Reading Guide for “Behavioral Economics: Past, Present ...



Reading Guide for “Behavioral Economics: Past, Present, Future” by Camerer and Loewenstein, ch1 of ABE

Target reading time: 60-80 minutes

This reading is much closer to a standard textbook piece. My goal for this discussion is to step way back and think about the big picture of behavioral economics, now that you’ve had half a semester to build up some context.

Chapter Overview: Flipping through the chapter, we notice that it starts with a general overview of behavioral econ, what it does and how it does it (pp1-9). Then there’s an overview of specific topics (pp9-14). Then we get an “overview of the book” (pp15-39) that summarizes each section of the text, followed by a conclusion (pp39-42).

General Overview of Behavioral Econ (pp1-9)

This section is worth reading very closely, and actively asking how it fits with the readings from earlier in the course. (You can skim the historical overview; this sort of thing is hard to follow if you don’t actually know any of the guys being talked about! Do read the last paragraph of this section, though.)

Suggested questions to take to the text:

1) What is behavioral economics trying to do? How is this exemplified by two or three of the readings we’ve covered?

2) What are Stigler’s 3 criteria for judging theories? Do these make sense to you? Do they strike any chords from the theory papers earlier in the course?

3) What is the “recipe” for a behavioral economics paper on p7?

4) Does the section on methods fit with your experience from earlier in the course?

Basic Concepts and Research Findings (pp9-14)

Again, this section is worth a fairly close read, as it lays out in one place a lot of key concepts that are quite important. As it happens, this class gives extremely short shrift to these particular topics, so this is your best place to learn anything about them. Keep an eye out for anything that grabs your interest; any of these topics are legitimate fodder for a term paper, if you’re willing to go outside the syllabus topics.

Note: the word “heuristic” refers to “mental shortcuts,” cheap ways to make reasonable guesses about things

Can you define the following terms?

1) Bayes’s rule (this isn’t really defined in the text, but you can note what it’s used for)

2) Availability heuristic

3) Representativeness

4) Law of small numbers/gambler’s fallacy

5) framing effects

6) anchoring

7) preference reversals

8) context effects

9) coherent arbitrariness

Overview of the Book (pp15-39)

This section walks through a bunch of stuff that’s covered in lots more detail elsewhere. You’ll want to pick your battles here, skimming some parts and focusing on others. Even in the parts you read attentively, don’t try to get every detail straight or you don’t have a chance. Here, I’ll give you some questions to pay particular attention to.

The following are relevant to the course and should be read attentively:

Reference-Dependence and Loss Aversion (pp15-18)

What is the endowment effect?

What is a wealth effect? Why do the authors refer to wealth effects as “calibrationally entirely implausible”?

What are some applications of loss aversion (hey, we’re going to read most of these papers! Fun!)?

What are some possible reference points OTHER THAN current endowments?

What is mental accounting and choice bracketing?

Intertemporal Choice on hyperbolic discounting (pp22-24; pp25-6 are less important)

What does “DU” stand for?

What is the “immediacy effect”?

What does hyperbolic discounting imply about people’s ability to be farsighted when planning?

What is the difference between sophistication and naivete in modeling self-control?

Fairness (pp27-29) (this material should feel quite familiar)

What is the ultimatum game?

What is the difference between negative and positive reciprocity?

What is the basic idea behind Rabin’s model of fairness?

What is the “dual-entitlement” hypothesis?

Macro and Saving (pp31-33)

What is the life-cycle model of savings?

What is money illusion?

Labor Economics (pp33-34)

How do Akerlof and Yellen explain the fact that wages are set above the market-clearing level?

The discussion on the intertemporal substitution of labor may be a bit confusing; read over it now, so you’ll have seen these ideas before when we get to them in a few weeks, but don’t worry about “nailing it” at this time..

The other sections are less relevant to the course. You should look more closely at any you find interesting, especially if you think you might be interested in one as a term paper topic.

Conclusions: You should read over these, but don’t get caught up in this stuff, especially the discussion of specific models about which you’ve never heard.

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