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Behavioral Economics

Course description

The area of “Behavioral Economics” analyzes how agents actually 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 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 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). To raise students’ awareness of the importance of well-established standards in Experimental Economics we will try to organize an online exercise to conduct short experiments.

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, 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

IMPORTANT!

Due to the spread of the COVID-19, we will completely organize this course digitally. There will be an online kick-off meeting on Tuesday, April 13th, at 11:30 where we address the organization of the lecture and the exercise in detail and answer any questions that you might have. Please register for this course on StudOn to make sure that you can participate in this online meeting and receive any future updates about this course.

The course consists of one lecture (2 SWS) and an exercise (1 SWS). We will provide a new lecture unit every week and a new problem set for the exercise every two weeks. We will offer the opportunity to clarify questions and discuss any issues for both the lecture and the exercise in online meetings. The time slots for these online meetings will be Tuesdays from 11:30 – 13:00. 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.

A script for the lecture will be made available every week on StudOn. The course is completely in English (lectures, exercises, and the exam). Instead of a textbook 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 in order 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