(88-702) BEHAVIORAL ECONOMICS, Spring, 2024

Wednesdays 3:30-6:20 pm
Porter Hall 223D
Last updated December 29, 2025

Instructor: George Loewenstein (PH 319C; [email protected]; (412)867-8150 (my cell;

only for emergencies or scheduled calls))
Assistant: Rosa Stipanovic (PH319G; [email protected]; 268-6971)

This is a PhD-level course on behavioral economics – the application of psychological research

and theory to economic analysis. The course focuses exclusively on aspects of behavioral
economics involving choice/utility and not on phenomena relating to judgment such as
probability judgments, Bayesian updating, and so on.
I have tried to include a mix of basic research findings and applications. The papers are all at a
level of mathematical sophistication that should be accessible by first year economics PhD
students (which is about the limit of my own mathematical sophistication). Many of them
assume a grasp of graduate-level microeconomics, but really only an understanding of utility
functions and indifference curves. If you have not had graduate-level microeconomics class you
may find the course a struggle, and I urge you to consider taking graduate micro now and this
course later (or both at the same time). The same goes for econometrics.
Syllabus subject to revision. The most up-to-date syllabus will always be on Canvas. If you
need help accessing Canvas, please contact Rosa Stipanovic (see top of this document).

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Course requirements
Attendance. Attend the class religiously. The norm should be 100% attendance. If you are going
to miss a class, please email me in advance. Arrive before the class time so we are ready to go
when class begins.
Readings. For each class there will be two to four required readings. All readings are available
on Canvas. Do the readings compulsively (all of them, and on time for class) and carefully. Don't
wait until the day before class to read the papers. Some of them will take you several days to
digest, and you will benefit from discussion with other students prior to class. Don't gloss over
sections of papers that you don't understand, but struggle to make sense of them. Work with
fellow students, and bring your unresolved (and resolved, since they may remain unresolved for
others) questions to class.
Weekly assignments. For 10 classes there will be an assignment, which will be either a brief
essay (3 classes) or a problem set (7 classes). Please submit your essays and problems on paper,
in class (handing them back is how I will learn your names).
The essay questions are designed to stimulate your creative thinking. Please answer the essay
question in a two page (max) (12-point font, 1.5 spacing, 1” margins), thoughtful, carefully
reasoned, well-crafted, essay. I want you to put deep thought and great care into crafting your
answers. If I have trouble interpreting what you are trying to say, I’m going to give up.
The problems are designed to help you understand the insights behind theoretical models. Unlike
the more creative essays, problems typically have only one correct answer. On the other hand,
these questions also provide more guidance, so you should find them relatively straightforward
to answer. Please always explain your answers in full sentences, do not simply provide a
solution.
Term paper. There is a term paper requirement, which is due on the last day of class (4/24). The
deadline is FIRM. The paper should ideally apply to one of the topics covered in the course. The
term paper need not be empirical, it could be a theoretical paper, though, if so, the bar will be
high.
Empirical research paper. Most papers will involve empirical studies. For these, what I care
most about is the idea you are testing and the quality of your design. Unless data collection is
very cheap, you may want to collect just enough data to show that the study is feasible, then
analyze the data as if it is a large(r) data set, so I know you know how to analyze the data if and
when you collect more of it. In past years, students have started work on research papers very
late in the semester, and quality has, in many cases, reflected the late start. Please start thinking
about potential ideas early. If you want help coming up with an idea, you should come to one of
the group brainstorming sessions with me (George) that Rosa will help to schedule. To prepare
for this meeting, please read Murray S. Davis "That's interesting," which is available on Canvas.
Davis, M. S. (1971) That’s Interesting!: Towards a Phenomenology of Sociology and a
Sociology of Phenomenology. Philos. Soc. Sci., 1, 309–344.
Theory paper. You can also choose to write a theory paper, instead of designing an empirical
study. This is a very risk option; I don’t think I’ve ever seen a good example. The theory should

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be in a form similar to those we review in class (e.g., not just a box diagram), and it needs to be
sufficiently simple that I can understand it with my limited math capabilities.
For both empirical research and theory papers, the maximum length of the paper is 10 pages
(same format as essays), not including references, tables, figures, appendices. Whether it is
empirical or theory, the format of your paper should be:

 Abstract (100 words max)

 Intro (provide motivation for why your topic is interesting and important)
 Literature review (Review the most important papers, with very brief descriptions of
what the authors did and found). The literature review should pave the way for your
studies; you should be addressing a (hopefully large) gap in the existing literature.
 Your study (for empirical research):
o Overview
o Methods (including sample information)
o Results
 Discussion/conclusion

A one-page proposal for the topic of your paper is due by 2/28. The proposal should present the
general research topic and the specific research question(s) you plan to investigate (relevant
theories, hypotheses, predictions, etc.). Once approved, you will then have the months of March
and April to conduct the study and write up the final paper (or write up the literature review). If
you already have an idea for a topic, you should
arrange to meet with me quickly, so I can approve it. The weighting of the
If you want to collaborate with another student on different components will
your paper, I’m open to that. be as follows:
Final exam. There will be a take-home final during • 30% essays (10% each)
the week following the end of class. You have 4 • 35% problems (5% each)
hours to do it and you must arrange for Rosa • 25% research paper
Stipanovic to send it to you at some time between
9am and 5pm. The final will cover all materials • 20% final take‐home exam
including the background readings assigned for the (I know it adds to more than
first class. Prior years' finals should be up on Canvas 100%)(No one ever gets
(ask me if they are not). 100%)

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 Schedule of Readings/Topics/Assignments

1/15 Behavioral economics background and loss aversion

• Ashraf, N., Camerer, C. & Loewenstein, G. (2005). Adam Smith, Behavioral

Economist. Journal of Economic Perspectives, 19(3), 131–146.
• Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decision under
risk. Econometrica, 47(2), 363–391.
• Thaler, R. (1980). Toward a positive theory of consumer choice. Journal of economic
behavior & organization, 1(1), 39-60.
Assignment: Problem I: Indifference curves for loss-aversion

On Canvas

1/22 The endowment effect and reference-dependence

• Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1990). Experimental tests of the
endowment effect and the Coase theorem. Journal of political Economy, 98(6), 1325-
1348.
• Kőszegi, B., & Rabin, M. (2006). A Model of Reference-Dependent Preferences.
Quarterly Journal of Economics, 121(4), 1133–1165.
• Weaver. R. and Frederick, S. (2012). A reference-price theory of the endowment effect.
Journal of Marketing Research, 49(5), 696–708.

Assignment: Problem II: The endowment effect

On Canvas

1/29 Reference-dependence: applications

• Mas, Alexandre (2006). Pay, reference points, and police performance. The Quarterly
Journal of Economics, 121(3), 783–821.
• Homonoff, T. A. (2018). Can Small Incentives Have Large Effects? The Impact of
Taxes Versus Bonuses on the Demand for Disposable Bags. American Economic
Journal: Economic Policy, 10(4), 177–210.
Optional (from last year)
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 Genesove, D. & Mayer, C. (2001). Loss Aversion and Seller Behavior: Evidence from the
Housing Market. The Quarterly Journal of Economics, 116(4), 1233–1260.

Assignment: Essay I
Propose a novel application of reference-dependence in an area of research of special
interest/relevance to you, and a field test of the operation of reference-dependence in
the domain you propose. Note (since so many people seemed confused last year): by
"reference-dependence" I mean a situation in which you don't evaluate things in
absolute terms, but relative to some point or points of reference. Usually, the key idea
is that the reference point(s) divide outcomes into gains and losses.

2/5 Decisions under risk and risk aversion

• Starmer, C. (2000). Developments in non-expected utility theory: The hunt for a
descriptive theory of choice under risk.
• Rabin, M and Thaler, R. (2001). Anomalies: Risk Aversion. Journal of Economic
Perspectives, 15(1), 219–32.

Assignment: Problem III: The “John problem”

Download from Canvas
Assignment: Problem IV: Triangle diagrams
Download from Canvas

2/12 Decision under risk II: Extensions and an application

• Sydnor, Justin. (2010). (Over)insuring Modest Risks. American Economic Journal:
Applied Economics, 2, 177-199.
• Imas, A. (2016). The Realization Effect: Risk Taking After Realized Versus Paper
Losses. American Economic Review. 106: 2086–2109.
• Loewenstein, G. & Carbone, E. (forthcoming). Affective Influences on Risk-taking
and Avoidance.

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2/19 Intertemporal choice 1: Hyperbolic time discounting
• Frederick, S., Loewenstein, G. and O'Donoghue, T. (2002). Time Discounting and Time
Preference: A Critical Review. Journal of Economic Literature, 40(2), 351–401.
• Rabin, M. & O'Donoghue, T. (2000). The Economics of Immediate Gratification. Journal
of Behavioral Decision Making, 13(2), 233–250.
Assignment: Problem V
On Canvas

2/26 Intertemporal choice 2: Applications and affect

TERM PAPER PROPOSAL DUE
• Shapiro, Jesse M. (2005). Is there a daily discount rate? Evidence from the food
stamp nutrition cycle. Journal of Public Economics, 89(2), 303–325.
• Loewenstein, G. & Carbone, E. (2024). Self-control ≠ Temporal Discounting.
Current Opinion in Psychology, 60
Assignment: Essay II
Waiting for something bad is almost always unpleasant (confers negative utility). But,
waiting for something good is sometimes pleasurable, but, I would argue, more often
painful (aversive). What determines whether waiting for something positive is
pleasurable or painful? Think of examples from your own life. What distinguishes the
one situation from the other? Propose a very simple experiment to test your theory,
varying what you believe is important while holding everything else as constant as
possible. I will explain why, I believe, this is an incredibly important question.

3/3 – 3/7 Spring Break

3/12 Mental accounting and narrow bracketing

• Prelec, D. & Loewenstein, G. (1998). The red and the black: mental accounting of
savings and debt. Marketing Science, 17(1), 4–28.
• Thaler, Richard H. (1999). Mental accounting matters. Journal of Behavioral Decision
Making, 12(3), 183–206.
• Hastings, J. and Shapiro, J.M. (2018). How are SNAP Benefits Spent? Evidence from a
Retail Panel. American Economic Review, 108(12), 3493–3540.
• Rick, S. I., Cryder, C. E., & Loewenstein, G. (2008). Tightwads and spendthrifts.
Journal of consumer research, 34(6), 767-782.
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3/19 Taste-prediction and experienced utility
• Wilson, T. D., & Gilbert, D. T. (2003). Affective forecasting. In M. P. Zanna (Ed.),
Advances in experimental social psychology, Vol. 35, pp. 345-411). San Diego, CA,
US: Elsevier Academic Press.
• Loewenstein, G., O'Donoghue, T., & Rabin, M. (2003). Projection bias in predicting
future utility. Quarterly Journal of Economics, 1209-1248.
• Chang, T. Y., Huang, W., & Wang, Y. (2018). Something in the air: Pollution and the
demand for health insurance. The Review of Economic Studies, 85(3), 1609-1634.
Assignment: Problem VI: TBA

3/26 Constructed preferences, context effects, and preference reversals

• Ariely, D., Loewenstein, G. and Prelec, D. (2003). Coherent arbitrariness: Stable
demand curves without stable preferences. QJE, 118(1), 73–106.
• Hsee, C. K, Loewenstein, G. F., Blount, S. & Bazerman, M. H. (1999). Preference
reversals between joint and separate evaluation of options: A review and theoretical
analysis. Psychological Bulletin, 125, 576–590.
• Cubitt, R., McDonald, R., & Read, D. (2017). Time Matters Less When Outcomes
Differ: Unimodal vs. Cross-Modal Comparisons in Intertemporal Choice.
Management Science, 64(2), 873-887.
• Assignment: Essay III
Propose a different domain from intertemporal choice in which you think you could
easily observe an effect analogous to that shown by Cubitt et al. Explain what it is, what
implications it would have for decision making, and how you could study it. How does it
affect conclusions that have been reached in the economics/behavioral economics
literature?

4/2 Beliefs and motivated beliefs (Prof. P. Schwardmann guest-lecturing)

• Bénabou, R., & Tirole, J. (2016). Mindful economics: The production, consumption,
and value of beliefs. Journal of Economic Perspectives, 30(3), 141–64.
• Schwardmann, P, Tripodi, E. & van der Weele, J. (2022). Self-Persuasion: Evidence
from Field Experiments at International Debating Competitions. American Economic
Review, 112(4): 1118-1146.

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4/9 Social preferences
• Benabou, R., & Tirole, J. (2006). Incentives and Prosocial Behavior. American
Economic Review, 96, 1653–78.
• Dana, J., Weber, R. A. and Kuang, J. X. (2007). Exploiting Moral Wiggle Room:
Experiments Demonstrating an Illusory Preference for Fairness. Economic Theory, 33,
67-80.
• Charness, G. and Rabin, M. (2002). Understanding Social Preferences with Simple
Tests. The Quarterly Journal of Economics, 117, 817–869.
Assignment: Problem 7: Signaling altruism
On Canvas

4/16 Cognitive Economics (Prof. J. Conlon guest-lecturing)

TERM PAPER DUE

4/23 Attention
• Loewenstein, George F. and Wojtowicz, Zachary, The Economics of Attention (February
23, 2023). Available at SSRN: https://ssrn.com/abstract=4368304

• Quispe-Torreblanca, Edika and Gathergood, John and Loewenstein, George F. and

Stewart, Neil, Attention Utility: Evidence From Individual Investors (September 10,
2022). Available at SSRN: https://ssrn.com/abstract=3527082

• Lacetera, N., Pope, D. & Sydnor, J. (2012). Heuristic thinking and limited attention in
the car market. American Economic Review, 102(5), 2206-2236.
Short offshoot for your amusement: Behavioral Heuristics in Coronary-Artery Bypass Graft
Surgery

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