The Foundations of Behavioral. Economic Analysis SANJIT DHAMI

Transcription

1 The Foundations of Behavioral Economic Analysis SANJIT DHAMI OXFORD UNIVERSITY PRESS

2 CONTENTS List offigures ListofTables %xi xxxi Introduction 1 1 The antecedents of behavioral economics 3 2 On methodology in economics 5 3 The experimental method in economics 10 4 Approach and Organization of the book 21 5 Five theoretical approaches in behavioral economics 25 6 Five examples of behavioral evidence 48 Appendix A: The random lottery incentive mechanism 59 Appendix B: In lieu of a problem set 59 References 65 PART 1 Behavioral Economics of Risk, Uncertainty, and Ambiguity Introduction to Part The Evidence on Human Choice under Risk and Uncertainty Introduction The elements of classical decision theory Subjective expected Utility theory (SEU) Eliciting the Utility function under EU Violations of expected Utility theory 95 2 Behavioral Models of Decision Making Introduction Probability weighting functions Rank dependent Utility theory (RDU) Prospect theory (PT) Elicitation of Utility and probability weighting functions in PT The axiomatic foundations of PT Third generation PT and stochastic reference points Stochastic reference points in PT under rational expectations Limitations of PT A selection of other behavioral theories Human behavior for extreme probability events Risk preferences and time preferences Applications of Behavioral Decision Theory Introduction 213

3 Contents xv 3.2 The endowment effect and exchange asymmetries Prospect theory preferences in primates Myopie loss aversion Why do people pay taxes? Explanation of Rabins paradox using PT Goals as reference points Why is it so hard to find a taxi on a rainy day in New York? Some implications of inverse S-shaped weighting funetions Contracts as reference points Moral hazard, loss aversion, and optimal contracts Renegotiation, long-term contracts, and loss aversion Human Behavior under Ambiguity Introduction A problem for SEU: The Ellsberg paradox Neoclassical models of ambiguity Behavioral models of ambiguity 301 Exercises for Part References for Part PART 2 Other-Regarding Preferences Introduction to Part The Evidence on Human Sociality Introduction Ultimatum and dictator games Gift exchange and trust games Public goods games How representative is the lab evidence? Indirect reciprocity Models of Other-Regarding Preferences Introduction The Fehr-Schmidt model The ERC model Fairness and stochastic dominance Behavioral political economy Fairness, general equilibrium, and welfare Evidence on models of social preference and reciprocity A discussion of other promising models Human Morality and Social Identity Introduction Human virtues Social identity 465

4 xvi I Contents 8 Incentives and Other-Regarding Preferences Introduction Moral hazard and other-regarding preferences Incomplete contracts under other-regarding preferences Reciprocity and long-term contracts Extrinsic and intrinsic motivation: theoretical framework Extrinsic and intrinsic motivation: empirical evidence 540 Exercises for Part References for Part PART 3 Behavioral Time Discounting Introduction to Part The Evidence on Temporal Human Choice Introduction The discounted Utility model The exponential discounted Utility model (EDU) Anomalies of the EDU model Behavioral Models of Time Discounting Introduction Explaining the sign and magnitude effects Explaining the common difference effect Attribute-based models The reference time theory (RT) Applications of Present-Biased Preferences Introduction Two frameworks for modeling present-biased preferences Optimal consumption under hyperbolic discounting Endogenous retirement decisions Procrastination and preproperation Interdependence, multiple activities, and competition Optimal sin taxes Investment and leisure goods Other applications of hyperbolic discounting 688 Exercises for Part References for Part PART 4 Behavioral Game Theory Introduction to Part The Evidence on Strategie Human Choice Introduction 713

5 Contents xvii 12.2 Iterated deletion of dominated Strategie: Mixed strategy Nash equilibria Coordination games Bargaining games Asymmetrie Information, signaling, and cheap talk Public signals and correlated equilibria Strategie complements and Strategie Substitutes A digression on competitive equilibrium experiments Models of Behavioral Game Theory Introduction Quantal response equilibrium (QRE) Level-k and cognitive hierarchy models Applications of level-k and CH models Psychological game theory Correlated equilibrium and social norms Other behavioral models ofhow people play games Behavioral economics of auetions 988 Exercise for Part References for Part PART 5 Behavioral Models of Learning Introduction to Part Evolutionär/ Game Theory Introduction Some preliminaries Evolutionär/ stable strategies in two-player games Relation of ESS with other equilibrium concepts Replicator dynamics Applications of evolutionär/ game theory Playing the field Gene-culture coevolution The evolution of altruism and reciprocity Social learning and replicator-like dynamics Models of Learning Introduction Reinforcement learning Belief-based models of learning The experience weighted attraction model of learning Learning models: two points of view The class of learning direction theories Rule-based learning Multiple games, complexity, and categorization Possibility and impossibility of rational learning 1153

6 xviii I Contents 16 Stochastic Social Dynamics Introduction Fixing ideas in stochastic dynamics Perturbed Markov dynamics in 2 x 2 games Memory, Conventions, and risk dominance in 3 x 3 games Social networks 1182 Appendix A: Ordinary differential equations 1186 Appendix B: A note on choice under stochastic Utility 1193 Appendix C: A Brief user's guide to Markov Chains 1196 Exercises for Part References for Part PART 6 Emotions Introduction to Part Emotions and Human Behavior Introduction Visceral influences and the rationality of emotions Cue-conditioned behavior and habit formation Anticipation and delay under certainty Fear and anxiety under uncertainty Projection bias Temptation preferences: a revealed preference approach Temptation and conflicts between commitment and flexibility Happiness economics Interactions between Emotions and Cognition Introduction Emotions and a two-modules view of the brain A dual selves model with costly commitment Information asymmetries between emotions and Cognition Strategie ignorance, confidence, and self-esteem 1308 Exercises for Part References for Part PART 7 Bounded Rationality Introduction to Part Judgment Heuristics Introduction The law of small numbers Conjunction fallacy The availability heuristic 1365

7 Contents xix 19.5 The affect heuristic Anchoring and adjustment Base rate neglect and conservatism Hindsight blas Confirmation blas Other judgment heuristics Dual process models and judgment heuristics Coarse thinking and persuasion Mental models Herbert Simons approach to bounded rationality The great rationality debate Shrouded attributes Limited attention Do experts exhibit biases? Mental Accounting Introduction Framing and mental accounting Prospect theory and mental accounting The behavioral life-cycle model The red and black of mental accounting Choice bracketing Coherent arbitrariness Sunk costs and mental accounting Some other mental accounting phenomena Bounded Rationality in Financial Markets Introduction The efficient markets hypothesis Noise trader risk The limits to arbitrage Gradual flow of Information Stock market underreaction and overreaction Behavioral corporate finance 1526 Exercises for Part References for Part PART 8 Behavioral Weifare Economics Introduction to Part Behavioral Weifare Economics Introduction Fixing basic ideas Soft paternalism Regulation under imperfect self-information Choice and non-choice data: What is the scope of economics? 1603

8 xx Contents 22.6 Choice-based behavioral welfare economic; Revealed preference under limited attention The contractarian approach Behavioral public finance and welfare 1625 Exercises for Part References for Part PART 9 Neuroeconomics Introduction to Part Neuroeconomics Introduction A brief introduction to the brain An introduction to neuroeconomic techniques The neuroeconomics of risky decisions The neuroeconomics of social preferences The neuroeconomics of time preferences The neuroeconomics of Strategie interaction Pharmacoeconomics: an application to the social effects of Oxytocin 1692 References for Part Appendix an Game Theory 1703 Index ofnamed Authors 1725 Subject Index 1736