Prof. Bill Harbaugh bill@harbaugh.org
538 PLC 346-1244
Office Hours, 10-12 Wed.
Course Content:
Behavioral economics consists of a variety of alternatives to the rational choice model of behavior. For example, behavioral economists have developed “hyperbolic discounting” models of choice over time. They argue that these models, are better at describing actual behavior in areas such as retirement savings accumulation and addiction than the standard constant discount rate models are. Another example would be fairness. People seem to want to be nice to people who are nice to them, and mean to people who are mean. Behavioral models that incorporate these preferences lead to some interesting predictions about behavior and equilibria.
Experimental economics is a methodology – instead of testing theories using the sort of happenstance data that most empirical economists use, experimentalists get their data from experiments under controlled conditions. We use cash payoff so that people’s decisions have real consequences, just like decision outside the lab do. I like to say that experimental economists are producers of data, not just consumers of it.
Experiments are often used to test between behavioral models and to compare them with standard models. But there is no necessary relationship – some experimental economists are interested in behavior in situations where game theory does not predict unique equilibria, for example. Others are interested in predicting how people will behave under various market institutions – for example, the recent FCC spectrum auctions. Others believe that the anomalies behavioral economists claim to have identified are not general enough to bother with, perhaps because they believe they tend to go away with learning, or in situations where the stakes are higher.
This course is designed to give you a background in both subjects.
Topics:
Individual decision making, under certainty, uncertainty, and over time.
Strategic behavior and Bargaining
Auctions and markets
Learning
Other-regarding preferences
Asymmetric and incomplete markets
Behavioral finance
Neuroeconomics
Readings:
This syllabus will be posted at http://harbaugh.org/Classes/GBE/, from there you should be able to link to many articles directly, so long as you are on campus or connecting through UO. Most of my articles are on my web site, sometimes the links from the syllabus are missing so try my site directly.
The course is taught from the articles, but you might find these books useful. They’re available from Amazon.com or you can borrow them from me.
Kagel and Roth, Handbook of Experimental Economics , Princeton University Press 1995. q
Thaler, Quasi-rational Economics, Russell Sage Foundation, 1991.
Thaler, The Winner’s Curse, Princeton University Press 1992.
Davis and Holt, Experimental Economics, Princeton University Press 1993.
Friedman and Sunder Experimental Methods, Cambridge University Press 1994.
Conover, Practical Non-parametric Statistics, Wiley 1999.
Camerer, Behavioral Game Theory, 2003.
Grading:
Grades are based on three things:
A 3 page review of any paper from the syllabus or another paper. This is due by the end of the third week. Come see me in my office this week to pick a paper. 20% of grade.
A powerpoint presentation of a different paper to the class. (I'll consider appeals to present the same paper as you reviewed.) Aim for about ½ hour. Schedule this with me, it must be done by the 5th week. 30% of grade.
A written proposal for an experiment. This is due by the 8th week. This proposal should be about 15 pages. It should should include a statement of the research question, a lit review that explains why the question is important ad what is already known about it, an experimental design, and a detailed protocol in the appendix. I will be able to fund one or more of these experiments. 50% of grade.
Schedule:
Note: Paperswith * are required reading. Others are for reference if you get deeper into a subject. Note that the papers are in logical order, not required order.
Rational choice with certainty
* GARP for Kids: On the Development of Rational Choice Behavior William T. Harbaugh; Kate Krause; Timothy R. Berry. The American Economic Review, Vol. 91, No. 5. (Dec., 2001), pp. 1539-1545.* Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias Daniel Kahneman; Jack L. Knetsch; Richard H. Thaler. The Journal of Economic Perspectives, Vol. 5, No. 1. (Winter, 1991), pp. 193-206.
Economic Theory of Choice and Preference Reversal Phenomenon. Grether, David M., and Charles R. Plott, 1979, The American Economic Review, 69, 623-638.
The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations. Charles R. Plott ; Kathryn Zeiler. The American Economic Review. Volume: 95 Number: 3 Page: 530 -- 545
A Test of the Theory of Reference-Dependent Preferences. Ian Bateman; Alistair Munro; Bruce Rhodes; Chris Starmer; Robert Sugden The Quarterly Journal of Economics, Vol. 112, No. 2, In Memory of Amos Tversky (1937-1996). (May, 1997), pp. 479-505.
Odean, Terrance”Are investors reluctant to realize their losses? “ Journal of Finance October 1998.
Uncertainty
* Expected utility theory: Mas Colell Chapter 6, sections A – C.
* Choice Under Uncertainty: Problems Solved and Unsolved Mark J. Machina The Journal of Economic Perspectives, Vol. 1, No. 1. (Summer, 1987), pp. 121-154.
* Prospect Theory: An Analysis of Decision-making under Risk. Daniel Kahneman and Amos Tversky. Econometrica, Vol. 47, No. 2. (Mar., 1979), pp. 263-292.
The Probability Weighting function. Prelec, Drazen, 1998, Econometrica, 66, 497 – 527.
Prospect Theory in Choice and Pricing Tasks. Harbaugh, William T., Kate Krause, and Lise Vesterlund.
Empirical tests of weighted utility theory.Chew, S. H. and W. S. Waller, Journal of Mathematical Psychology, 30:55-72, 1986.
* Risk Aversion and Incentive Effects Charles A. Holt; Susan K. Laury The American Economic Review, Vol. 92, No. 5. (Dec., 2002), pp. 1644-1655
Risk Attitudes of Children and Adults: Choices Over Small and Large Probability Gains and Losses. Harbaugh, William T., Kate Krause, and Lise Vesterlund. Experimental Economics, June 2002, 5(1): 53-84.
Choice over time.
* Delay of gratification in children. Mischel, Walter, Yuichi Shoda and Monica L. Rodriguez. 1989. Science 244:933-938.
* The time-additive stationary model: Varian, Microeconomic Analysis, 3rd ed. Pages 358-359.
Strotz R. H., Myopia and Inconsistency in Dynamic Utility Maximization, The Review of Economic Studies, Vol. 23, No. 3. (1955 - 1956), pp. 165-180.
Fischer, Carolyn. “Read This Paper Later: Procrastination with Time-Consistent Preferences,”Journal of Economic Behavior and Organization v46, n3 (November 2001): 249-69
Anomalies in Intertemporal Choice: Evidence and an Interpretation. George Loewenstein, Drazen Prelec, The Quarterly Journal of Economics, Vol. 107, No. 2. (May, 1992), pp. 573-597. [ View Article ]
* Laibson, D. “Golden eggs and hyperbolic discounting”, QJE, v112 n2, May 1997, p.443-77.
Laibson, D., Repetto, A., and Tobacman, J., “Self-control and saving for retirement”, BPEA, 1998 (1), p.91-196.
Gruber and Köszegi, “Is Addiction "Rational"? Theory and Evidence” QJE, November 1991 .
Bargaining.
A. Ultimatum bargaining
q Anomalies: The Ultimatum Game Richard H. Thaler The Journal of Economic Perspectives, Vol. 2, No. 4. (Autumn, 1988), pp. 195-206.[ Article ]
q Children’s Bargaining Behavior: Differences by Age, Gender, and Height.” William T. Harbaugh, Kate Krause, and Steve Liday.
q Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An Experimental Study Alvin E. Roth, Vesna Prasnikar, Masahiro Okuno-Fujiwara, Shmuel Zamir The American Economic Review, Vol. 81, No. 5. (Dec., 1991), pp. 1068-1095. [ Article ]
q Does culture matter in economic behavior? Ultimatum game bargaining among the Machiguenga. Joe Henrich. American Economic Review (forthcoming June 2000). [PDF version]
B. Alternating offer bargaining
q TBA
A. Other regarding preferences and fairness.
q Anomalies: Ultimatums, Dictators and Manners Colin Camerer, Richard H. Thaler The Journal of Economic Perspectives, Vol. 9, No. 2. (Spring, 1995), pp. 209-219. [ Article ]
q Anomalies: Cooperation Robyn M. Dawes, Richard H. Thaler The Journal of Economic Perspectives, Vol. 2, No. 3. (Summer, 1988), pp. 187-197. [ Article ]
q A Comparative Model of Bargaining: Theory and Evidence. Gary E Bolton. The American Economic Review, Vol. 81, No. 5. (Dec., 1991), pp. 1096-1136. [ View Article ]
q Andreoni and Miller “Giving according to GARP” Forthcoming, Econometrica.
q Incorporating Fairness into Game Theory and Economics. Matthew Rabin The American Economic Review, Vol. 83, No. 5. (Dec., 1993), pp. 1281-1302. Stable URL: http://links.jstor.org/sici?sici=0002-8282%28199312%2983%3A5%3C1281%3AIFIGTA%3E2.0.CO%3B2-X
q "Which is the Fair Sex? Gender Differences in Altruism," Jim Andreoni and Lise Vesterlund. February 1999. Forthcoming, Quarterly Journal of Economics, 2001.
q "Children’s Contributions in Public Good Experiments: The Development of Altruistic and Free-riding Behaviors," Kate Krause and William T. Harbaugh (2000). Economic Inquiry, January 2000.
B. Building cooperation
q A site with lots of info and examples for the RPD. Includes on-line software for trying new strategies. http://www.lifl.fr/IPD/ipd.frame.html
q Andreoni, Harbaugh, and Vesterlund. The Carrot or the Stick?
A. Non-cooperative game theory – do people play Nash?
q Goeree and Holt, “Ten little treasures of game theory and ten intuitive contradictions” AER, Decmber 2001.
A. Auctions, revenue equivalence, winner’s curse.
q Kagel’s chapter in Handbook of experimental economics.
q "Using Field Experiments to Test Equivalence Between Auction Formats: Magic on the Internet.David Lucking-Reiley "American Economic Review, December 1999. Read the abstract. Download the manuscript.
q Anomalies: The Winner's Curse Richard H. Thaler The Journal of Economic Perspectives, Vol. 2, No. 1. (Winter, 1988), pp. 191-202. [ Citation ][ Article ]
q Auctions and Bidding: A Primer (in Symposia: Auctions) Paul Milgrom. The Journal of Economic Perspectives, Vol. 3, No. 3. (Summer, 1989), pp. 3-22. [ Citation ][ Article ]
q Expected Revenue from Open and Sealed Bid Auctions (in Symposia: Auctions) John G. Riley The Journal of Economic Perspectives, Vol. 3, No. 3. (Summer, 1989), pp. 41-50. [ Citation ][ Article ]
q How Auctions Work for Wine and Art (in Symposia: Auctions) Orley Ashenfelter The Journal of Economic Perspectives, Vol. 3, No. 3. (Summer, 1989), pp. 23-36. [ Citation ][ Article ]
B. Competitive markets.
q Misha and Plott
6. Learning:
q Binmore, Ken, John Gale, and Larry Samuelson, "Learning to be Imperfect: The Ultimatum Game." GEB, 1995.
q Stahl, Dale O., "Boundedly Rational Rule Learning in a Guessing Game," GEB, 1996, 303-330.
q Ho, Camerer, and Weigelt “Iterated Dominance and Iterated Best Response in Beauty contests. 1998 AER.
q Erev, Ido and Alvin E. Roth, "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria." AER, 1998, 848-881.
A. Adverse selection
q TBA
B. Signaling and countersignaling
q Some fascinating info on signaling by animals, by Carl Bergstrom
q Check here for the countersignaling paper, and some interesting links, by Rick Harbaugh
q TBA
C. Information cascades
q “Information Cascades in the Classroom” explains the protocol and describes the probabilities for the classroom experiment. http://www.people.virginia.edu/~cah2k/cascadtr.pdf
q This site has an excellent summary and set of links for research on information cascades: http://welch.som.yale.edu/cascades/
8. Neuroeconomics
q A functional imaging study of cooperation in two-person reciprocal exchange. PNAS September 2001. Kevin McCabe*†‡, Daniel Houser*†§, Lee Ryan*¶, Vernon Smith*†, and Theodore Trouard*
9. Behavioral Finance:
q Do Investors Trade Too Much? TERRANCE ODEAN* 1999 AER.
q Boys will be boys. Barber and Odean, 2001 QJE