Course description
We study alternatives to the standard rational choice model featured in microeconomic theory textbooks. The following four themes are the pillars of the course: choice under certainty (e.g. menu and endowment effects), choice under uncertainty (e.g. prospect theory), intertemporal choice (e.g. hyperbolic preferences), and strategic choices (e.g. social preferences, envy, altruism).
Target audience
This course is aimed at anyone who completed ECON 410. Besides economics majors, this course is a great fit for psychology and business majors.
Requisites
Prerequisite, ECON 410 with a grade of C or better.
Grading status
Letter grade.
Learning objectives
Identify failures of the standard rational choice model in predicting real-life behavior. Being able to use behavioral models and understanding their advantages and limitations vis-à-vis the standard model.
Class structure
First, we start with a quick review of the standard economic theory approach to a given topic. Second, we discuss data that conflicts with the predictions of the standard model. Third, we introduce alternative behavioral models. Finally, we address the limitations of the behavioral models.
The course main goal is to provide tools to enable you to: construct behavioral models of economic behavior; identify their (built-in) limitations and; think critically about how to apply them to real-life.
The Canvas website is our primary and preferred means of communication. Check Canvas for weekly assignments and grades. Canvas messages will be responded to within 48 business hours (Monday through Friday). Outlook is NOT recommended.
To book an office hour (OH) meeting use Canvas > Calendar > Find Appointment. Sign in with the SSO login option at unc.zoom.us for OH meetings. If your schedule conflicts with regular OH, please send a Canvas message to schedule meetings outside of regular OH.
Lecture notes and other resources will be posted at soparreiras.org/E416/.
Required textbook
Ogaki, Masao, and Saori C. Tanaka. Behavioral Economics: Toward a New Economics by Integration with Traditional Economics. Springer Texts in Business and Economics. Singapore: Springer, 2017. UNC Library catalog.
Supplementary references
None of these must be purchased.
- Angner, Erik. A Course in Behavioral Economics. 2nd ed. London: Palgrave Macmillan, 2016. Optional; page references follow the second edition. Used prices vary dramatically — do not buy it above $23. Compare used copies (links search this ISBN directly): AbeBooks, Alibris, Amazon, ThriftBooks, Better World Books, Powell’s Books, Half Price Books, eBay.
- Levine, David K. Is Behavioral Economics Doomed? The Ordinary versus the Extraordinary. Cambridge: Open Book Publishers, 2012. Free PDF.
- Sapolsky, Robert M. Behave: The Biology of Humans at Our Best and Worst. New York: Penguin Press, 2017. Excerpts only.
- Camerer, Colin F. Behavioral Game Theory: Experiments in Strategic Interaction. Princeton, NJ: Princeton University Press, 2011. Excerpts only.
Required software
Mathematica — order it free at software.unc.edu.
Course grade weights
- Midterms — 45%
- Problem sets and quizzes — 25%
- Final exam — 25%
- Active participation — 5%
- Extra credit opportunities — 2%
Important dates
- Midterm 1 — Tuesday, September 29
- Midterm 2 — Tuesday, November 3
- Final exam — Thursday, December 10, 4:00–7:00 pm (note the exam time differs from our class time)
Curving
Exam grades are converted into scores (“curved”) according to the formula: original grade plus 100 minus the maximum between the top class grade and 50. Assignments and problem sets are not curved.
Grading scale
| Letter grade | Minimum score |
|---|---|
| A | 95 |
| A− | 90 |
| B+ | 87 |
| B | 83 |
| B− | 80 |
| C+ | 77 |
| C | 73 |
| C− | 70 |
| D+ | 67 |
| D | 63 |
During this course, we may employ additional material from podcasts, video, or literature to discuss economics related issues. Sometimes, you may find the political or religious views, or the profanity contained in these materials offensive or objectionable and you may feel uncomfortable. I will not endorse or advocate any particular political views, but as part of your university education, I wholeheartedly believe that it is important for us to engage in critical thinking while respecting different opinions.
Our classroom is an inclusive environment and your participation is critical for the success of this course. You are expected to attend class, read the assigned readings and be prepared to discuss and present your work in the classroom.
You are encouraged to use AI tools in this course within the following guidelines:
- AI assistance is permitted for homework and projects only.
- AI use is not allowed during exams or quizzes.
- You must clearly cite any AI tool used.
- If AI-generated content is substantial, include the original prompt alongside your citation.
- You may be asked to present or explain your work, regardless of AI use.
AI tools can be especially helpful for debugging and explaining Mathematica code, but they may produce errors or “hallucinate” facts. Use critical judgment. For practical guidance on using AI effectively as a study aid, see Lutz Hendricks’ AI Study Assistant guide.
Syllabus changes
I reserve the right to make changes to the syllabus including project due dates and test dates. These changes will be kept to the necessary minimum and announced as early as possible.
Communication
Please use Canvas to send me messages instead of regular email. All assignments should be submitted on Canvas.
Honor code
All students are expected to follow the guidelines of the UNC honor code. In particular, students are expected to refrain from “lying, cheating, or stealing” in the academic context. If you are unsure about which actions violate the honor code, please see me or consult the UNC honor code.
Exams and grades
If you are eligible for testing accommodations, schedule your exam through the University Compliance Office at compliance.unc.edu at least 14 business days in advance, and please notify me as soon as possible. Accommodations cannot be provided retroactively.
Any final-exam rescheduling request, for those with more than three final exams within a 24 hour period, must be received no later than our first midterm.
Attendance policy
Attendance will be recorded. No right or privilege exists that permits a student to be absent from any class meetings, except for these University Approved Absences (UAA):
- Authorized University activities.
- Disability/religious observance/pregnancy, as required by law and approved by Student Accommodations in the University Compliance Office and/or the Equal Opportunity and Compliance Office.
- Significant health condition and/or personal/family emergency as approved by the Office of the Dean of Students, Gender Violence Service Coordinators, and/or the Equal Opportunity and Compliance Office.
Eight non-UAA without any consultation with the instructor may result in a grade F in the course. Ten total non-UAA in a semester may result in a grade F regardless of the reasons you missed class. In all instances, either UAA or not, you MUST notify the instructor prior to missing class. If a student misses a class, it is the student’s responsibility to find out what was covered in the class and whether changes have been made on the schedule, and if there was any assignment given.
Grade appeal process
If you feel you have been awarded an incorrect grade, please discuss it with me. If we cannot resolve the issue, you may talk to our departmental director of undergraduate studies or appeal the grade through a formal university process based on arithmetic/clerical error, arbitrariness, discrimination, harassment, or personal malice. To learn more, go to the Academic Advising Program website.
| Week | Tentative coverage | Tuesday | Thursday |
|---|---|---|---|
| Week 1 | Introduction: what is behavioral economics? BE pp. 3–17. | 8/18: Syllabus, QZ 00, Rational Preferences, Thaler’s Nobel lecture | 8/20: QZ 01 |
| Week 2 | Choice under certainty: preferences, utility, rationality. BE p. 10; LEC. | 8/25: PS 1 due. Preferences and utility. | 8/27: Choice under certainty: rational choice, QZ 02 |
| Week 3 | Revealed preferences and demand. LEC; K81. | 9/1: Revealed preferences, PS 2 due, LEC. | 9/3: QZ 03 (preferences and revealed preferences), K81. |
| Week 4 | Loss aversion, endowment effect and brain biology. BE pp. 8–10, 23–30, 62–64; BH pp. 31–76. | 9/8: Loss aversion and the endowment effect, KR06, PS 3 due. | 9/10: The amygdala, the frontal cortex, and the dopamine reward system. |
| Week 5 | Probability judgement and the classic fallacies. LEC. | 9/15: Probability theory review, LEC. | 9/17: Gambler’s fallacy, conjunction and disjunction fallacies, QZ 04 (Bayes’ rule), LEC. |
| Week 6 | Biases in judgement; choice under uncertainty. LEC; BE pp. 34–38. | 9/22: Base rate neglect and confirmation bias, PS 4 due, LEC. | 9/24: Rational choice under uncertainty, BE pp. 34–38. |
| Week 7 | Midterm 1. Expected utility theory. BE pp. 34–38. | 9/29: Midterm 1 | 10/1: Expected utility theory. |
| Week 8 | Risk aversion and its measures. BE pp. 36–44. | 10/6: Well-Being Day | 10/8: Risk aversion, PS 5 due. |
| Week 9 | Framing effects and mental accounting. BE pp. 60–61, 79; T99. | 10/13: Framing effects, mental accounting, T99. | 10/15: Fall Break |
| Week 10 | Choice paradoxes and prospect theory. BE pp. 44–47, 55–69. | 10/20: Choice paradoxes, prospect theory, KT79. | 10/22: KKT91 and CLS06 |
| Week 11 | Research methods; discounted utility. BE pp. 85–90. | 10/27: SNS11 | 10/29: Discounted utility, a consumption-saving problem. |
| Week 12 | Midterm 2. Recursive utility. LEC. | 11/3: Midterm 2 | 11/5: Recursive utility, LEC. |
| Week 13 | Dynamic choice and hyperbolic discounting. BE pp. 91–96. | 11/10: Applications of dynamic choice. | 11/12: Hyperbolic discounting, PS 6 due. |
| Week 14 | Naive and sophisticated agents; strategic games. BE pp. 93–96, 12–21. | 11/17: Myopic and forward looking behavior. | 11/19: Strategic games, Nash equilibrium. |
| Week 15 | Extensive games and subgame perfect equilibrium. BE pp. 14–21. | 11/24: Extensive games and subgame perfect Nash eq. | 11/26: Thanksgiving Recess |
| Week 16 | Social preferences. BE ch. 8, pp. 115–139. | 12/1: Social preferences | Thursday 12/10: 4:00–7:00 pm, Final Exam |
Abbreviations
- PS — problem set; QZ — quiz; TBA — to be announced; LEC — course page, soparreiras.org/E416/
- BE — Ogaki, M. and Tanaka, S. C., 2017. Behavioral Economics: Toward a New Economics by Integration with Traditional Economics. Springer.
- BH — Sapolsky, Robert M., 2017. Behave: The Biology of Humans at Our Best and Worst.
- K81 — Kagel et alia, 1981. Demand curves for animal consumers. QJE, 96(1), pp. 1–15.
- KR06 — Kőszegi, B. and Rabin, M., 2006. A model of reference-dependent preferences. QJE, 121(4), pp. 1133–1165.
- T99 — Thaler, R. H., 1999. Mental accounting matters. JBDM, 12(3), pp. 183–206.
- KT79 — Kahneman, D. and Tversky, A., 1979. Prospect theory. Econometrica, 47(2), pp. 263–292.
- KKT91 — Kahneman et al., 1991. The endowment effect, loss aversion, and status quo bias. JEP, 5(1), pp. 193–206.
- CLS06 — Chen et al., 2006. How basic are behavioral biases? JPE, 114(3), pp. 517–537.
- SNS11 — Simmons et al., 2011. False-positive psychology. PS, pp. 1359–1366.