Formation Analyse et politique Economiques (APE)


		FORMATION ANALYSE ET POLITIQUE ECONOMIQUES (APE) MASTER - DOCTORAT

Behavioral Economics and Finance
Milo Bianchi – Paris School of Economics – Fall 2009

Course Presentation:

Standard economic theory postulates that individual decisions are the product of purely self-interested and perfectly rational agents. A substantial body of literature documents that these assumptions are often inaccurate, and that individuals display systematical departures from the standard paradigm. For example, agents face limitations in their ability to process all the relevant information and they are very sensitive to the way this information is framed. They overestimate their ability to perform a task and they may take actions which are not in their long-run interest. They care about other people’s utility and about how other people perceive their actions.

Behavioral economics documents these “biases” and incorporates them into alternative models of decision-making and strategic interactions. In this course, we offer an overview of some of the most active lines of research in this field. Along the course, we will provide evidence (especially from the field) on individual departures from the standard economic paradigm, analyze these phenomena with rigorous formal models, and discuss how these behaviors affect strategic and market interactions.

The course is intended to stimulate some critical thinking about the fundamental building blocks of economic theory and provide some avenues to enrich them. Our ultimate goal is to introduce participants to a set of questions and tools to enable them to start their own journey into (behavioral) economics research.

List of Topics:

Introduction: what is behavioral economics, and why should we care.
Prospect Theory Applications: labor supply and investors’ behaviors
Bounded Rationality I: Decision making, Information Processing and Framing Applications: financial and consumer credit markets
Bounded Rationality II: Strategic Interactions with Partially Sophisticated Agents Applications: bubbles and political economy
Intertemporal Choices and Self-Control Applications: health and saving decisions
Self-Confidence Applications: stock markets and occupational choices
Social Preferences I: Social esteem Applications: prosocial behaviors, occupational choices, norm enforcement
Social Preferences II: Fairness Applications: firms and workers behaviors

Evaluation:

80%: Term paper on a topic of your choice (related to the course and agreed with me.) The paper can be theory or applied, it should be short (5-10 pages) and contain some original idea, however preliminary. It may be a starting point for your master thesis. The term paper must be handed in by December 17.

20%: Participation in class. This includes a short (5-10 minutes) informal presentation during the last lecture, November 12, in which you discuss the idea you intend to develop in the term paper.

Lecture notes:

Lecture notes will be distributed in class. If you cannot attend a class and would like to read the lecture notes, please send me an email.

List of required readings: (For each topic, a more comprehensive list of references can be found here)

1. Introduction

Camerer, Colin and George Loewenstein. 2003. “Behavioral Economics: Past, Present, Future.” In Advances in Behavioral Economics, ed. Colin Camerer, George Loewenstein and Matthew Rabin. Princeton: Princeton University Press.

Rabin, Matthew. 1998. “Psychology and Economics”. Journal of Economic Literature 36:11-46

Stefano DellaVigna, 2007. "Psychology and Economics: Evidence from the Field," NBER Working Papers 13420

David Hirshleifer (2001), “Investor Psychology and Asset Pricing”, The Journal of Finance 56 (4), 1533–1597.

2. Prospect Theory

* Kahneman D, Tversky A. “Prospect theory: an analysis of decision under risk.” Econometrica 1979, vol. 47, pp. 263-291.

Koszegi, Botond and Rabin, Matthew. “A Model of Reference-Dependent Preferences”, Quarterly Journal of Economics (2006), 121(4), pp. 1133-1166

Odean T. “Are investors reluctant to realize their losses?” Journal of Finance 1998, vol. 53, pp. 1775-1798.