AN AL YT IC AL I NSI G H T, G L O BAL L E AD ER S

Department of Economics

ECON471: Behavioral Economics

Fall 2012

Professor: Sandra Maximiano

E-mail: maximiano@purdue.edu
Webpage: http://www.smaximiano.com

Teaching Assistants: Paul Thomas (pwt1489@gmail.com) and Xiaoxiao Li (li914@purdue.edu)

Class meetings: Tue & Thu, 7.30am to 8.45am, KRAN G010 & VSEEL (KRAN 701)
Office hours: Prof. Maximiano: Tue and Thu, 10.30am to 11.30am, KRAN 523 and by
appointment. Teaching Assistants: by appointment.

Course website: on Katalyst

Overview

In this course you will learn how individuals actually behave and make choices in different
markets, games, and strategic interactions and not only how individuals should behave when
they are fully rational and unswayed by social and psychological considerations. Despite
embedding psychology insights, behavioral economics departs from psychology and sociology
by aiming at constructing formal models of economic behavior with predictive power. The idea
in this course is still to retain the basic principles of neoclassical reasoning and modeling but
generalize the standard approach by considering that individuals have limited cognitive ability,
willpower, rationality, and self-interest.

In particular, you will study choices and behavior in markets with price controls, imperfect
information, markets for trading long-lived assets, and situations where sellers try to conspire
to fix prices. You will also study social dilemmas that arise when people make voluntary
contributions to a public good. Also, you will learn that unbounded selfishness that
characterizes the Economic Man is a great assumption for building tractable economic models
but often fails to exist. Results from a large number of laboratory and field experiments have
shown that people are nice to those that are nice to them, and unkind to people that behave

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unkind. Behavioral models that incorporate these preferences lead to some new and
interesting predictions about behavior. They also have important implications for the study of
certain economic topics, such as unemployment and wages. In the last part of the course, you
will study choices over gambles and lottery choices anomalies. We will discuss the shortcoming
of the expected utility model and we will introduce prospect theory. Intertemporal choices and
the anomalies in the discounted expected utility model will also be covered. In this part of the
course we will give a briefly overview of how behavioral economics has been looking at the
gender differences and how it considers emotions in economic behavior

In this course you will study the economic behavior using the methodology of Experimental
Economics. Most empirical regularities that made behavioral economics a prominent field were
found by running controlled experiments. Experimental Economics is thus an important modern
methodology, if not the most important one, for studying actual economic behavior.

In general we will meet one day a week in the Vernon Smith Experimental Economics
Laboratory, where you will participate in a demonstration experiment on that weeks discussion
topic. You will then write a lab report based on the experiments data.

You are studying the behavior and interactions of people in economically interesting situations.
And as one of these interacting economic agents, you will be able to experience the problems
faced by such an agent first hand. We suspect that you will learn nearly as much about
economic principles from your experience as a participant as you will from your analysis as an
observer.

Bergstrom and Miller (1999). Experiments with Economic Principles

And I do totally share Bergstrom and Millers view!

Web Resources

Class announcements and additional readings will be posted on Katalyst. Make sure you check
the course website regularly for updated information about the course. However, there may be
occasions where announcements will be made in class and not posted on the website.
Grading
Lab reports (@ 3% each) 27%
Exams (@24% each) 48%
Group Experiment Design Project 15%
Credit from experimental earnings 7%
Participation 3%

Course Requirements and Policies

Lab reports: Students can drop their lowest lab report score so only 9 of the 10 lab reports
will count towards the final grade. Lab reports are due at the start of class and may not be
turned in later. So, if you must miss class on a day that a report is due, be sure to turn it in
before class. Email submissions are acceptable in such cases. The experimental data for your lab
reports will be posted on the Katalyst website. The data are usually in Excel format, and you
download them from Katalyst. Everyone must complete his or her own lab reports,
independently of other students. [You may discuss general strategies for solving problems on
the lab reports with your classmates, as long as you write them independently.] Do not
collaborate with a classmate and turn in very similar lab reports.

Exams: Students will take two midterm exams and a final exam. All exams count equally, and
students may drop the score of one of the three exams. However, students may only drop the
final exam score if they miss no more than one class session between November 6 and
December 6 (unless they provide a doctors note documenting a severe illness), and receive
passing grades on all previous exams, lab reports after the second midterm (lab reports #5
through #10). No make up exams are given. The final exam will focus on the newer material
introduced after the second midterm.

Group Experimental Design Project: Students will be divided into 4-or 5-person groups
by random draw. Part of this courses purpose is to allow you to learn about scientific
methodologies. Therefore, each group will design their own experiment to test a specific
research question. The groups should meet early in the semester, both with and without
Professor Maximiano (or Teaching Assistants), to discuss possible research questions and
experiments. Each group will present their research question and experimental design in a 15-
minute presentation during the last week (Dec 4-6). Your project/presentation constitutes 15%
of your grade. Part of this grade will be based on Professor Maximianos assessment of your
groups accomplishments, and part will be based on an evaluation of your contribution to the
group project by your peers. Presentations will also be evaluated by other colleagues.
Credit form experiments and Participation: It will be difficult for you to write a good
lab report if you are absent on the day of the corresponding experiment, so attendance is
strongly encouraged. 7% of your final grade will also be based on your cumulative experimental
earnings over the semester, and if you miss an experiment then you do not have any earnings
(and receive a grade of zero) for that experiment. Participation in class is expected and it counts
3% for your final grade. However, it is not required that you answer questions correctly but that
you show enthusiasm, participate in discussions, and be fully attentive. The use of cell phone is
penalized. You can use your personal computer only for the purpose of the class.

Of course, you should not attend class if you are sick with a communicable disease. This is one
reason why lab reports can be turned in by email if necessary, as explained above. If you must
miss class for several days, and have a doctors note documenting your illness, you can make-up
a missed lab report by completing a 4 to 5 page critical review (summary) of a behavioral
economics research article that Professor Maximiano will provide you.

Campus Emergencies and Adverse Weather Conditions

In the event of a major campus emergency, course requirements, deadlines and grading
percentages are subject to changes that may be necessitated by a revised semester calendar or
other circumstances beyond the instructors control.

The University takes into consideration local and regional weather conditions, travel conditions
and decisions by local school districts when deciding whether to delay, dismiss or cancel classes
and/or routine operations for an entire campus due to Adverse Weather Conditions. When
conditions warrant, a decision to delay, dismiss, or cancel classes and/or routine operations is
coordinated with appropriate local city, county or state officials and communicated to faculty,
staff and students of the affected campus. The decision to delay, dismiss or cancel classes
and/or routine operations for the West Lafayette campus is made by the President and for each
of the Regional Campuses it is made by the Chancellor. The President and the Chancellors will
each assign a designee for such purposes to act in his or her absence.
P u r d u e University Code of Honor

The purpose of the Purdue University academic community is to search for truth and to
endeavor to communicate with each other. Self-discipline and a sense of social obligation
within each individual are necessary for the fulfillment of these goals. It is the responsibility of
all Purdue students to live by this code, not out of fear of the consequences of its violation, but
out of personal self-respect. As human beings we are obliged to conduct ourselves with high
integrity. As members of the civil community we have to conduct ourselves as responsible
citizens in accordance with the rules and regulations governing all residents of the state of
Indiana and of the local community. As members of the Purdue University community, we have
the responsibility to observe all University regulations.

To foster a climate of trust and high standards of academic achievement, Purdue University is
committed to cultivating academic integrity and expects students to exhibit the highest
standards of honor in their scholastic endeavors. Academic integrity is essential to the success
of Purdue Universitys mission. As members of the academic community, our foremost interest
is toward achieving noble educational goals and our foremost responsibility is to ensure that
academic honesty prevails.

COURSE OUTLINE AND READINGS

BOOKS:

Markets, Games & Strategic Behavior by Charles Holt (2007), Pearson Addison-Wesley, ISBN 0-
321-41931-6. I will cover 19 of the 34 chapters in this book. Most of the experiments done in
class are reported in the book.

Behavioral Economics by Edward Cartwright (2011), Routledge, ISBN: 978-0-415-57312-2. This

is a very good introductory book to Behavioral Economics.

Readings selected from other sources (mainly articles from academic journals) will be assigned
occasionally and posted on Katalyst.
 PART 1: MARKETS READINGS
AUG 21 Introduction to behavioral and Holt, Chapter 1
experimental economics
Week 1 Cartwright, Chapter 1

AUG 23 LAB EXP #1

AUG 28 The double auction market: excise taxes Holt, Chapters 2 (pp. 1-33).
and price controls
Isaac, M. and Plott, C. (1981). Price
[Exp. Methodology: Control over Controls and the Behavior of Auction
preferences] Markets: An Experimental Examination,
Week 2
American Economic Review 71, 448-459
LAB REPORT 1 DUE
Cartwright, Chapter 2 (pp. 54-59)
AUG 30 LAB EXP #2
SEP 4 Asymmetric quality information: a Holt, Chapter 10 (pp.123-132)
market for lemons
Week 3
[Exp. Methodology: Treatments vs.
Sessions]

LAB REPORT 2 DUE

SEP 6 LAB EXP #3
SEP 11 Double auction markets for long-lived Holt, Chapter 11 (pp. 133-143)
assets
Week 4 Cartwright, Chapter 5 (p. 201-209)
[Exp. Methodology: Between and Within
subjects design]

LAB REPORT 3 DUE

SEP 13 LAB EXP #4
SEP 18 Post offer markets and market power Holt, Chapters 8-9 (pp. 95-121).

[Exp. Methodology: Observation: one Camerer, C. and Lovallo, D. (1999).

shot vs. repeated. Partners vs strangers] Overconfidence and excess entry: an
experimental approach. American
Week 5
Economic Review 89, 306-318.
LAB REPORT 4 DUE
Cartwright, Chapter 2 (pp. 59-60)
SEP 20 Midterm #1 Lecture Notes + Lab reports + Readings
 PART 2: GAMES & SOCIAL PREFERENCES READINGS
Week 6 SEP 25 LAB EXP #5.1
SEP 27 LAB EXP #5.1
OCT 2 Revision of game theory: Competition, Holt, Chapter 3 (35-46), 24, and 25(pages
coordination, and guessing games. 35-46).

Mixed strategies Cartwright, Chapter 6 (pp. 252-261)

The volunteers dilemma: intro Holt, Chapters 15

Week 7
LAB REPORT 5 DUE
OCT 4 The volunteers dilemma: cont. Holt, Chapters 15

Provision of public goods through Holt, Chapters 14

voluntary contributions: intro
Week 8 OCT 9 Provision of public goods through Holt, Chapters 14
voluntary contributions: cont.
Fehr, E. and Gchter, S. (2000).
[Exp. Methodology: Elicitation of beliefs] Cooperation and punishment in public
goods experiments, American Review,
Vol. 90, No. 4, pp 980-994
OCT 11 LAB EXP #6
OCT 16 Sequential bargaining games Holt, Chapter 10 (pp.123-132)

Social Preferences I: Ultimatum and Holt, Chapter 11 (pp. 133-143)

dictator
Week 9
[Exp. Methodology: Role reversal]

LAB REPORT 6 DUE

OCT 18 LAB EXP #7
OCT 23 Social Preferences II: Reciprocity and Holt, Chapter 11 (pp. 133-143)
Trust Games
Cartwright, Chapter 5 (p. 201-209)
Models of social preferences
Week 10 Maximiano, S., Randolph, S., Sonnemans,
[Exp. Methodology: Strategy method] J. (2007). Gift exchange in a multi-
worker firm, Economic Journal, Vol.
117, 1025-1050
REPORT 7 DUE
OCT 25 LAB EXP #8
OCT 30 Field Experiments I: Gift-exchange in the Gneezy, U., and List, A. (2006). Putting
field and charity giving Behavioral Economics to Work:
Week 11 Testing for Gift Exchange in Labor
Markets Using Field Experiments,
Econometrica, 74(5): 1365-1384
LAB REPORT 8 DUE
NOV 1 Midterm #2 Lecture Notes + Lab reports + Readings
 PART 3: INDIVIDUAL CHOICES READINGS
NOV 6 The Economic utility model vs. the Cartwright, Chapter 2 (30-53)
psychology utility model. Framing and
Week 12 endowment effect. Kahnem, D., Knetsch, J. L., and Thaler,
R. (1990). Experimental Tests of
the endowment effect and the
Coase Theorem, Journal of
Political Economy, vol 98, no. 6,
pp 1325-1348
NOV 8 LAB EXP #9
NOV 13 Decision making under risk and Holt, Chapter 4(47-58) and 28 (351-
uncertainty 359)
Week 13
LAB REPORT 9 DUE Cartwright, Chapter 3 (pp. 86-133)
NOV 15 Lottery choice anomalies Holt, Chapter 10 (pp.123-132)

Prospect Theory. Holt, Chapter 28

Week 14 NOV 20 Video and Classroom experiment
NOV 22 THANKSGIVING (NO CLASS)
NOV 27 Intertemporal Choice Cartwright, Chapter 4 (p. 135-168)

LAB REPORT 10 DUE

NOV 29 The gender gap: Nature vs. nuture debate Cartwright, Chapter 8 (pp. 333-342)
Week 15
Steffen, A., Ertac, S., Gneezy, U., List,
J. Maximiano, S. (2011). Gender,
Competitiveness and
Socialization at a Young Age:
Evidence from a Matrilineal and
a Patriarchal Society, working
paper
DEC 4 Emotions Loewenstein, G. Out of control:
visceral influences on behavior in
Week 16 Advances in Behavioral
economics, eds. Camerer, C.,
Students presentations Loewenstein, G. and Rabin, M.,
Russel Sage Foundation
DEC 6 Students presentations

FINAL PROJECT DUE

TO BE DETERMINED THIRD MIDTERM (FINAL) Lecture Notes + Lab reports + readings