Preliminary Syllabus Behavioral Economics Pontificia Universidad Javeriana June 13-24, 2016

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1 Week 1: Fundamentals Instructor: Karna Basu Week 2: Empirical Applications Instructor: Stephen O Connell soconnell@gradcenter.cuny.edu Preliminary Syllabus Behavioral Economics Pontificia Universidad Javeriana June 13-24, 2016 Course Description This is an advanced undergraduate/masters level course in behavioral economics (also known as: economics and psychology). You will be introduced to several topics in this new and exciting field. The main objective of behavioral economics is to modify existing models of economic decision-making using results from experimental psychology. We will continue to use the methodology of economics, but we will tweak the models to make them more realistic. We will then use these models to try and analyze behavior in various settings, from standard economic ones (like saving, borrowing, and labor market decisions) to noneconomic ones (like deciding when to go to the gym). Some additional topics to be studied include procrastination, altruism, gambling, and self-control. In the first week of this course, we will cover theoretical fundamentals behavioral models will be presented as a counterpoint to traditional theory. In the second week, we will focus more on empirical applications, and examine how these models could be applied to questions in applied microeconomics fields such as development and labor. Upon completion of this course, you will be able to place microeconomic theory in a broader, richer context, and will have acquired the language to critique some of its orthodox tenets. You will begin to develop the skills necessary to (a) articulate new theories of decisionmaking using simple models, and (b) test new theories through experiments. Students should have a firm background in microeconomics (advanced undergraduate or first-year MA microeconomics). Logistics

2 There is no assigned textbook for this course. We will distribute academic papers and lecture notes over as the course progresses. Students may find the following books useful for background or supplementary reading: Gut Feelings: The Intelligence of the Unconscious by Gerd Gigerenzer Predictably Irrational by Dan Ariely There will be 2 exams (one at the end of each week), as well as short problem-solving exercises as the course progresses. Topics (Week 1): Day 1: Introductory topics What is microeconomics? Why are models useful? What is behavioral economics? Is behavioral economics necessary? Examples of biases. Behavioral Economics by Sendhil Mullainathan & Richard Thaler Psychology and Economics by Matthew Rabin Decision-making over time (time-consistency) time-separable utility functions, exponential discounting, consumption-savings problems, Euler equations. Intermediate Micro Economics by Hal Varian (Chapter 10) Microeconomic Analysis by Hal Varian (Chapter 19) Day 2: Decision-making over time (time-inconsistency) evidence for/against time-consistency, quasi-hyperbolic discounting, sophistication/naivete, timing of costly tasks going to the gym, consumption-savings problems, modified Euler equations. Doing it Now or Later by Ted O Donoghue and Matt Rabin Implications of quasi-hyperbolic discounting, empirical evidence, commitment devices. Commitment Devices by Gharad Bryan, Dean Karlan, and Scott Nelson

3 Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines by Nava Ashraf, Dean Karlan, and Wesley Yin Day 3: Decision-making under risk (Expected Utility theory) St. Petersburg paradox, EU theory, risk-preferences, insurance, value of information. Intermediate Micro Economics by Hal Varian (Chapter 12) Microeconomic Analysis by Hal Varian (Chapter 11) Decision-making under risk (Prospect theory) implications of EU theory, empirical puzzles, prospect theory (value function, coding, editing). Choices, Values, and Frames by Daniel Kahneman and Amos Tversky Prospect Theory: An Analysis of Decision under Risk by Daniel Kahneman and Amos Tversky Prospect Theory by Andrew Chiu and George Wu Risk Aversion and Expected-Utility Theory: A Calibration Theorem by Matthew Rabin Day 4: Mental accounting How are reference points chosen? How are frames chosen? Equity premium puzzle. Status quo bias. Endowment effects. Mental Accounting Matters by Richard Thaler Myopic Loss Aversion and the Equity Premium Puzzle by Shlomo Benartzi and Richard Thaler Prospect Theory in the Wild: Evidence from the Field by Colin Camerer Labor Supply of New York City Can Drivers: One Day at a Time by Colin Camerer, Linda Babcock, George Loewenstein, and Richard Thaler Fairness and reciprocity Anomalies: The Ultimatum Game by Richard Thaler A Theory of Fairness, Competition, and Cooperation by Ernst Fehr and Klaus Schmidt Day 5:

4 Neuroeconomics. Neuroeconomics: How Neuroscience can Inform Economics by Colin Camerer, George Loewenstein, and Drazen Prelec Happiness theory, empirical evidence Happiness and Public Policy: A Challenge to the Profession by Richard Layard Thinking, Fast and Slow by Daniel Kahneman Policy Nudge by Richard Thaler and Cass Sunstein Topics (Week 2): Day 6: The experimental approach to behavioral economics. Rubin causal model. Identification and policy evaluation. Sec. 1-4, Imbens and Wooldridge (2009) Recent Developments in the Econometrics of Program Evaluation. Journal of Economic Literature, Vol. 47, No. 1, pages Mostly Harmless Econometrics Chapters 1-2 Lab Experiments Are a Major Source of Knowledge in the Social Sciences by Armin Falk and James Heckman Psychology and Experimental Economics: A Gap in Abstraction by Dan Ariely and Michael Norton Why behavioral economics and development? An overview. Randomized controlled trials. Banerjee, Abhijit, and Esther Duflo (2007). The Economic Lives of the Poor. Journal of Economic Perspectives. Psychology and Development Economics by Sendhil Mullainathan Poor but Rational? by Esther Duflo Banerjee (2009). Big Answers for Big Questions: The Presumption of Growth Policy. In Cohen and Easterly, What Works in Development? Cohen, Jessica, and William Easterly. Introduction: Thinking Big versus Thinking Small. In Cohen and Easterly, What Works in Development?

5 Day 7: Psychology and development. Savings and spending. Microfinance. Mani, Anandi, Sendhil Mullainathan, Eldar Shafir, and Jiaying Zhao Poverty Impedes Cognitive Function. science 341 (6149): DellaVigna, Stefano (2009). Psychology and Economics: Evidence from the Field," Journal of Economic Literature, 47(2), Ashraf, Nava, Dean Karlan, and Wesley Yin (2006). Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines. Quarterly Journal of Economics. Banerjee, Abhijit, and Sendhil Mullainathan (2010). The Shape of Temptation: Implications for the Economic Lives of the Poor. Working Paper, MIT. Karlan, Dean, and Jonathan Morduch (2010). Access to Finance. Handbook of Development Economics, Vol. 5. Morduch, Jonathan (1999). The Microfinance Promise. Journal of Economic Literature. Banerjee, Abhijit, Esther Duflo, Rachel Glennerster, and Cynthia Kinnan "The Miracle of Microfinance? Evidence from a Randomized Evaluation." American Economic Journal: Applied Economics, 7(1): Day 8: Education. Health. Gender. Duflo, Esther (2001). Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment. American Economic Review. Duflo, Esther, Rema Hanna, and Stephen Ryan (2011). Incentives Work: Getting Teachers to Come to School. American Economic Review. Poor Economics, Chapter 2. Thornton, Rebecca (2008). The Demand for, and Impact of, Learning HIV Status. American Economic Review. Miguel, Edward, and Michael Kremer, Worms: Education and Health Externalities in Kenya. Econometrica.

6 Ashraf, Nava (2009). Spousal Control and Intra-Household Decision Making-An Experimental Study in the Philippines. American Economic Review. Beaman, Lori, Raghabendra Chattopadhyay, Esther Duflo, Rohini Pande, and Petia Topalova (2009). Powerful Women: Does Exposure Reduce Bias? Quarterly Journal of Economics. Day 9: Agriculture, informality, and firms. Duflo, Kremer, and Robinson Nudging Farmers to Use Fertilizer-Theory and Experimental Evidence from Kenya. Working Paper, Harvard University. Dean Karlan, Robert Osei, Isaac Osei-Akoto, Christopher Udry, Agricultural Decisions after Relaxing Credit and Risk Constraints (October 2015) The Quarterly Journal of Economics 129(2), pp McKenzie, David, and Seynabou Sakho (2010). Does it pay firms to register for taxes? Journal of Development Economics. de Mel, Suresh, David McKenzie, and Christopher Woodruff (2008). "Returns to capital in microenterprises: evidence from a field experiment. Quarterly Journal of Economics Kaur, Supreet, Michael Kremer, and Sendhil Mullainathan Self-Control and the Development of Work Arrangements. The American economic review 100 (2): Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, David McKenzie, and John Roberts (2011). Does Management Matter? Evidence from India. NBER Working Paper No Day 10: Limitations and challenges of controlled trials. Behavioral economics and policy. Allcott, Hunt (2015) "Site Selection Bias in Program Evaluation." Quarterly Journal of Economics, Vol. 130, No. 3 (August), pages Selected chapters, from Richard H. Thaler and Cass R. Sunstein Nudge: Improving Decisions About Health, Wealth, and Happiness Richard H. Thaler and Shlomo Benartzi, Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving Journal of Political Economy 2004 Richard H. Thaler and Shlomo Benartzi, Heuristics and Biases in Retirement Savings Behavior, Journal of Economic Perspectives 2007

7 Mullainathan, Sendhil, Jens Ludwig, and Jeffrey R Kling Mechanism Experiments and Policy Evaluations. Journal of Economic Perspectives 25 (3): Selected chapters from Sendhil Mullainathan, and Eldar Shafir, Scarcity: Why Having Too Little Means So Much