literature is a prerequisite for conducting research. Therefore in this course, we will also guide students to understand how to develop proper (experimental) tests of various economic theories, and students are asked to read the weekly assigned research papers (typically 2 per week).
The course is divided into three parts. The first part is devoted to decision theory. We will study models in which standard economic rationality assumptions are combined with psychologically plausible assumptions on behavior. We will mainly focus on choice under uncertainty and probabilistic judgments. In the second part, on behavioral game-theory, we study the strategic interaction of subjects and analyze how predictions change if “boundedly” rational subjects are considered. These studies lead us to part three of the class: theories and experimental evidence of social preferences and some selected applications of behavioral economics.

Prerequisites

The course is part of the Master’s program in economics and is open to master students of related programs, e.g. in marketing, management, social economics, as well as exchange students. Participants need to have a solid knowledge of microeconomics and game theory, which is at least of the level obtained by passing the compulsory master lectures Microeconomics and Game Theory (see modules handbook of the MSE for details on the taught material in these classes).

Organization & Literature

IMPORTANT!

If regulations allow, we intend to have the lectures in person and the exercise classes as recorded videos. Otherwise, we will have a weekly zoom lecture. Please register for this course on StudOn to make sure you have all current data.

The course consists of a lecture (2 SWS) and an exercise (1 SWS). We will provide a new problem set for the exercise every two weeks. The solution for the exercises will be provided in written form and video. We will offer the opportunity to clarify questions about the exercise in online meetings. The time slots for these online meetings will be Thursday from 13:15 – 14:45, but we will not have them every week. The actual dates of any online meeting will be announced in time on StudOn and by mail. We encourage students to submit their solutions to the problem sets we hand out for exercise. For further guidelines regarding the organization of this course please refer to this document.

The course is completely in English (lectures, exercises, and the exam). Students are required to read 1-2 research articles per week, which will be announced in a reading list accompanying the lecture units.

Grading

The grading is based on a final exam (90 minutes) at the end of the term covering the topics discussed in the lectures and exercises. The exam has to be passed to pass the class. The format of the final exam is yet to be determined. We keep you updated on any developments on StudOn. Success in the course grants Master students 5 ECTS points. Feel free to ask further questions regarding the course content or the organizational details. Please send any inquiries to Dr. Yuval Ofek-Shanny.

 

Tentative outline of topics

1. Decision Theory

(a) Expected Utility Theory

(b) Classical Anomalies

(c) Prospect Theory

(d) Probability Judgments

2. Behavioral Game Theory

(a) Game Theory Concepts

(b) 2-Player Bargaining

(c) Rationality & Strategic Interaction

3. Social Preferences & Labor Economics

(a) Evidence of Social Behavior

(b) Models of Fairness and Reciprocity

(c) Selected Applications of Behavioral Economics