Behavioral and Experimental Economics



Faculty of Economic Sciences

Behavioral and Experimental Economics

Fall semester 2020

Instructor: Piotr Evdokimov, Assistant Professor, PhD

e-mail: pevdokim@

phone: +7-495-772-95-90 ext. 27522

General information about the course:

Experimental economics is the branch of economics concerned with testing economic theory using controlled experiments. This methodology was introduced in the 1960s by Vernon Smith, who used it to study behavior in markets. Beginning in the 1970s, experimental methods were increasingly used by psychologists such as Kahneman and Tversky to point out behavior at odds with the standard economic model, and this work came to be known as behavioral economics. This course will teach you about behavioral and experimental economics through the lens of experiments on strategic behavior (game theory) and individual decision making (decision theory).

The first half of this course will focus on individual decisions. Here, we will learn about how people form beliefs and how they deal with uncertainty. We will look at a number of research papers, including classic work of Kahneman and Tversky and more recent developments, e.g. on how non-standard data such as response times can be used to shed light on the decision-making process.

The second half of this course will focus on game theory experiments. First, we will discuss “traditional” game theory experiments testing the validity of different equilibrium concepts, studying how well agents coordinate, and so on. Because to see how well game theory does in the lab, one first has to understand the theory, we will spend some time reviewing the theoretical fundamentals, such as Nash Equilibrum, subgame perfection, etc. Second, we will see how game theory experiments can be used to shed light on preferences for altruism, trust, and other important drivers of human behavior which standard economic courses do not cover.

Course goals and learning objectives:

This course has several learning objectives.

1. First, the course is designed to give you a good sense of where the field is today.

2. Second, my goal is to teach you to understand and critically evaluate the results of economic experiments.

To reach both of these objectives, you will read a number of research papers and be asked to critically evaluate them. While there is no assigned textbook for this course, you should expect to carefully read approximately 1 paper a week.

3. Third, the course is designed to teach you how to design experiments yourself, at least at a basic level. Because of the epidemic, we will be conducting our experiments online. You will be required to participate in all of our classroom online experiments and design your own experiment in a group with other students.

Who can benefit from this course?

This course is designed for students that are interested in economics as a science. Because the course requires a certain level of intellectual maturity, it is restricted to third and fourth year economics students. It is ideally suited for those who are considering obtaining an economics PhD.

I will be discussing a number of research papers. You should also be prepared to read such papers independently. (If you are unsure whether this course is for you, try to read to this paper from the beginning to the end and see if you understand it: )

At a minimum, you should know how to interpret the results of a simple linear regression. You should also have completed courses in intermediate microeconomics, calculus, and statistics.

Teaching language: English

Evaluation:

Evaluation of this course consists of three parts:

(1) Participation in classroom experiments, including those based on the final assignment (30%)

(2) Home assignments (40%)

(3) Final group assignment (30%)

Home assignments:

You will have two types of home assignments.

Type 1: A short (1 page) paper that takes one of the papers we discussed in class (your choice) and discusses another related paper. The assignment should have the following structure:

First paragraph: summary of the paper from class.

Main body of the assignment: summary of the new paper, how it is related to the paper from class, and what new insights it contributes to the literature. The new paper should cite the paper from class. You can find such related papers using the “Cited by” feature in Google Scholar.

Last paragraph: some suggestion for a future experiment building on the paper you found OR a criticism of the paper (e.g, an argument why it fails to address the question it claims, some flaw in the authors’ interpretation of the results, etc.)

Type 2: An OTree assignment. These assignments will teach you how to program experiments for running online.

Final group assignment (groups of 3-5):

The final assignment is your own online experiment. The assignment consists of two parts: the writing part and the files for running the experiment. A simple experiment can be run using an online survey such as Google Forms (we will do a number of such experiments in class). A more advanced experiment (with real time interaction, multiple periods, random number generation, etc.) can be run using OTree through a server. I will teach you the basics of OTree and provide you with a server if you need one for running your experiment.

The writing part should have the following structure:

• An abstract, summarizing the rest of the document in one paragraph;

• An introduction (2-3 paragraphs), describing the motivation for the experiment;

• A literature review/background section (min. 2 paragraphs), describing what previous studies have been done on the topic you are planning to investigate and what makes your proposed experiment different;

• A detailed description of the experiment, including the treatments and hypotheses (predictions)

Quality is more important than quantity for the writing part of the final assignment. I am not going to grade you based on how many pages you write, but based on how clear and interesting the description of your experiment is.

The experiment can be based on any paper that we discussed in class (it can be an extension of some existing experiments, investigating related questions), but it does not have to be. It can also be a completely new experiment investigating any issue related to economic behavior that you find interesting.

We will collect data for the most interesting experiments from the final assignment in class and discuss it.

Attendance policy: Although attendance is not included in the evaluation of this course, it is strongly recommended to attend all classes. In particular, by missing a lecture you are risking missing a classroom experiment.

 

Textbooks:

There is no required textbook for this course. Instead, you will be asked to read research papers that will be announced in class. Some of these papers are included in the outline below.

Course outline:

(The outline is approximate and may change during the term.)

Week 1: Introduction

Topics:

Why we need experiments, methodology, what makes economics experiments different from psychology

Readings:

• Hertwig, Ralph, and Andreas Ortmann. "Experimental practices in economics: A methodological challenge for psychologists?." Behavioral and Brain Sciences 24.3 (2001): 383-403.

• Others TBA

Weeks 2-4: Beliefs

Topics:

How people form beliefs on the basis of uncertain information, how they learn on their own and how they learn from others

Readings:

• TBA

Week 5: Prospect Theory

Topics:

How risk-taking behavior in experiments deviates from the predictions of the standard model, prospect theory

Readings:

• Kahneman, Daniel, and Amos Tversky. "Prospect Theory: An Analysis of Decision under Risk." Econometrica: Journal of the Econometric Society (1979): 263-291

• Others TBA

Week 6: Levels of reasoning

Topics:

What does it mean to be rational? How game theorists model levels of reasoning (the way we think about others being rational) and what the data says (k-level thinking)

Readings:

• Course notes

• Research papers TBA

Weeks 7: Nash Equilibrium

Topics:

How well Nash Equilibrium performs in the lab, coordination games, experiments on equilibrium selection

Readings:

• Andreoni, James, and John H. Miller. "Rational cooperation in the finitely repeated prisoner’s dilemma: Experimental evidence." Economic Journal 103.418 (1993): 570-85.

• Van Huyck, John B., Raymond C. Battalio, and Richard O. Beil. "Tacit coordination games, strategic uncertainty, and coordination failure." The American Economic Review 80.1 (1990): 234-248.

• Blume, Andreas, and Andreas Ortmann. "The effects of costless pre-play communication: Experimental evidence from games with Pareto-ranked equilibria." Journal of Economic theory 132.1 (2007): 274-290.

• Other research papers TBA

Weeks 8-9: Prosocial behavior

Topics:

How game theory can be used to study prosocial behavior, with a focus on reciprocity (studied using the ultimatum game), altruism (studied using the dictator game), and trust (studied using the trust game)

Readings:

• Dana, Jason, Roberto A. Weber, and Jason Xi Kuang. "Exploiting moral wiggle room: experiments demonstrating an illusory preference for fairness." Economic Theory 33.1 (2007): 67-80.

• Forsythe, Robert, et al. "Fairness in simple bargaining experiments." Games and Economic behavior 6.3 (1994): 347-369.

• Cherry, Todd L., Peter Frykblom, and Jason F. Shogren. "Hardnose the dictator." American Economic Review 92.4 (2002): 1218-1221.

• Hoffman, Elizabeth, et al. "Preferences, property rights, and anonymity in bargaining games." Games and Economic behavior 7.3 (1994): 346-380.

• Roth, Alvin E., et al. "Bargaining and market behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo: An experimental study." The American economic review (1991): 1068-1095.

• Charness, Gary, and Martin Dufwenberg. "Promises and partnership." Econometrica 74.6 (2006): 1579-1601

Weeks 10-11: Anomalies

Topics:

How processing of probabilistic information in experiments deviates from the Bayesian benchmark, the stability of behavioral anomalies and what they teach us about decision making

Readings TBA

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