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Topic 3: Behavioural economics /2548

Lecture handouts

A note about lecture handouts – you should regard the lecture handouts as a skeleton or framework for ideas that we flesh out in the lectures. Moreover, that skeleton requires you to follow up through the guided reading. The handouts alone are simply insufficient for you to address the module in a satisfactory fashion – they are merely the starting point.

  • Introduction
  • Judgement: Heuristics handout
  • Choice: Preference construction
  • Prospect theory I
  • Prospect theory II
  • Business application
  • Social preference and fairness I
  • Social preference and fairness II

Don’t forget to look at relevant case study tutorials too.

Main references

*** Camerer, C and Loewenstein, G (2004), Behavioral Economics: Past, Present and Future [pdf], in Camerer, Loewenstein and Rabin (eds) (2004), Advances in Behavioral Economics, New York: Princeton University Press

** Wilkinson, Nick (2008), An Introduction to Behavioral Economics, Basingstoke: Palgrave-MacMillan (see chapter 1 pdf, including case 1.3 on charitable donations)
or  Wilkinson, N and Klaes, M (2012), An Introduction to Behavioral Economics (2nd ed), Basingstoke: Palgrave-MacMillan

** Ariely, D (2009), Predictably irrational – The hidden forces that shape our decisions (revised ed), London: Harper [see also Ariely’s TED talk]

* Ariely, D (2010), The upside of irrationality, London: Harper Collins

* Poundstone, William (2010a), Priceless: the myth of fair value (and how to take advantage of it), New York: Hill & Wang

* DellaVigna, S (2009), Psychology and Economics: Evidence from the Field, Journal of Economic Literature, v47 i2 pp315-372

Seminal papers

Tversky, A and Kahneman, D (1974), Judgment under uncertainty: Heuristics and biases, Science, v185 pp1124-1131

Kahneman, D and Tversky, A (1979), Prospect Theory: An Analysis of Decision under Risk, Econometrica, Vol. 47, No. 2. (Mar.), pp. 263-292.

Tversky, A and Kahneman, D (1981), The framing of decisions and the psychology of choiceScience [New Series], Vol. 211, No. 4481. (Jan. 30), pp. 453-458

Kahneman, D, Knetsch, JL and Thaler, R (1986), Fairness as a constraint on profit seeking: Entitlements in the market, American Economic Review, v76 No 4, Sept pp728-741

Simonson, I and Tversky, A (1992), Choice in Context: Tradeoff Contrast and Extremeness Aversion, Journal of Marketing Research, Vol. 29, No. 3 (Aug.), pp. 281-295

Thaler, R (1985), Mental accounting and consumer choice, Marketing Science, Vol. 4, No. 3, Summer, pp. 199-214

Huber, J and Puto, C (1983), Market boundaries and product choice: Illustrating attraction and substitution effects, Journal of Consumer Research, V10 No 1, June, pp31-44

Iyengar, S and Lepper, M (2000), When Choice is demotivating: Can one desire too much of a good thing?Journal of Personality and Social Psychology, Vol. 79, No. 6, pp995-1006

Other sources

Ariely, D et al (2009), Large stakes and big mistakes, The Review of Economic Studies, 76 v2 pp451-469 [link to 2008 draft]

Barberis, N (2013), Thirty Years of Prospect Theory in Economics: A Review and AssessmentJournal of Economic Perspectives, V27 No 1, Winter, pp173–196

Bateson, M et al (2006), Cues of being watched enhance cooperation in a real-world setting, Biology Letters

BBC (2014), How you really make decisions, Horizon, April 3rd – a version has been uploaded here and here

Benson, B (2016), Cognitive bias cheat sheet, better humans [blog], Sept 1st – see Wikipedia’s list of cognitive biases and the graphic cognitive bias codex

 Butler, S and Goodley, S (2015), Sports Direct: it’s all about discounts, but are they what they seem?, The Guardian, Dec 10th

Cartwright, E (2011), Behavioral Economics, Abingdon: Routledge

Clifford, S and Rampell, C (2013), Sometimes, We Want Prices to Fool Us, New York Times, April 13th

Duhigg, C (2012), How Companies Learn Your Secrets, New York Times, Feb 16th

Dawnay, E and Shah, H (2005), Behavioural economics: seven principles for policy-makers, New Economics Foundation [pdf]

Economist (2008), Do economists need brains?, The Economist, July 24th

Economist (2010), The data deluge, The Economist, Feb 25th

Economist (2013), Time is not moneyThe Economist, Oct 5th

Erta, K et al (2013), Applying behavioural economics at the Financial Conduct Authority, FCA Occasional Paper No.1, April

Gabaix, X and Laibson, D (2005), Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets, NBER Working paper 11755 [Published as Gabaix, Xavier and Laibson, David (2006), “Shrouded Attributes, Consumer Myopia, And Information Suppression In Competitive Markets,” Quarterly Journal of Economics, v121 (2, May), 505-540]

Goldstein, ER (2011), The Anatomy of Influence, The Chronicle Review, Nov 8th

Heukelom, F (2007), Kahneman and Tversky and the Origin of Behavioral Economics, Tinbergen Institute Discussion Paper, TI 2007-003/1

Holmes, D (2015), After de Blasio calls snowstorm gouging illegal, Uber still uses surge prices — just not as horribly as usual, PandoDaily, Jan 26th

Iyengar, Sheena (2010), The art of choosing, London: Little, Brown [see her 2010 TED talk too]

Jacobi, JL and Riofrio, M (2012), Ink-onomics: Can You Save Money By Spending More on Your Printer?, PC World, May 2nd

Joelving, F (2009), Why the #$%! Do We Swear? For Pain Relief, Scientific American, July 12th [refers to Stephens et al (2009) paper]

Johnston, C (2010), Envy stimulates the economy—and is why you bought your iPhone, Ars Technica, Oct 27th

Kahneman, D (2002), Maps of bounded rationality: a perspective on intuitive judgment and choice, Sveriges Riksbank Prize lecture, Dec 8th

Kahneman, D and Deaton, A (2010), High income improves evaluation of life but not emotional well-being, PNAS, August 4th

Kahneman, D (2011), How cognitive illusions blind us to reason, The Observer, Oct 30th
[extract from Kahneman’s book – Thinking, fast and Slow, published by Farrar, Straus and Giroux but now available as a Penguin paperback. Also listen to Daniel Kahneman at the Royal Institution in November 2011, talking about the book (audio available) – and see also Eva Lottchen’s visualisation of the talk. ]

Kedmey, D (2014), This Is How Uber’s ‘Surge Pricing’ Works, Time, Dec 15th

Koderisch, M et al (2007), Bundling in banking — A powerful strategy to increase profits, Journal of Financial Services Marketing, 11, 268–276

Layard, R (2003), Happiness: has social science got a clue?, Lionel Robbins Memorial Lectures 2002/3, LSE

Lopez-Perez, R and Spiegelman, E (2012), Do Economists Lie More?Department of Economic Analysis, Universidad Auto?noma de Madrid Working Paper 4/2012 (see also Weissmann, J (2012), Research Says: Studying Economics Turns You Into a Liar, The Atlantic, Dec 18th)

Penenberg, A (2011), NeuroFocus Uses Neuromarketing To Hack Your Brain, Fast Company, Aug 8th

Poundstone, W (2010b), The hidden psychology of menu design, Wired magazine, April

Rilling, JK, King-Casas, B and Sanfey, AG (2008), The neurobiology of social decision-making, Neurobiology, 18, pp159-165

Saini, A (2011), A formula for justice, The Guardian, Oct 2nd

Schoar, A and Datta, A (2014), The power of heuristics, ideas42, January

Sullivan, B (2012), ‘Fair and square’ pricing? That’ll never work, JC Penney. We like being shafted, Red Tape Chronicles on NBC News, May 25th

van de Ven, N et al (2011), The envy premium in product evaluation, Journal of Consumer Research, v37 i6 pp984-998

Welch, N (2010), A marketer’s guide to behavioral economics, McKinsey Quarterly, Feb [requires free registration]