Objectives

This course offers a theoretical and empirical introduction to "behavioral economics". Behavioral economics enriches economics with insights from psychology. The aim of this approach is to generate new theories that provide a better and more realistic description of human behavior than standard economic models.

The course introduces some of the most important theoretical and empirical developments in the literature on the psychological foundations of economic behavior. We will discuss a number of important and interesting behavioral phenomena that standard economic models fail to explain. We will demonstrate that psychologically enriched models – taking into account that people are not completely rational and do not only pursue material self-interest – can often explain observed behavioral patterns better.

Contents

There are four parts to the course. In each part, we will discuss theory and evidence associated with a specific type of behavior, which is not in line with the predictions of standard economic models.

Part I: Economics of Fairness

We will discuss the importance of social motives for human behavior. There is a lot of evidence that many (but not all!) people are motivated by powerful non-pecuniary concerns like the desire to reciprocate or the desire to avoid social disapproval. We will see that this has important implications in many economically relevant situations (e.g., behavior in employment relations, bargaining behavior, or the contribution to public goods).

Part II: Time-Inconsistency

We will consider intertemporal decision problems, i.e., choices that affect two different points in time (for example, saving money reduces current consumption, but reduces severe risks later in life). We will study why people tend to make severe mistakes in this type of decisions and how this can lead to important economic and social problems like undersaving, overeating, and addictions.

Part III: Reference-Dependence and Loss Aversion

We will investigate the effects of reference-dependent preferences. There is a lot of evidence showing that people evaluate economic outcomes relative to a reference point. If the reference point is not reached, people are unhappy, because they experience the outcome as a loss. We will see that this has important implications for consumption patterns, investments, and labor market decisions.

Part IV: Overconfidence

This part will cover the problem of overconfidence. Research consistently shows that many people overestimate their abilities and knowledge not only in absolute terms, but also relative to others. We will show that overconfidence can lead to very suboptimal choices in a variety of economically relevant situations (for example career and education choices, project selection in management, stock market investments, or market entry decisions).

References

All readings (journal articles, book chapters etc.) will be downloadable from the Moodle page.

Evaluation

First attempt

Exam:

Written 2 hours

Documentation:

Allowed

Calculator:

Allowed

Evaluation:

Your mark will be determined by two components: i) Problem sets that you have to hand in during the semester, ii) a written exam (either on site or online) during the exam session. The problem sets account for 25% of the final mark, while the exam accounts for 75%.

Retake

Exam:

Written 2 hours

Documentation:

Allowed

Calculator:

Allowed

Evaluation:

For those who need to retake the exam, there will be a possibility during the official retake examination period. You may be eligible to redo exercise work if both your overall final grade and exercise grade in the first attempt are lower than 4.