Behavioral Economics

Course description

The area of “Behavioral Economics” analyzes how agents actually behave and models systematic deviations from the predictions of “standard 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 lecture is concerned with the systematic modeling of human behavior and considers especially 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 masters program to qualify students to undertake independent scientific work. Being able to understand and critically assess the (current) literature is a necessary prerequisite for conducting research. Therefore in the course we will also guide students to understand how proper (experimental) tests of various economic theories are developed and students are asked to read the weekly assigned research papers (typically 2 per week). To raise students’ awareness for the importance for well-established standards in Experimental Economics in one exercise class students will participate in a short experiment. This exercise class will take place in the LERN (Laboratory for Experimental Research Nuremberg).

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 applications of behavioral economics in labor economics.


The course is part of the Master 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, that 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

!In the winter term there will be neither lectures nor exercise classes!

The course consists of one lecture a week (2 SWS) and an exercise (1 SWS), which will take place about every second week. The lecture takes place every Tuesday from 11:30 – 13:00 in LG 0.141. (There will be no lecture on June 11th and 20th.) The exercise will be Thursdays from 13:15 to 14:45 in LG 0.143. The tentative dates will be announced in the first lecture, but are subject to change. Students are expected to attend lecture and exercise classes regularly. One exercise class will take place in the Laboratory for Experimental Research Nuremberg (LERN).

Slides for the lecture will typically be made available one week ahead on StudOn. The password for the course will be announced in the second lecture. The course is completely in English (lectures, exercises, and the exam). Instead of a textbook students will read 1-2 research articles per week, which will be announced in class.


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 in order to pass the class. By passing the course Master students receive 5 ECTS points. Feel free to ask further questions regarding the course content or the organizational details. Please send any inquiries to Edmund Baker.


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) Applications to Labor Economics