Post Graduate Programme in Management

2016-17
TERM: VI
TITLE OF THE COURSE: BEHAVIOURAL ECONOMICS
CREDITS: 4
Instructor
Subrato Banerjee

COURSE: Elective Course

Email:
subrato.banerjee@qut.edu.au

No. of Section: 2
Tel. Number
09818537064/+61432460804

COURSE DESCRIPTION
This is an introductory course on behavioral economics where we examine the
prediction power of economic theory and game theory in the real world. We look at why
(and by how much) human behavior consistently deviates from the predictions of theory
and how such understanding can be useful to refine our models aimed at predicting
human behavior.
COURSE OBJECTIVES
The objective of this course is to introduce the experimental approach to understand
causality that is of frequent interest in market and economic research. At the end of
this module, the student will be equipped to design experiments, test hypotheses, and
conduct empirical research with behavioral insights. Additionally, the student will learn
concepts in applied economic psychology (a relatively new field) and use the same to
understand and study the behaviour of economic agents.
PEDAGOGY/TEACHING METHOD
Class lectures that focus on explaining theory, its applications and its limitations in
predicting human behavior. Students will get to participate in the classroom and in the
experiments to motivate the content and the discussions that follow. Students will get
evaluated on the basis of class participation and a short term paper on research
proposal.
EVALUATION
Assignments
Class Participation
Examination
Total

Weightage
40%
20%
40%
100%

SCHEDULE OF SESSIONS
Module I
Solution concepts in microeconomic theory and game theory
Module Objective
The objective is to make the pupil understand the solution concepts in order to predict
theoretical outcomes to certain real-life situations.
Sessions and Objective
Session 1: A serious thought experiment
1.1
Discussion of students' decisions in the thought experiment
1.2
Introduction to experimental economics
Reading: No readings for this session (Classroom exercise)
Session 2: Simple models of game theory (Part 1)
2.1
Prisoners dilemma, battle of the sexes, stag hunt and matching pennies
2.2
Solutions to the above games with real life examples (currency exchange etc.)
2.3
A brief introduction to laboratory observations in these games
2.4
A discussion on potential causes of departures from theory
Readings:
1.
Camerer C. 2003. Behavioural game theory: Experiments in strategic interaction.
Princeton University Press. Chapter 1.
2.
Chaudhuri A. 2008. Experiments in economics: Playing fair with money.
Routledge. Chapter 1 (Appendix).
Session 3: Simple models of game theory (Part 2)
3.1
Ultimatum games, dictator games, trust and investment games
3.2
Solutions to the above games with real life examples (tipping and charity etc.)
3.3
A brief introduction to laboratory observations in these games
3.4
A discussion on potential causes of departures from theory
Readings:
1.
Chaudhuri A. 2008. Experiments in economics: Playing fair with money.
Routledge. Chapter 2.
2.
Camerer C. 2003. Behavioural game theory: Experiments in strategic interaction.
Princeton University Press. Chapter 2 (Optional reading).
Session 4: Gap between empirics and theory
4.1
Revisiting the potential causes of departures from theory from Sessions 1 and 2
4.2
Limitations of assuming rationality
4.3
Discussion on when economic theory fails to predict agent behaviour
4.4
Alternative theories building on ideas from psychology etc. (reference
dependence etc.)
Reading: Ariely D. 2008. Predictably irrational: The hidden forces that shape our
decision. Harper Collins. Chapter 12.
Session 5: Two thought experiments
5.1
Discussion of students' decisions in the thought experiment
5.2
Analysis of the thought experiments
Reading: No readings for this session (Classroom exercise)

Module II
Introduction to alternate theories/models
Module Objective
This module focuses on alternate explanations to observed outcomes, and reasons why
the above theories may fail to predict human behavior.
Sessions and Objective
Session 6: Comparing alternative explanations against each other (Part 1)
6.1
Testing one theory against the other
6.2
The experimental method
6.3
The Granger and the counterfactual notions of causation
6.4
Defining an experimental intervention
6.5
Setting up of null and alternate hypotheses/theories
6.6
Acceptance/rejection of hypothesis/theory based on experimental observation
6.7
Type 1 and Type 2 errors in judgement and the p-value
6.8
The limitations of the p-value as a tool for decision making
Reading: Angrist J and Pischke JS. 2009. Mostly harmless econometrics: An empiricists
companion. Princeton University Press. Chapters 1 and 2.
Session 7: Comparing alternative explanations against each other (Part 2)
7.1
A thought experiment
7.2
Analysis of the thought experiment
7.3
Anchor and gender effects
7.4
Why women think differently than men?
Readings:
1.
Chaudhuri A. 2008. Experiments in economics: Playing fair with money.
Routledge. Chapter 5.
2.
Frey B, Stutzer A. 2007. Economics and Psychology: A promising new crossdisciplinary field. MIT Press. Chapters 4 and 7.
Session 8: Social behaviour in contrast to economic predictions
8.1
Determinants of social behaviour
8.2
Anchoring and experimenter effects revisited
8.3
A short thought experiment
8.4
A discussion of the thought experiment
Reading: Frey B, Stutzer A. 2007. Economics and Psychology: A promising new crossdisciplinary field. MIT Press. Chapters 2 and 3.

Module III
Experiments
Module Objective
The objective of this module is to be able to appreciate the role of controlled
experiments to understand cause and effect.
Sessions and Objective
Session 9: Design of experiments
9.1
Why controlled experiments?
9.2
Examples of too much noise in real life empirics (study on labour market
discrimination after 9/11)
9.3
Examples of causality and reverse causality (police recruitment vs criminal
activities)
9.4
Role of experiments to understand causality
9.5
A thought experiment
Readings:
1.
Angrist J and Pischke JS. 2009. Mostly harmless econometrics: An empiricists
companion. Princeton University Press. Chapters 1 and 2.
2.
Ariely D. 2012. The (honest) truth about dishonesty: How we lie to everyone especially ourselves. Chapters 1 and 2.
Session 10: How theory evolves!
10.1 Modification of theory to account for experimental observations
10.2 Examples of modification (Rabins fairness axioms to predict observed outcomes
in the games discussed in previous sessions)
10.3 The reference dependence model of consumer behaviour
10.4 An exercise for the class to tell reference dependence from consumer theory
Reading: Smith V. 2007. Rationality in economics: Constructivist and ecological forms.
Cambridge University Press. Chapter 1.
Session 11: Limitations of the experimental method
11.1 Examples of too sterile environments
11.2 Experimental method for testing the effectiveness of parachutes
11.3 Framing and experimenter effects in games discussed in Sessions 1 and 2
11.4 Single and double blind protocols
11.5 A thought experiment
Reading: Camerer C. 2003. Behavioural game theory: Experiments in strategic
interaction. Princeton University Press. Chapter 2 (Chapter 9 can be optional reading).

Module IV Regression analysis in the context of experiments

Module Objective
The objective of this module is to equip the pupil to analyse the data generated from
social experiments.
Sessions and Objective
Session 12: Using regressions to aid experiments (Part 1)
12.1 What is a regression?
12.2 Dummy variables
12.3 Experimental intervention as a dummy variable
12.4 Significance of the dummy variable coefficient
12.5 Choice of models
12.6 Complex experiments with multiple interventions
12.7 Simultaneous testing for several theories
12.8 Examples of complex experiments
12.9 p-value revisited in the context of previous experiments
Reading: Angrist J and Pischke JS. 2009. Mostly harmless econometrics: An empiricists
companion. Princeton University Press. Chapter 3 (Optional reading).
Session 13: Using regressions to aid experiments (Part 2)
13.1 Analysis of data from thought experiments of previous sessions (better designs?)
13.2 Discussion of the results
13.3 Can there be better designs?
13.4 Non-parametric approaches to inference
Reading: Angrist J and Pischke JS. 2009. Mostly harmless econometrics: An empiricists
companion. Princeton University Press. Chapter 3 (Optional reading)
Session 14: Exercise - choose your own research question and design an experiment
14.1 Discussion
14.2 Assessment
Reading: Camerer C. 2003. Behavioural game theory: Experiments in strategic
interaction. Princeton University Press. Chapter 9.

Module V
Field experiments and practicalities
Module Objective
The objective of this module is to take the experimental methodology into the real
world to address some of the limitations of the experimental protocols in sterile
laboratories (that are therefore suspected to yield questionable inferences).
Sessions and Objective
Session 15: Field experiments
15.1 Sterile laboratory environments revisited
15.2 Eradicating framing and experimenter effects
15.3 Naturally occurring experiments (gender effects etc.)
15.4 A parallel with laboratory dictator games
15.5 Altruism vs warm-glow theories
15.6 The evidence so far!
Readings:
1.
Andreoni J, Bernheim D. 2009. Social image and the 5050 norm: A theoretical
and experimental analysis of audience effects. Econometrica 77(5): 16007-1636.
doi: 10.3982/ECTA7384
2.
DellaVigna S, List JA, Malmendier U. 2012. Testing for altruism and social
pressure in charitable giving. Quarterly Journal of Economics, 127(1): 1-56.
3.
Parrett, M. 2006. An analysis of the determinants of tipping behavior: A
laboratory experiment and evidence from restaurant tipping. Southern Economic
Journal, 73(2): 489-514.
4.
Ruffle, B. 1998. More is better, but fair is fair: Tipping in dictator and ultimatum
games. Games and Economic Behavior, 23: 247-265. (Optional reading)
Session 16: Experiments on the role of incentives and show-up fees
16.1 Blood donation experiments
16.2 The debate between psychologists and economists
16.3 A discussion on the use of incentives and deception
16.4 Group experiment
Reading: Ariely D. 2008. Predictably irrational: The hidden forces that shape our
decision. Harper Collins. Chapter 4.
Session 17: Experiments on discrimination
17.1 A discussion on potential experiment for the labour market
17.2 A few research papers on labour market experiments studying discrimination
17.3 The evidence so far!
17.4 Group experiment
Readings:
1.
Bertrand M, Mullainathan S. 2004. Are Emily and Greg more employable than
Lakisha and Jamal? A field experiment on labour market discrimination. The
American Economic Review 94(4): 991-1013.
2.
Castillo M, Petrie R, Torero M, Vesterlund Lise. 2013. Gender differences in
bargaining outcomes: A field experiment on discrimination. Journal of Public
Economics, 99: 3548.

Session 18: Understanding contexts and social framing effects

18.1 Framing effects in the field
18.2 Cooperators vs competitors in prisoners' dillema
18.3 Group experiment
Readings:
1.
Carpenter J, Burks S, Verhoogen E. 2005. Comparing students to workers: the
effects of social framing on behavior in distribution games, in.
2.
J. Carpenter, G. Harrison and J. List (eds.) Field Experiments in Economics,
(Greenwich, CT and London: JAI/Elsevier): 261290.
Session 19: The role of trust in development
19.1 Do developed economies display more trust and trustworthiness?
19.2 What can potentially explain the above evidence?
19.3 How to infer hidden tradeoffs from experimental/empirical data?
19.4 Group experiment
Readings:
1.
Ashraf N, Bohnet I, Piankov N. 2006. Decomposing trust and trustworthiness.
Experimental Economics 9: 193-208. doi: I 10.1007/s10683-006-9122-4.
2.
Gauriot R, Page L. 2015. I take care of my own: A field study on how leadership
handles conflict between individual and collective incentives. American Economic
Review 105(5): 414-19.
Session 20: Direction of causality in field experiments
20.1 Are agent-types inherent or are they contingent?
20.2 Experimental approach to establish causality
20.3 Group experiment
Reading: Ariely D, Norton MI. 2008. How Actions CreateNot Just RevealPreferences.
Trends in Cognitive Sciences 12(1): 1316.
Additional Readings
1.
2.

Stoop JTR. 2013. From the lab to the field: envelopes, dictators and manners.
Experimental Economics, 110. doi:10.1007/s10683-013-9368-6
Acemoglu D, Cantoni D, Johnson S, Robinson JA. 2011. The consequences of
radical reform: The French revolution. American Economic Review 101 (December
2011): 3286-3307.

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