Course: Behavioral Economics

 

Professor: Massimo Warglien (email: warglien@unive.it)

Office Hours: After class or by appointment

 

Purpose of the course  The course introduces to recent developments in experimental economics and in behavioral models of evonomic behavior. The course has two parts. The first part deals with experimentally observed violations of expected utility  and introduces alternative models of individual behavior. The second part reconsiders basic solution concepts in game theory in the light of the experimental evidence on game playing and explores behavioral models of interactive decision making.

 

Prerequisites Students are expected to have basic notions of expected utility theory and some familiarity with the basic concepts of game theory.

 

Teaching method  There will be twenty lectures on experimental methods and results, and basic models of behavioral economics.

 

Examination policy Evaluation will be based on participation to class work, an oral exam  on an indidual reading list to be agreed with the teacher, and a project work consisting in the design of an economic experiment.

 

 

Course Program

(20 lectures of 1:30')

 

1)    Introduction: contents and methods

 

Part I: Individual behavior

 

2)    Expected utility: biases and violations

3)    Probabilistic reasoning

4)    Some alternatives to expected utility:

Prospect theory

Rank dependent utility

Experimental evidence on non-EU models

5)    Similarity, analogy and case-based decision making

 

Part II: Behavioral game theory

 

6)    Reasoning in games:

Common knowledge

Dominance and iterated dominance.

Backward induction and subgame perfect equilibria.

A model of bounded rationality with limited reasoning steps: the "Poisson Cognitive Hierarchy"

Quantal Response equilibria

7)    Learning in games

8)    Motivation and fairness. Inequality aversion. Fairness equilibria.

 

Reading list

(most papers are available via electornic library services)

 

General reference books on the course topics are:

John Kagel and Alvin Roth, Handbook of Experimental Economics. Princeton 1995.

Colin Camerer, Behavioral Game Theory: Experiments on Strategic Interaction, Princeton, 2003

 

Introductory overview papers are:

Matt Rabin  (1998) Psychology and Economics, Journal of Economic Literature 36(1) 11-46

Alvin Roth (1995) "Introduction to Experimental Economics" chapter 1 of Kagel and Roth, Handbook of Experimental Economics

 

 

Papers (ony a first list; other readings will be suggested during the classes)

 

Violations of Expected Utility; bias and heuristics

Maurice Allais "Le Comportement de l'Homme Rationnel devant le Risque: Critique des postulats et axiomes de l'École Americaine", 1953, Econometrica.

Ellsberg, D. (1961) "Risk, ambiguity, and the Savage Axioms," Quarterly Journal of Economics, 75:643-69.

Grether, D. and C. Plott (1979) "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, 69:623-38

Becker, G.M., DeGroot, M.H., & Marschak, J.  "Measuring Utility by a Single Response Sequential Method(1964) Behavioral Science. 9, 226-232.

C.Holt (1986) "Preference reversal and the independence axiom" American Economic Review  508-515

Tversky, A., P. Slovic, and D. Kahneman (1990) "The causes of preference reversal," American Economic Review, 80:204-17

Hsee, C. et. al. (1999) "Preference Reversals Between Joint and Separate Evaluations of  Options: A Theoretical Analysis," Psychological Bulletin, 125(5):576-90

Tversky, A. and D. Kahneman (1974) "Judgement under Uncertainty: Heuristics and  Biases," Science 185, 1124-31.

Tversky, A. and D. Kahneman (1981) "The Framing of Decisions and the Psychology of  Choice," Science, 211:453-58

Barberis, Huang and Santos (2001) "Prospect theory and asset prices". Quarterly Journal of Economics.

Benartzi & Thaler, (1995) "Myopic loss aversion and the equity premium puzzle," Quarterly Journal of Economics, 110,  73-92.

Rabin, M. (2000) "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, 68(5), 1281-1292

Simonson, I. and A. Tversky (1992) "Choice in Context: Tradeoff Contrast and

Extremeness Aversion," Journal of Marketing Research, 29(3), 281-95

Shafir, E. I. Simonson,  and A.Tversky "Reason-based choice," Cognition, 1993, 49, 11-36.

Thaler, R. (1985) "Mental accounting and consumer choice". Marketing Science,

Camerer and Dan Lovallo.(1999) "Overconfidence and excess business entry: An experimental approach", American Economic Review

 

Non-EU models

Starmer, C. "Developments in Non-Expected Utility Theory: The Hunt for a Descriptive  Theory of Choice Under Risk," Journal of Economic Literature, 38:332-82

Kahneman, Daniel & Amos Tversky, "Prospect theory," Econometrica 1979, 47(2), 263-91 

Tversky, A. and D. Kahneman, D. (1992) "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, 297-323

 

 

Iterated reasoning in games

Randolph Beard and Richard Beil, "Do People Rely on the Self-interested Maximization of Others? An Experimental Test," Management Science 40 (1994), 252-262

Andrew Schotter, Keith Weigelt, and Charles Wilson, "A Laboratory Investigation of Multiperson Rationality and Presentation Effects," Games     and Economic Behavior 6 (1994), 445-468

Nagel, R. (1995) "Unraveling in Guessing Games: An Experimental Study," AER, 85(5):1313-26.;

Stahl, D. and P. Wilson (1995) "On player's models of other players: theory and

experimental evidence," Games and Economic Behavior, 10:218-54;

E.Johnson, C.Camerer, S.Sen, T.Rymon (2002) "Detecting failures of backward induction" Journal of Economic Theory:16-47

Colin Camerer, Teck-Hua Ho, and Juin-Kuan Chong, "A Cognitive Hierarchy Theory of One-Shot Games forthcoming QJE

 

QRE equilibria

Richard McKelvey and Thomas Palfrey, "Quantal Response Equilibria for Normal-Form Games," Games and Economic Behavior 10 (1995),   6-38

 

Learning in games

Drew Fudenberg and David Levine, The Theory of Learning in Games, MIT 1998

Yaw Nyarko , Andrew Schotter (2002) "An experimental study of belief learning using elicited beliefs" Econometrica

Ido Erev and A. Roth, Predicting how people play games: Reinforcement learning in experimental games with unique, mixed strategy equilibria. 1998 AER, 88, 848-881.

R.Selten, K.Abbink,, R.Cox "Learning direction theory and the winner's curse" WP, UNi.Bonn, 2002

Colin Camerer and Teck-Hua Ho, "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, 67 (1999), 827-874

 

Case-based decision making

I.Gilboa, D.Schmeidler  "Case based decision-making" QJE 1995, 605-639

 

Fairness and reciprocity

Alvin Roth, "Bargaining Experiments," chapters 1 and 4 of Kagel and Roth, Handbook of Experimental Economics

Colin Camerer and Richard Thaler, "Ultimatums, Dictators, and Manners," Journal of Economic Perspectives 9 (1995), 209-219

Bolton, G.E. and A. Ockenfels (2000) "ERC: A theory of equity, reciprocity, and competition," American Economic Review, 90(1):166-93 

Fehr, E, and K, Schmidt (1999) "A Theory of Fairness, competition, and cooperation," Quarterly Journal of Economics, 117(3):817-68

Ernst Fehr and Simon Gachter (2000) "Fairness and retaliation: the economics of reciprocity". Journal of Economic Perspectives, 14, 159-81

Matthew Rabin, "Incorporating Fairness into Game Theory and Economics," American Economic Review 83 (1993), 1281-1302

George Akerlof (1982) " Labour contracts as partial gift exchange " Quarterly Journal of Economics, 97, 543-69

Lazear, Edward (1989) "Pay equality and industrial politics," Journal of Political Economy, 97, 561-580.

 

Other recommended papers:

John B. Van Huyck, Raymond C. Battalio, and Richard O. Beil (1990) Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure. American Economic Review, 80, 234-48

Roberto Weber and Colin Camerer (2003) Cultural conflict and merger failure . Management Science 49 (4) 400-415.

            Joyce Berg, John Dickhaut and Kevin McCabe (1995) Trust reciproccity and social history, Games and Economic Behavior 10, 122-142

Ernst Fehr and Simon Gachter (2000) Do incentive contracts crowd-out voluntary cooperation? WP, University of Zurich