Decision Theory and Behavioural Economics
A.Y. 2021/2022
Learning objectives
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)
· 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
Assessment methods: Esame
Assessment result: voto verbalizzato in trentesimi
Single course
This course cannot be attended as a single course. Please check our list of single courses to find the ones available for enrolment.
Course syllabus and organization
Single session
Responsible
Lesson period
First trimester
The information to access classes online via Teams are available on the Ariel page of the course.
Classes will be recorded and made available to students for 5 days.
Classes will be recorded and made available to students for 5 days.
Course syllabus
An introduction to behavioural economics
Simple heuristics for complex choices
- Utility and search
- Mental Accounting and Framing
- Applications to finance and economics
Choice with risk
- Expected utility
- Reference dependence and prospect theory
- Preference reversals
- Applications to finance and economics
Choosing when to act
- Exponential discounting
- Hyperbolic discounting
- Loss aversion and sequences
- Applications to finance and economics
Learning from new information
- Bayesian updating
- Confirmatory bias
- Learning from others
- Applications to finance and economics
Social preferences
- Experimental evidence
- Inequality aversion
- Fairness
- Applications to finance and economics
Happiness and utility
- What makes us happy?
- Do we know what makes us happy?
- Do people like having choices?
- Applications to finance and economics
Simple heuristics for complex choices
- Utility and search
- Mental Accounting and Framing
- Applications to finance and economics
Choice with risk
- Expected utility
- Reference dependence and prospect theory
- Preference reversals
- Applications to finance and economics
Choosing when to act
- Exponential discounting
- Hyperbolic discounting
- Loss aversion and sequences
- Applications to finance and economics
Learning from new information
- Bayesian updating
- Confirmatory bias
- Learning from others
- Applications to finance and economics
Social preferences
- Experimental evidence
- Inequality aversion
- Fairness
- Applications to finance and economics
Happiness and utility
- What makes us happy?
- Do we know what makes us happy?
- Do people like having choices?
- Applications to finance and economics
Prerequisites for admission
A fruitful attendance of the course relies upon the prior knowledge of principles of Microeconomics and the underlying quantitative methods.
Teaching methods
Lectures and experiments in class.
Teaching Resources
The main texbook is
Cartwright, E. (2018). Behavioral economics. Routledge, Chapters 1-5, 7, 10.
Additional compulsory and non-compulsory readings (mostly covering applications to finance and economics) will be also provided.
Cartwright, E. (2018). Behavioral economics. Routledge, Chapters 1-5, 7, 10.
Additional compulsory and non-compulsory readings (mostly covering applications to finance and economics) will be also provided.
Assessment methods and Criteria
The exam is in written form only. It lasts 90 minutes and consists of three questions (mix of open questions and exercises). Students will be mainly evaluated judging their ability to apply behavioural insights to financial and economic problems.
Educational website(s)
Professor(s)
Reception:
Friday 9-12
Room 16, second floor, via Conservatorio 7/MS- TEAMS (please send me an email for booking a slot)