Economics 404: Behavioral Economics

Spring 2013

Course Outline

Prerequisites: Economics 4011
Credit: This is a two credit course. Together with Economics 493 or an approved equivalent mathematics course, this counts as a full course towards the economics major.
Lecture Dates: Jan 17, 24, 31, Feb 7, 14 (no class Feb 21), 28, Mar 7
Laboratory Sessions: Mar 21, April 18
Book: Is Behavioral Economics Doomed available online
Grading: Based on the team project. Following the first laboratory session your team will have two weeks to design your own experiment. Your experimental proposal should contain the following:
1) 1-2 page description of the game that is being played
2) 1-2 pages with the motivation for the experiment including an explicit statement of the question your experiment is designed to address
3) written experimental instructions
4) the powerpoint presentation to be used during the actual experiment
Project Guidelines: Your proposed experiment may be either a one-person decision problem or a two-person game. In each case, plan on each participant playing ten times - in case of a two person game, they will play round-robin. You should limit yourself to no more than four total alternatives per plays, and in the case of a game, may either propose a simultaneous or sequential move game. You may either invent a new game to test a theory of your own, or a variation on an existing game designed to add something to our knowledge about the issues surrounding that game. Don't just propose to do exactly what someone else has already done.
Project Submission: Projects must be submitted by email in pdf or powerpoint formats. (No other formats permitted.)
Project Due Date: April 4
Final Laboratory Session: The final laboratory session will take April 18. The best project will be implemented by you in the laboratory, with the team who submitted the second best project in the role of experimenters and the rest of the class in the role of subjects. 

Outline of the seven lectures:

1st lecture: Basic Theory

reading: chapter 1, chapter 2 (Does Economic Theory Work?), chapter 3 (Why is the World so Irrational?)
topics: Nash equilibrium
1. PD experiments
2. voting experiments
3 market experiments
4. beauty contest experiments

2nd lecture: Basic Experiments

reading: chapter 1, chapter 2 (Does Economic Theory Work?), chapter 3 (Why is the World so Irrational?)
1. voter participation
2 market experiments
3. beauty contest experiments

3rd lecture: One is Born Every Minute

reading: chapter 5 (You Can Fool Some of the People)
topics: approximate equilibrium, quantal response equilibrium, mixed strategies
1. voter participation
2. winner's curse
3. matching pennies

4th lecture: Dynamic Games and Subgame Perfection

topics: extensive form games, subgame perfection
reading: chapter 4 (Does Economic Theory Fail?)
1. ultimatum bargaining
2. best shot
3. centipede

5th lecture: Social Preferences

topics: social preferences, altruism, spite, fairness
1. dictator
2. public goods games
3. token contribution games

6th lecture: Uncertainty and Expected Utility Theory

reading: chapter 7 (Time and Uncertainty)
topics: Allais paradox, Rabin paradox, Ellsburg paradox, risk averion, prospect theory

7th lecture: Learning

reading: chapter 6 (Biases and Irrationality), chapter 8 (Learning and Friends), chapter 9 (Conclusion)

First Laboratory Session

The first laboratory session will have two parts. In the first half session you will participate as subjects in an experiment run by the lab TAs (you will not be paid real money). In the second half the session laboratory methods will be discussed and a laboratory orientation provided. The experiment from the first half session will be examined from the perspective of the experimentor, and the mechanics of using the lab elucidated. Common problems and mistakes in experimental design will be discussed.