Behavioral Economics

Over the last decades, the standard model of economic rationality - based mainly on the assumption of expected utility maximization, has come under increasing criticism. The recent global financial crisis revealed that there are a large number of empirical anomalies that the standard model not only fails to predict, but even fails to explain. Behavioral economics attempts to address this criticism by taking a broader approach to studying economic phenomena. It deploys methodology and knowledge of all the behavioral sciences, in particular economics, psychology, sociology, and biology.

The purpose of this course is to review the basic concepts of the standard model that are dealing with decision-making of individuals and contrast them with various experimental findings which led to a "behavioral" extension of these neo-classical concepts. A good example is risk-taking that should not be dependent on the "sign" of the prospective outcome. Yet, the experimental evidence shows that people are willing to take more risk to avoid losses than to realize corresponding gains.