040062 UK Behavioral Economics (MA) (2020S)

This course is designed to make you familiar with the most relevant concepts from behavioral economics. After following this course, you will be able to answer the following paradoxes:

- Why do people pay more for a diamond than for a month’s water consumption even though water is more useful?

- Why are people willing to pay only a modest fee for a lottery of infinite value?

-How could the same individual gamble and buy insurance at the same time?

- Under standard economic theory rejecting a lottery offering -1.0 Euro with 50% chance and 1.1 Euro with 50% chance implies rejecting a lottery offering infinity Euros with 50% chance.

-Why do people exhibit a preference for known risks over unknown risks?

-Why do people make plans that they cannot fulfill?

-Why aren't there more tragedy of the commons?

To explain these paradoxes, you are going to get acquainted with the most relevant theories in the field. Namely rank-dependent utility theory, cumulative prospect theory, hyperbolic discounting, inequity aversion, level-k theory, and quantal response equilibrium.

To understand these alternative theories, we will also review and understand their standard economics counterparts: expected value, expected utility theory, exponential discounting utility, and Nash equilibrium.

Rather than only introducing and reviewing these models through mathematical formulae, I also focus on their behavioral foundations, i.e. their axioms. For the first couple of models we will see how these foundations of preference translate into the mathematical formulae you might be familiar with. This process makes clear that abstract concepts such as utility and (subjective) probability have an intuitive behavioral foundation.

Finally, note that my job is to convince you that the alternative theories that I present are better descriptive approximations than their standard counterparts with the support of data from experiments, data from surveys, data from economic phenomena, and your own decisions!