10 January 07

Yale Econ 485b Behavioral Economics Tentative Syllabus

COURSE DESCRIPTION: The interface of psychology and economics has a long history. After all, psychologists study human behavior, and economists try to understand the implications of human behavior on economic life and institutions. While neoclassical economics assumes a simplified model of perfectly rational individuals, modern behavioral economics strives towards more realistic models of human behavior, taking into account known deviations from perfect rationality. These deviations have been documented empirically as well as experimentally. In order to understand economic consequences, economists have also proposed a number of formal behavioral models. In this course we will learn about empirical facts, we will learn and reproduce some basic experiments that demonstrate deviations from rationality, and we will learn how economists model such behaviors formally. We will try to understand the disagreements between the modeling approaches and we will have in-class debates, as well as paper presentations and discussions. Students are expected to learn to think critically and creatively and to form their own opinions about these topics. The seminar will cover the following topics: 1. Bounded Rationality and Behavioral Economics 2. Reference Dependence and Loss Aversion 3. Preferences over Risky and Uncertain Outcomes 4. Intertemporal Preferences 5. Fairness and Social Preferences 6. Neuroeconomics 7. Behavioral Finance 8. Memory and attention The seminar will be focused on discussing materials in class. There will be two debates. The topics in the class will be motivated either by apparent anomalies in our daily

economic life, or through in-class experiments. I will introduce the necessary methodologies used in approaching a specific topic. GRADING: -There will be a list of required readings (some of them selected from the two books, and some selected research articles) on which students will have to write short reports. -Students will be required to read weakly assignments. In class we will discuss the readings. -Students will be required to actively participate in discussion. There will be two debates in class. -Students will have a choice to write: (i) more readings reports and a short (10-15 page) research paper or (ii) fewer readings reports and a longer (20-25 page) research paper. I will be very available to help students with their research papers. -Grades will be based on class participation (30%), reports (20-30%), and the research paper (40-50%). TENTATIVE SCHEDULE: CLASS 1 Introduction: modeling principles and theories; empirical vs experimental evidence; is Economics a hard science? Theory and anomalies. New directions: neuroscience, psychology, computer science, evolutionary biology. Readings: **[Simon (QJE 1955), MBR: Intro (pp 1-6)], *ABE: Intro (pp 3-14). CLASS 2 Preferences over goods and gambles. Allais paradox. Reference dependence and loss aversion. Readings: **MBR Chapter 1 (pp 7-24), *Chen, Keith, Lakshminarayanan, Venkat, and Santos, Laurie. The Evolution of Our Preferences: Evidence from Capuchin-Monkey Trading Behavior. April 2006, *ABE Chapter 2 (pp 55-74), *ABE Chapter 5 . CLASS 3 Complexity of decisions. Case-based decision making. How preferences form. Evolutionary principles and genetic programming: Darwinian selection in Finance. Readings: **MBR Chapter 2 (pp 25-39), *ABE Chapter 25 (pp 659 -688), **Lensberg and Schenk-Hoppe (2006). CLASS 4 Intertemporal preference. Hyperbolic disconunting, dual-self model. Readings: *ABE Chapter 6 (pp 162 -222), *ABE Chapter 15 (pp 429-457), **Fudenberg and Levine (2005), **Strotz (1956). CLASS 5 Addiction, temptation, and self control. Readings: **Gul and Pesendorfer (2001), *Dela Vigna and Malmendier (2003),

*Bernheim and Rangel (2004). CLASS 6 Fairness and social preferences, group decision making. Readings: *ABE Chapter 9, **Shaked (2006), *Fehr and Schmidt (2006), *ABE Chapter 8, **MBR Chapter 6, **Sobel 2005. (1st draft of paper proposals due) CLASS 7 Attention and memory. Readings: **MBR Chapter 4, *Barber and Odean (2003), *Hirshleifer and Welch (2002), **Testafsion (2003), **Wilson (2006). (1 page proposals for papers due approved.) CLASS 8 Behavioral Game Theory. Readings: **MBR Chapter 7, *ABE Chapter 13, **McKelvey and Palfrey 1992, *CostaGomes et. al. (2003). CLASS 9 Behavioral Finance, Investor decisions. Readings: Barberis and Thaler (2006), ABE Chapter 23. CLASS 10 New directions: neuroeconomics. Readings: Gul and Pesendorfer (2006), Camerer et. al. (2005), Hsu et. al. (2005). CLASS 11 Field experiments. Readings: Harrison and List (2004), Duflo (2005), Bandiera et. al. (2006). CLASS 12 Debate 2: Behavioral economics vs Bounded rationality. Readings: Camerer (2005), Rubinstein (2005), MBR Chapter 11. Additional references: Introduction Simon, H. A. (1955). A Behavioral Model of Rational Choice. Quarterly Journal of Economics 69, 99-118.

Intertemporal choice

Angeletos, M. et. al. (2001) The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation, Journal of Economic Perspectives, August, 47-68 Fudenberg, Drew and Levine, David. A dual self model of impulse control. February 2005. http://post.economics.harvard.edu/faculty/fudenberg/papers/dual_self.pdf Della Vigna, Stefano and Ulrike Malmendier. Overestimating self-control: Evidence from the health club industry, Nov 2003. http://emlab.berkeley.edu/users/sdellavi/wp/self_control_nov03.pdf Fairness and social preferences Fehr and Gachter, Fairness and retaliation: The economics of reciprocity. J Ec Perspectives, 2000. and in ADVANCES. Rabin, M. (1993) Incorporating Fairness into Game Theory and Economics, American Economic Review, 83(5):1281-1302. (Monster paper; a recipe for how to do behavioral economics) Sobel, Joel. Social interdependent preferences and reciprocity, J Ec Lit June 2005, vol 43, 392-436. Neuroeconomics Hsu, Bhatt, Adolphs, Tranel, Camerer. A neural system for judging degrees of uncertainty. Science 2005. Camerer, Loewenstein & Prelec. Neuroeconomics: How neuroscience can inform economics. J Ec Perspectives, March 2005. Gul and Pesendorfer: The case for Mindless Economics (2006) Behavioral Finance Barberis and Thaler. A survey of behavioral finance. In Handbook of Economics & Finance, in press. (http://badger.som.yale.edu/faculty/ncb25/ch18-6.pdf) Game Tehory Costa-Gomes, M. et. al. (2003) Experimental studies of strategic sophistication and cognition in normal-form games, Econometrica, 69:1193-1235. (Masterpiece of careful interaction of theory and design) McKelvey and Palfrey, "An experimental study of the centipede game," Econometrica 1992.

Field Experiments Harrison and List, 2004. Field Experiments. J Economic Literature http://www.arec.umd.edu/fieldexperiments/fieldexperiments/Field%20Experiments.pdf Tanaka, Nguyen and Camerer. Field experiments in Vietnam. Duflo, Esther. 2005. Field experiments in development economics. World Congress paper, http://econ-www.mit.edu/faculty/download_pdf.php?id=1265 Bandiera, Barankay and Rasul. Social preferences and the response to incentives: Evidence from personnel data, 2006, Quarterly Journal of Economics vol. 120(3), pages 917-962. Behavioral Economics and Bounded Rationality Camerer (2005): Behavioral Economics Rubinstein (2005): Discussion of Behavioral Economics Memory and attention Barber, Brad and Terrance Odean. All that glitters, 2003. http://faculty.haas.berkeley.edu/odean/papers/Attention/All%20that%20Glitters.pdf Hirshleifer and Welch. An Economic Approach to the Psychology of Change: Amnesia, Inertia, and Impulsiveness. Journal of Economics and Management Strategy 11-3, Fall 2002, 379-421. Wilson, Andrea (2006). Bounded memory and biases in information processing. http://www.princeton.edu/~awilson/memorybiases.pdf Testafsion, Leigh. Agent-based computational economics. August 2003 http://www.econ.iastate.edu/tesfatsi/acewp1.pdf