Behavioral Economics

Professor: Linnemayr
Units: 1.0
Elective Course
Concentrations: Economic Analysis and Social and Behavioral Science

Decision-making is a very active area of research both in economics and psychology. There is ample evidence that individuals and groups do not conform to the predictions of classical rational models of behavior. Some of the anomalies that psychologists have discovered include framing effects, priming, non-standard discounting in time preferences, nonstandard probability weighting in risk preferences, and biases in multi-attribute choice evaluation. The field of behavioral economics focuses on two fronts. First, produce utility models that account for the most robust anomalies (e.g., cumulative prospect theory, hyperbolic discounting, mental accounting models, self-control models). Second, design experiments, or use field data, to test these utility models. Utility models allow economists to explore the “market implications” of consumer anomalies. Experimental data allows them to improve the descriptive accuracy of the models.

In this Behavioral Economics course, we will explore the most robust anomalies in the behavior of individuals and consumers. These include loss aversion, over-weighting of small probabilities, decreasing impatience, magnitude effects in discounting, salience effects, sunk cost effects, flat-rate bias, endowment effect, and inconsistent attribute weighting, among others. For each, we will review the evidence from experiments, discuss possible models that explain this behavior, and discuss the experimental evidence from testing these models.