Decision Making, Behavioral Economics Approach

Mainstream economics has made major advances in explaining human behaviour extending the analysis even to such matters as love and marriage. However the assumptions of traditional economic models are not adequate to discuss many problems of real world. They appear as a normative ideal of how people should behave rather than as a truthful description of how they do behave. Behavioral Economics combines elements of economics and psychology and other social sciences as well as neuroscience to understand how and why people behave the way they do in the real world. Behavioral Economics is useful when decisions are complex and optimality is difficult to achieve. In the last twenty years, scholars developing this approach have von six Nobel Prizes in Economics, including Richard Thaler’s Prize in 2017.

1. Introduction. History and evolution of behavioral economics (2 hours).

2. Decision Making. Psychological and social factors affecting economic behavior. Cognitive abilities and cognitive effort. Intuition and reasoning (2 hours)

3.Attitudes; functions of attitudes, the relation between attitudes, utility and preferences. (2 hours).

5. Heuristic-driven bias – examples. Intertemporal choice (2 hours)

6. Behavioral Macroeconomics (2 hours)

7. 8. Decision making under risk - Prospect Theory (4 hours).

9. Behavioral Finance - application of Prospect Theory to explain financial decisions - the difficulties in realizing losses, hedonic framing. "Get eventis" problem (2 hours).

10. Mental accounting, endowment effect (2 hours)

11. Subjective measures of risk (2 hours).

12.Emotion, affect - for example anger, influencing decisions, compulsive buying.

13. Fairness and Social Preferences. Policy implications (2hours).

14. Nudge theory – examples, applications.

15. Conclusion (2 hours)

Obligatory:

George A.Akerloff, Behavioral Macroeconomics and Macroeconomic Behavior, The American Economic Review, vol 92, June 2002, pages 411-433

Colin Cramer, Behavioral Economics, Current Biology, vol.4/2015 no 18

Daniel Kahneman's Nobel Prize lecture http://nobelprize.org/nobel_prizes/economics/laureates/economics/2002/kahneman-lecture.html

D.Kahneman and A.Tversky(eds) Choices, Values and Frames, Cambridge University Press, Cambridge UK 2003 (suggested papers).

Peter E. Earl (2018) Richard H. Thaler: A Nobel Prize for Behavioral Economics, Review of Political Economy, 30:2, 107-125

Fred van Raaij, Understanding Consumer Financial Behavior, Money Management in an Age of Financial Illiteracy, Palgrave Macmillan 2016, ch.13-16

Hersh Shefrin, Beyond Greed and Fear. Harvard Business School Press, Boston, Ma.2000, Ch. 1, 2, 3, 14, 15

Paul Slovic and all, Risk as Analysis and Risk as Feelings: Some Thoughts about Affect, Reason, Risk, and Rationality, Risk Analysis, Vol.24-2/2004, p. 311-322

Richard Thaler, Nobel Prize lecture, www.nobelprize.org/prizes/economic-sciences/2017

Richard H. Thaler, Cass R Sustein, Nudge Nudge: Improving Decisions About Health, Wealth and Happiness 2009., selected chapters

Nick Wilkinson, An Introduction to Behavioral Economics. Palgrave Macmillan 2008,

Part 1, 2, 3 (5.1, 5.2, 5.5, 6.1-6.3), 4 (8.1-8, 8.7) 5 (9).

Sugessted:

Several articles published in the Journal of Economic Psychology and Behavioral Economics and other Journals according to the preferences of participants.

I assume that participants will acquire wider and deeper knowledge of complex factors affecting economic decision making. The understanding of social, biological and emotional factors affecting human reasoning may be useful not only in their research but in practice as well.

S_W01,S_W02,S_W03,S_W04,S_W05,S_U01,S_U01, S_U03,S_U04, S_U05, S_U06,S_U07,S_K01,S_K02,S_K03

The assessment will be made on the basis of attendance and activity -To receive a course credit, a participant should be present at most of the meetings. Active part in the discussion on basic readings is required to get credit . A Participant should write 3 short home-works. Writing an essay based on additional readings is required to receive higher grade (A or B). This essay should be presented in class. The presenter should be prepared to show the most interesting problems to initiate discussion. Students, who are interested in Economic Behavior are suggested to prepare joint research paper on attitudes and values affecting economic decisions and present this paper at The Students Research Conference.