The aim of this course is first to provide a grounding knowldege in the area of decision under risk adopting the classic Expected Utility model. Using experimental evidence showing how this model may miss important features of observed choices, the course will then present alternative models that have been developed to reconcile the theory with the empirical evidence. The course will then cover intertemporal decisions using a similar approach. Finally, the course will describe some well-known biases in decision making that can have significant effects in shaping financial decisions.
Expected learning outcomes
At the end of the course the students are expected to have acquired the tools necessary to: · understand the existing literature on decision under risk and on the most relevant topics in behavioral economics; · think and formalize decisions under risk using Expected Utility, Rank Dependent Utility and Prospect Theory, knowing the relative strengths and weaknesses of the different models; · think and formalize intertemporal decisions using Discounted Utility and (Quasi) Hyperbolic Discounting knowing the relative strength and weaknesses of the different models; · know how financial decisions are affected by biases known in the Behavioral Economics literature (self-control, disposition effect, myopic loss aversion)
Lesson period: First trimester
(In case of multiple editions, please check the period, as it may vary)
Risk and returns: stochastic dominance Expected utility theory Risk Aversion, certainty equivalent, risk premium. Measurement of Risk Attitudes: Theory (Arrow-Pratt etc.) Measurement of Risk Attitudes: Experimental methods State dependent utility Expected utility: violations and paradoxes Perception of probabilities: Probability weighting (Cumulative) Prospect Theory Reference dependent preferences Time preferences and hyperbolic discounting, Self-Control Myopic Loss Aversion Assets and Bubbles Disposition Effect
Prerequisites for admission
A fruitful attendance of the course relies upon the prior knowledge of principles of Microeconomics and the underlying quantitative methods The exam consists of mutiple choice questions, one open question, and two exercises.
Lectures and exercise classes
Useful textbooks for specific parts of the course (but that I do not suggest to buy in advance) are: "Notes on the Theory of Choice" by David Kreps "Advances in Behavioral Economics'' by Colin Camerer, George Loewenstein and Matthew Rabin "Microeconomics" by Andreu Mas-Colell, Michael D. Whinston, and Jerry R. Green A reading list of academic papers on specific topics will also be provided.