Behavioral Economics Module 2025

Module Information

• The module is Behavioral Economics at WIUT, dated January 13, 2025.
• Dr. Bilol Buzurukov is the module leader.
• Dr. Bilol Buzurukov and Naqeeb Ur-Rehman are seminar leaders.
• Lectures and seminars are two hours each.
• Lecture and seminar slides, plus other articles are posted weekly.
• The system used is the University Intranet.
• Coursework contributes 40% and the final exam contributes 60% to the module assessment.
• Team formation deadline for coursework is January 20th, 2025.
• Team should strictly consist of 5 students, from your own group and formed by the deadline.
• Submission Date is February 19th, 2025 on Wednesday
• Presentation Dates: Feb 24-28, 2025, which is teaching Week 7, in the Seminar Room.

Reading Materials

• Required textbooks include:
  • Edward Cartwright (2018), Behavioral Economics, 3rd edition, Routledge
  • Nick Wilkinson and Mattheas Klaes (2018), An Introduction to Behavioral Economics, 3rd edition, Springer
  • Sanjit Dhami (2017), The Foundations of Behavioral Economic Analysis, Oxford University Press
• Journal articles and online reading materials are also utilized

Introduction to Behavioral Economics

• Behavioral Economics is understanding economic behavior and its consequences
• It seeks to understand economic decisions like savings, purchases, and charitable giving, examining why people make certain choices.
• It also evaluates the quality of people’s choices and how to support them in making better ones.

Standard Economic Model

• Economists have designed models to understand economic behavior
• Assumes people are rational, calculating, and selfish.
• The standard economic model relies on strong assumptions about human behavior.

Behavioral Economics Aims

• Tests the standard economic model on humans and asks if it needs to be tweaked or overhauled to fit observations.
• It applies insights from psychology and other social sciences in economics.
• Works constructively with the standard economic model for a better understanding of economic behavior.

History and Controversies

• Adam Smith is credited as a founder of behavioral economics.
• Smith's "An Inquiry into the Causes of the Wealth of Nations, 1776" elucidates the market's invisible hand.
• Smith's "The Theory of Moral Sentiments, 1759" posits that people are motivated by self-interest and sympathy for others.
• Early economists considered emotions and impulses, but the 20th century saw a shift away from psychology.
• Vilfredo Pareto advocated for minimizing reliance on psychology in political economy (1897).
• Richard Thaler noted that consumers remain human, while economic models have become more sophisticated (1990).

Behavioral Economics Reborn

• Psychology gradually returned to economics from the 1960s onwards.
• Scholars such as Herbert Simon, Daniel Kahneman, Amos Tversky, and Vernon Smith provided evidence against economicus assumptions

Behavioral Economics and Policy

• Behavioral economics should be used to improve the understanding of the economy.
• Economics is an applied subject that informs how to alleviate poverty and regulate industries.
• The standard economic model suggests intervention when markets fail, whereas behavior economics can help improve policy decisions.
• It aims for clever government policies, not necessarily big government.
• It questions the purpose of policy, such as smoking bans.

Key Concepts in Behavioral Economics

• Bounded Rationality constrains decision-making due to cognitive capacity, memory, limited information, and time.
  • Individuals lack sufficient information for fully informed judgments.
  • Complex choices lead individuals to "satisfice" rather than maximize.
  • Bounded rationality does not equate to irrationality; decisions are, as much as possible, rational.
• Heuristics are used as rules of thumb in decision-making.
  • They can lead to biases, such as the status quo bias.
• Ecological Rationality is when a heuristic is useful depending on the environment where it is applied.
• Terms include:
  • Experimental Economics
  • Economic Psychology
  • Behavioral Finance
  • Neuroeconomics

Debate and Controversy

• Some question whether behavioral economics and economic experiments are necessary.
• It is useful to know something about the disagreements

Interesting Debates

• Is it sufficient to approximate people by Homo economicus, or are needs psychology assumptions?
• The methodology of positive economics suggests things are not so obvious and judged on its predictions and not its assumptions
• Model types include Cognitive Model vs Choice Model
• Emphasis should be put on the standard economic model, whether it does well or badly in certain situations.
• The standard economic model is a good predictor if people have had ample opportunity to learn from experience.
• Behavioral economics is working with the standard economic model, whether it is a good predictor or not.

Criticisms of Behavioral Economics

• Can be seen as not radical enough, as it is not different from the SEM
• Can be seen as to going too far and too quick to draw conclusions from lab experiments
• Novel testable predictions have proved correct, not only in the lab but also in real applications.

Experiments

• People are titled as subjects or participants.
• Subjects are recruited, and can be schoolchildren, or experienced people.
• Experiments should be deception-free and subjects should not be deceived in any way.
• Experiments can be conducted based on rewards given to the subjects.
• Should have a theory behind each experiment.