Introduction to Behavioral Economics

Professor Edoardo Gallo

 

The standard economic framework makes stark assumptions about the way humans make decisions, including an ability to memorize large amount of information, perform complex computations and make correct estimates of uncertain events.  In the late ’70s a handful of researchers mainly from psychology questioned the realism of these assumptions with a series of groundbreaking experiments.  This was the birth of what is now known as behavioral economics, a branch of economics that investigates the psychology of human decision making and how it affects economic outcomes.  Behavioral economics tools are now an integral part of economics and government policy. This course provides an introduction to behavioral economics and its widespread use across different areas of economics and policymaking.

 

This course charts the historical development of behavioral economics by studying the seminal experiments that revealed how humans use heuristics, i.e.  shortcuts, to make decisions and how at times these heuristics systematically misfire leading to biases in the choices we make.  We will learn the meaning of the endowment effect, status quo bias, anchoring, availability bias, representativeness, and framing.  During the course we will replicate many of the experiments that led to the discovery of these heuristics and the resulting biases using live interactive online experiments during the lectures.

 

The final part of the course explores how insights from psychology are important in labour and development economics. In labor economics, we look at implicit discrimination, an unconscious bias toward/against a particular group of people, as well as seeing how anchoring and framing matter in employment decisions.  In the context of development economics, we explore how psychological biases are even more relevant in environments where individuals are overburdened by cognitive demands that are absent in developed economics, and how to design policies that take them into account.

 

Books

These books that cover many (but not all!) of the topics of the course: 

1. Kahneman, D., “Thinking fast and slow,” Farrar, Straus and Giroux, 2011.

2. Thaler, R. H. and Sunstein, C.R.,  “Nudge:  Improving Decisions About Health, Wealth, and Happiness,” Penguin Books, 2009.

Course Schedule

Below is a reading list for each lecture, asterisks denote required readings.

 

Lecture 1: An introduction to behavioral economics

1. * Kahneman, D., “Thinking fast and slow,” Introduction and Part I, Farrar, Straus and Giroux, 2011.

2. Camerer, C. F. and Loewenstein, “Behavioral economics: Past, present and future,” in “Advances in behavioral economics” by Camerer, C. F., Loewenstein, G. and Rabin, M.., pages 3-42. Princeton University Press, 2011.

 

Lecture 2: The experimental methodology

1. * Roth, A.E., “Game Theory as a Part of Empirical Economics,” The Economic Journal, 101 (404), 1991, 107-114.

2. Camerer and Fehr,  “Measuring Social Norms and Preferences using Experimental Games:  A Guide for Social Scientists,” published in “Foundations of Human Sociality Experimental and Ethnographic Evidence from 15 Small-Scale Societies,” edited by Henrich, Boyd, Bowles, Camerer, Fehr, Gintis and McElreath.

 

Lecture 3:  The endowment effect and status quo bias

1. * Kahneman, D., “Thinking fast and slow,” Chapters 20 and 27, Farrar, Straus and Giroux, 2011.

2. * Thaler,  R. H. and  Sunstein,  C.R.,  “Nudge:  Improving Decisions About Health, Wealth, and Happiness,” Chapter 11, Penguin Books, 2009.

3. * Roth, A.E., “Game Theory as a Part of Empirical Economics,” The Economic Journal, 101 (404), 1991, 107-114.

4. Camerer and Fehr,  “Measuring Social Norms and Preferences using Experimental Games:  A Guide for Social Scientists,” published in “Foundations of Human Sociality   Experimental and Ethnographic Evidence from 15 Small- Scale Societies,” edited by Henrich, Boyd, Bowles, Camerer, Fehr, Gintis and McElreath.

5. Johnson E.J. and Goldstein D.“Do defaults save lives?” Science, 302(5649):1338, 2003.

6. Kahneman, D., Knetsch, J.L. and Thaler, R.,  “Anamolies:  The Endowment Effect, Loss Aversion, and the Status Quo Bias.”  Journal of Economic Per- spectives, 1991, 5(1), pp. 193-206.

 

 

Lecture 4:  Anchoring

1. * Kahneman, D., “Thinking fast and slow,” Chapter 10, 11, 14, 15, 17 and 18, Farrar, Straus and Giroux, 2011.

2. * Tversky, A., and Kahneman, D., “Judgment under Uncertainty: Heuristics and Biases,” Science 185, 1974, 1124-31.

 

Lecture 5:  Representativeness

1. * Kahneman, D., “Thinking fast and slow,” Chapter 10, 11, 14, 15, 17 and 18, Farrar, Straus and Giroux, 2011.

2. * Tversky, A., and Kahneman, D., “Judgment under Uncertainty: Heuristics and Biases,” Science 185, 1974, 1124-31.

 

Lecture 6:  Availability and framing

1. * Kahneman, D., “Thinking fast and slow,” Chapters 12, 13, 31, 32, 33 and 34, Farrar, Straus and Giroux, 2011.

2. * Tversky, A., and Kahneman, D., “Judgment under Uncertainty: Heuristics and Biases,” Science 185, 1974, 1124-31.

3. Tversky, A., and Kahneman, D., “The Framing of Decisions and the Psychology of Choice.” Science, 211(4481), 1981, 45358.

 

Lecture 7:  Applications to labor economics

1. * Babcock, L., Congdon, W.J., Katz, L.F. and Mullainathan, S.  “Notes on behavioral economics and labor market policy.”IZA Journal of Labor Policy 1, no. 1 (2012): 1-14.

2. * Bertrand, M., Chugh, D. and Mullainathan, S., “Implicit discrimination”, American Economic Review, 95, 2005, 9498.

3. Chugh, D., “Why milliseconds matter: societal and managerial implications of implicit social cognition,” Social Justice Research, Vol. 17, 2004, 203-222.

4. Fehr, E., Goette, L. F. and Zehnder, C., “A Behavioral Account of the Labor Market:  The Role of Fairness Concerns”, IZA Discussion Paper, No.  3901, 2008.

5. Gallo, E.,  Grund, T. and Reade, J. J.,  “Punishing the Foreigner:  Implicit discrimination in the Premier League based on oppositional identity,”Oxford Bulletin of Economics and Statistics, 75 (1), 2013, 136-156.

6. * Kahneman, D., Knetsch, J.L, and Thaler, R., “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,”American Economic Review, Vol. 76 (4), 1986, 728-741

7. Price, J. and Wolfers, J., “Racial discrimination among NBA referees,” Quarterly Journal of Economics, 4, 2010, 1859-1887.

 

Lecture 8:  Applications to development economics

1. Ashraf, N., Karlan, D., and Yin, W., “Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines,” Quarterly Journal of Economics, 121(1), 2006, 635672.

2. Banerjee, A.V. and Mullainathan, S., “Limited Attention and Income Distribution,” American Economic Review, 98 (2), 2008, 489-493.

3. * Bertrand, M., Mullainathan, S. and Shafir, E.,  “A Behavioral-Economics View of Poverty,”American Economic Review, 94(2), 2004, 419-423.

4. * Bertrand, M., Mullainathan, S. and Shafir, E., “Behavioral Economics and Marketing in Aid of Decision Making Among the Poor,” Journal of Public Policy and Marketing, 25 (1), 2006, 823.

5. Duflo, E., Kremer, M. and Robinson, J., “Nudging Farmers to Use Fertilizer: Theory and Experimental Evidence from Kenya.”American Economic Review, 101(6), 2011, 235090.

6. * Datta, S. and Mullainathan, S.,  “Behavioral Design:  A New Approach to Development Policy,”Center for Global Development Policy Paper 016, 2012. 

URL: http://www.cgdev.org/content/publications/detail/1426679

7. Shah, A.K., Mullainathan, S. and Shafir, E. “Some Consequences of Having Too Little,” Science, 338 (6107), 2012, 682-685.

 

Individual Evaluations

Students will be evaluated based on the following criteria:

Class attendance: 60%

Homework 1: 10%

Homework 2: 10%

Final Exam: 20%