Course 2022-2023 a.y.

Classes: 31 (II sem.)

Instructors:
Class 31: ANDREI SAVOCHKIN

Students who have preparation in Calculus, Statistics, Econometrics, and Intermediate Microeconomics will benefit from the course the most. Lack of background knowledge in one of these disciplines will increase the amount of work that students need to do to keep up with their peers.

By contrast to the extremely rational behavior that is assumed in the classical theory covered in Microeconomics courses, this course deals with psychological phenomena, biases, and socially-oriented behavior that affect economically relevant decisions of people. Our main focus will be on what economists have learned from various experiments, as well as the methodology of answering questions by the means of an experiment. In order to understand better the motivation and contribution of experimental works, we will also review the structure and predictions of standard models in Microeconomics and discuss the ways in which they are modified or extended to incorporate psychological theory and empirical findings.

The course covers the following topics (some topics take more than one lecture):

1. Introduction: Models in Economics. Rationality and psychological effects. Experiments and theory. Example of an experiment.
2. The methodology of experiments in Economics. Incentives. Examples of incentive schemes.
3. Introduction to Choice Theory. Rational choice and utility function. Psychological biases: framing; status-quo bias, endowment effect, default option effect; decoy options. Theory and experiments.
4. Choice under risk. Expected utility theory. Probabilistic biases and deviations from the expected utility theory. Theory and experiments.
5. Uncertainty vs. risk. The concept of beliefs. Ambiguity.
6. Confidence in choice. Over-confidence and under-confidence. Theory and experiments.
7. Multistage and intertemporal choice. Dynamic consistency. Discounting. Present bias and hyperbolic discounting. Theory and experiments.
8. Analysis of experimental data. Review of concepts: statistical test, p-value, regression. Multiple hypothesis testing. Statistical vs. econometric methods. Correlation and causality.
9. Testing theories and discriminating between theories. Identification. Behavioral Economics vs. Decision Theory.
10. Introduction to game theory. Sequential move games, simultaneous move games, repeated games. Key concepts: dominance, equilibrium, backward induction.
11. Rational playing of games vs. psychological aspects and socially-oriented behavior. Experiments on other-regarding preferences, trust, fairness, reciprocity.
12. Introduction to the theory of psychological games.
13. Beliefs about beliefs. Level-k theory. Experiments.
14. Experiments on gender issues.

At the end of the course student will be able to...

At the end of the course students will be able to:

• describe the classical models of individual choice;
• explain the way an interaction between people or other agents is modeled by a game and understand concepts that are relevant for analyzing a game and making predictions about its outcome;
• describe various psychological considerations and the way they may refute the predictions of the classical models of individual choice and interactions in Economics;
• summarize key principles of designing an experiment in Economics;
• understand the way experimental data is analyzed and evidence for or against theories is established and presented.

At the end of the course student will be able to...

At the end of the course students will be able to:

• determine whether a model is classical or behavioral;
• find the classical solution of a simple game in the table or tree form;
• propose a way for a question to be answered or a theory to be validated by the means of an experiment;
• read and understand an experimental paper;
• give the basic evaluation of the evidence presented in an experimental paper and its strength.

 

• Face-to-face lectures
• Online lectures
• Individual assignments
• Group assignments

 

Online lectures will consist of the recording and, possibly, the synchronous streaming of face-to-face lectures, or alternative methods, such as recorded presentations of slides, should face-to-lectures become unfeasible.

Individual assignments: problem sets and a report on a research paper.

Group assignments: a project that covers several stages of an experiment.

	Continuous assessment	Partial exams	General exam
Written individual exam (traditional/online)			x
Individual assignment (report, exercise, presentation, project work etc.)	x	x
Group assignment (report, exercise, presentation, project work etc.)		x

Individual assignments motivate students to review the material and help to get a better understanding and some hands-on practice with the main theoretical concepts studied in the course, as well as provide them with feedback on their level of understanding of the course material.

Group assignments allow students to get some practice with experimental methods, as well as develop teamwork skills.

The grade for the course will be given on the basis of the score that is computed as the weighted sum of the points awarded for

• problem sets (there will be 3 of them with approximately one weak for each to complete, 2 best will be included in the final score with the total weight of 15%),
• individual report on an experimental paper (with the weight of 15%),
• group project (with the weight of 40%),
• written final exam (with the weight of 30%).

Each problem set, the report, the project, and the final exam will be graded on a 100-point scale. The weighted sum of the earned points will be then translated into the transcript grade to represent the relative performance of each student in comparison to her/his peers. (The scale will be approximately linear and calibrated to match the typical grade curve of an elective course at Bocconi.)

For the report, each student needs to choose a published experimental paper to her/his liking. The paper needs to be confirmed with the instructor in advance to make sure that two or more students do not choose the same paper.  The report should be 1–2 pages long and summarize (in student’s own words) the research question of the paper, its motivation, the methodology of the experiment, and the results. To get the top grade, a student needs to elaborate what she/he likes in the paper and what she/he perceives as its weaknesses. The deadline for submitting the report will be approximately at 2/3 of the length of the course; the precise deadline with be agreed upon during the first two weeks of classes.

The group project should be devoted to an experimental study of some psychological phenomenon relevant for Economics or experimental evaluation of a model of individual decision making or interaction between people. It needs to cover at least two of the following points:

• motivation of an original question for the experiment and review of related literature;
• design of the experiment that includes formulation of questions, instructions for subjects, and design of an incentive scheme;
• technical preparation of the experiment (as Web pages or in special software for running experiments);
• execution of the experiment (replication of an experiment published in an existing paper is perfectly fine);
• analysis of raw data from an experiment (using data collected by someone else is fine);
• making an in-class presentation of the results of your work on one of the above points (the presentation needs to be scheduled with the instructor in advance).

Students taking the course should self-organize into groups. Each group should consist of at least two and at most four people. Everyone in a group gets the same grade; however, the group should submit a short summary of the contribution of each of its members.

Before the midterm exam break, a project proposal needs to be submitted. The proposal may be half-page long and list the members of the group, the topic, and the points (from the above list) that the group plans to cover to fulfill the requirements. Failure to submit the proposal on time will result in a penalty. The deadline for submitting the entire project will be agreed upon during the first two weeks of classes.

The final exam will last 60 minutes and may contain problems that are similar to those given in problem sets, questions on incentive schemes, and questions asking to identify the psychological phenomenon that can be reasonably captured by a given model or specification of the utility function.

The main source of course material is lectures. Slides of the lectures will become available to students as the course unfolds.

The discussion of experiments and models that account for psychological aspects of decision making will be based on original research papers. (References will be provided in the slides.)

For methodological and theoretical parts of the course, the following books may be used as supplementary materials.

• Methodology of experiments:
  • Frechette and Schotter, Handbook of Experimental Economic Methodology
• Analysis of data:
  • Hogg, Tanis, and Zimmerman, Probability and Statistical Inference (or any undergraduate textbook on Statistics)
  • Moffatt,  Experimetrics: Econometrics for experimental economics
• Rational choice of economic agents:
  • Varian, Intermediate Microeconomics: A Modern Approach or Intermediate Microeconomics with Calculus: A Modern Approach
• Departures from rational choice:
  • Angner,  A Course in Behavioral Economics
• Game theory:
  • Battigalli, Catonini, and De Vito, Game Theory: Analysis of Strategic Thinking, available from Prof. Battigalli’s Web page
  • Osborne and Rubinstein, A course in Game Theory