Syllabus: Behavioral Economics & Strategy
Yale School of Management, Fall 2008

Books for Behavioral Economics & Strategy:

Required Books: Available at the bookstore or through these links:	Suggested books: These are good reference texts.

There are two books for this course in which there will be required reading, and two very good reference books that I suggest and will have available for borrowing in my office. Buying all four books would be bit much, but these are all books I think you will enjoy having; I also don't mind if you share, and encourage you to shop for them used / online (their pictures are links to the books on Amazon.)

Of the suggested books, the first is fantastic, with many of the older and seminal papers in behavioral economics, while the required "Advances" book focuses on more recent work. The second is an incredible reference for understanding biases and the social psychology of judgment & decision making but is a bit overwhelming to read straight through and so is optional; buy this if you really want to delve into the social psychology of judgment under uncertainty. Amazon now lets you browse through the table of contents and excerpts of these books, click the author or the book cover to take a look.

You can also search several other used book sites by going to isbn.nu.

Grading:

Two-thirds of student grades will be determined by performance on a short-answer final exam, date TBA. The other third will be determined by class participation as judged by the TA, the instructor, and an online evaluation by the other students in the course.

Class Schedule:

Note: Class schedule may be rearranged in order to accommodate guest speakers

Thu Sep 4: Course Overview and Approach

Today's Agenda:
The uses of classic economic analysis
When rationality goes wrong: integrating psychological observations.
Introducing my research
Course structure, presentations and grading
Office Hours and TA

Tue Sep 9: Reference-Dependence and Loss-Aversion

Readings for Today:
Advances in Behavioral Economics, Chapter 2: "Experimental Tests of the Endowment Effect and the Coase Theorem"
The Winner's Curse, Chapter 6

Optional:
Kahneman & Tversky, Prospect Theory, Econometrica, 1979
Chen et al, How Basic are Behavioral Biases? Evidence from Capuchin-Monkey Trading Behavior

Thu Sep 11: Risk Preferences

Readings for Today:
Advances in Behavioral Economics, Chapters 4 & 5: "Developments in Nonexpected-Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk" by Chris Starmer and "Prospect Theory in the Wild: Evidence from the Field" by Colin F. Camerer

Optional:
Rabin, Diminishing Marginal Utility of Wealth Cannot Explain Risk Aversion

Tue Sep 16: Fairness and Social Preferences

Readings for Today:
Advances in Behavioral Economics, Chapters 8: Fairness as a Constraint on Profit Seeking: Entitlements in the Market by Daniel Kahneman, Jack L Knetsch, and Richard H Thaler
The Winner's Curse, Chapter 4

Optional:
Advances in Behavioral Economics, Chapters 9 & 10 (skim these) A Theory of Fairness, Competition, and Cooperation by Ernst Fehr and Klaus M Schmidt; Incorporating Fairness into Game Theory and Economics by Matthew Rabin

Thu Sep 18: Framing, Mental Accounting and Choice-Bracketing

Readings for Today:
Advances in Behavioral Economics, Chapter 3: Mental Accounting Matters by Richard H Thaler
The Winner's Curse, Chapter 7

Optional:
Advances in Behavioral Economics, Chapter 14: Mental Accounting, Saving, and Self-Control by Hersh M Shefrin and Richard H Thaler
The Winner's Curse, Chapter 9

Tue Sep 23: Hedonics and Mis-Prediction of Preferences

Readings for Today:
Loewenstein, O'Donoghue & Rabin, Projection Bias in Predicting Preferences, Quarterly Journal of Economics, 2003
Medvec, Madley & Gilovich, Counterfactual Thinking & Satisfaction, Journal of Personality and Social Psych, 1995

Optional:
Choices Values and Frames, Chapter 37 (Experienced Utility)

Thu Sep 25: Present-Biased Preferences

Readings for Today:
Advances in Behavioral Economics, Chapter 6
The Winner's Curse, Chapter 8

Tue Sep 30: Present-Biased Preferences II

Readings for Today:
Advances in Behavioral Economics, Chapter 15
O'Donoghue Rabin, Doing it Now or Later, American Economic Review, 2001

Optional:
Angeletos, Labison, Et Al, The Hyperbolic Consumption Model: Calibration, JEP 2001

Thu Oct 2: Biases in Belief Formation

Readings for Today:
Rabin Schrag, First Impressions Matter: A Model of Confirmatory Bias, Quarterly Journal of Economics, 1999
Kahneman Lovallo, Timid Choices & Bold Forecasts, Management Science, 1993
Sherman & Cohen, Self-Affirmation and Defensive Biases, Current Directions in Psychological Science, 2002
Gilovich, Differential Construal and False Consensus, Journal of Personality and Social Psychology, 1990

Tue Oct 7: Applications: Behavioral Negotiations

Readings for Today:
Farber & Bazerman, Divergent Expectations & Disagreement, The Quarterly Journal of Economics, 1989
Babcock Wang & Loewenstein, Choosing the Wrong Pond, The Quarterly Journal of Economics 1996
Pogarsky & Babcock, Motivated Anchoring and Bargaining Impasse, The Journal of Legal Studies, 2001
Robinson Keltner Ward and Ross, Naive Realism in Intergroup Conflict, Journal of Personality and Social Psychology 1995

Optional:
Lesson on the Ultimatum game from Professor Nalebuff's life: "The Sophisticates Abroad".
Wolfers, Divorce Laws and Divorce Rates, Working Paper, 2003

Thu Oct 9: Applications: Labor Economics

Readings for Today:
Advances in Behavioral Economics, Chapters 18 & 21
The Winner's Curse, Chapter 4

Optional:
Advances in Behavioral Economics, Chapter 20

Tue Oct 14: Applications: Industrial Organization

Readings for Today:
Oster & Scott Morton, Magazine Subscription Prices, The BE Journals in Economic Analysis & Policy, 2005
Mullainthan & Schleifer, The Market for News, Working Paper, 2004

Optional:
Della Vigna & Malmendier, Contract Design and Self-Control, The Quarterly Journal of Economics, 2004
This paper has three sections, the second of which is very technical. Read sections one and three, then read section two only if you have experience with formal modeling.

Thu Oct 16: Summary, Lessons, & Wrapup