Professor: Massimo Warglien (email: email@example.com)
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.
1) Introduction: contents and methods
2) Expected utility: biases and violations
3) Probabilistic reasoning
4) Some alternatives to expected utility:
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:
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.
(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
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
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
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
Richard McKelvey and Thomas Palfrey, "Quantal Response Equilibria for Normal-Form Games," Games and Economic Behavior 10 (1995), 6-38
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
I.Gilboa, D.Schmeidler "Case based decision-making" QJE 1995, 605-639
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