75757 - Behavioral economics

Learning outcomes

At the end of the course, students will have a basic knowledge of the tools of experimental economics and of how an experimental approach can be applied to the study of human behavior in many fundamental problems of microeconomics, game theory, industrial organization and labor economics.

Course contents

During the last three decades, economics has been progressively permeated by behavioral considerations. Researchers have investigated whether and under which conditions theoretical models are able to predict how people actually make decisions. When a detachment between the theoretical predictions and the observed behavior emerged, new models have been proposed, aimed at an increase of the descriptive accuracy, which preserved the analytical tractability.

The process gave rise to whole new streams of literature, in the fields of game theory, law and economics, finance, and industrial organization. The empirical approach adopted in behavioral economics is largely based on laboratory experiments, aimed at studying behavior in markets, games and other strategic situations, under strictly controlled environmental conditions.

This course is designed to offer an introductory overview both of the tools adopted, and of some of the most established results that have emerged within this broad strand of literature.

More specifically, the course is articulated as follows.

Part 1: Basic Concepts: Decisions, Game Theory, and Market Equilibrium.

The first set of classes will provide an introduction to experimental economics, and to the three main types of experiments: individual decisions, games, and markets. Each class reviews some key concepts, such as expected value, risk aversion, Nash equilibrium, and market efficiency.

Part 2: Choice under risk and uncertainty.

In this set of classes, we will focus on individual decision making when the payoff outcomes cannot be known for sure in advance. After having reviewed the basic concepts of Expected Utility Theory, we will discuss some “anomalies” in lottery-choice situations, and other observed departures from the theoretically optimal behavior.

Part 3: Behavioral Game Theory

This part presents several games in which behavior is influenced by intuitive economic forces in ways that are not captured by basic game theory. We will consider models that try to account for these empirical regularities, by relaxing the strong game-theoretic assumptions of perfect rationality and perfect predictions of others’ decisions.

Part 4: Bargaining and fairness

This part focuses on the issues of fairness, equity, trust and reciprocity within the framework of bilateral bargaining. We will review the vast experimental literature on these issues, which highlight how – under several circumstances – observed behavior tends to depart in substantial ways from the standard theoretical predictions.

Part 5: Market experiments and auctions

This part reviews games designed to represent many of the standard market models that are used in economic theory, from monopoly, to oligopoly, to competitive markets and asset markets. It will also cover the experimental literature on auctions.

Part 6: Public Choice

This part focuses on situations in which the outcome, and the social welfare, depends on the behavior of a large set of agents. We will consider voting and other political processes, and see how the outcomes of such processes can be very sensitive to the rules that govern them. We will also study situations where the actions taken by some people affect the well being of others. Examples are the provision of public goods, and the exploitation of common resources.

Part 7: Information and Learning

Information specific to individuals is often unobserved by others. Such information may be conveyed at a cost, but misrepresentation and strategic non-revelation is sometimes a problem. Informational asymmetries yield rich economic models that may have multiple equilibria and unusual patterns of behavior. Here we will consider how information is used to form and update beliefs (Bayesian updating, and statistical discrimination). We will also study situations in which people may learn from others’ actions, giving rise to bandwagon effects.

Readings/Bibliography

Holt, Charles A.
Markets, games, and strategic behavior: recipes for interactive learning.
Pearson Addison Wesley, 2006.

Teaching methods

Teaching will combine participation in mock-experiments, active on-line learning exercises, and traditional lecturing.

Assessment methods

The final exam aims at verifying the acquisition of the following learning outcomes:

- basic knowledge of the methodology of experimental economics;

- knowledge of the main results emerging from the literature in behavioral economics.

Students will be assessed based on one short essay on a topic of their choice, among those discussed in the course (30% of the mark), plus a final exam (70% of the mark) which will include a set of questions covering both the mathematical/analytical aspects of the models discussed in class and their interpretation. In the final exam students may use calculators (but not other electronic devices), but they may not consult notes, books, or other written material (including their classmates' exam papers).

Teaching tools

During the course, students will be involved in mock experiments, which should provide them with a more vivid idea of the issues to be examined later during the lecture, and active participation to the in-class discussion will be encouraged. Students will also be requested to constantly test their understanding of the basic concepts discussed in class by means of on-line self-assessment quizzes.

Office hours

See the website of Maria Bigoni