Incentives and Behavior Prof. Dr. Heiner Schumacher KU Leuven - PowerPoint PPT Presentation

Incentives and Behavior Prof. Dr. Heiner Schumacher KU Leuven Introduction Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 1 / 15

Organizational Details First Lecture: Tuesday, 11 - 13 h, HOGM 00.85. Second Lecture: Wednesday, 18 - 20 h, HOGM 00.85. Prof. Dr. Heiner Schumacher, Naamsestraat 69, Room 2.121, heiner.schumacher@kuleuven.be. Thomas Boogaerts, Naamsestraat 69, Room 2.145, thomas.boogaerts@kuleuven.be. Exam: 22.01.2019, 09 - 13 h, AV 01.12 (Auditoriacomplex). O¢ce hour by appointment. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 2 / 15

Introduction In classic economic analysis, a very simple model of human behavior is used: humans decide rationally, they have stable preferences, and they are interested only in their own payo¤ (“homo economicus”). Over the last four decades, psychologists and economists gathered empirical evidence which shows that these assumptions are wrong. In many instances, humans do not decide rationally, their preferences change over time, and sometimes they are interested in the well-being of others. The research …eld that tries to incorporate this evidence into economic analysis is called “behavioral economics.” Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 3 / 15

Introduction This course provides an introduction into behavioral economics. The …rst goal of this course is to make you familiar with the most important concepts from behavioral economics. How do people deal with risk? How do they make intertemporal trade-o¤s? When do they behave pro- or anti-socially towards strangers? What are the most common decision errors? Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 4 / 15

Introduction The second goal of this course is to demonstrate how these concepts can be applied to analyze markets and organizations. How can public policy help people to make better decisions? How can …rms exploit consumers’ bounded rationality? Should I pay people for performance? How should I behave in di¢cult bargaining situations? Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 5 / 15

Introduction The material for this lecture comes from three disciplines: economics, psychology and business/managerial economics. The advantage of this is that we get a holistic picture of behavioral economics. The disadvantage of this is that the course may appear as less coherent than a standard economics course. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 6 / 15

Syllabus Calendar Week 40 First Lecture: Game Theory I (Slides 1) Second Lecture: Game Theory II (Slides 2) Calendar Week 41 First Lecture: Risk Preferences I (Slides 3) Second Lecture: Risk Preferences II (Slides 4) Calendar Week 42 First Lecture: Portfolio Choice (Slides 5) Second Lecture: Time Preferences I (Slides 6) Calendar Week 43 First Lecture: Time Preferences II (Slides 7) Second Lecture: Tutorial I (Problem Sets 1+2) Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 7 / 15

Syllabus Calendar Week 44 First Lecture: Social Preferences (Slides 8) Second Lecture: Behavioral Biases I (Slides 9) Calendar Week 45 First Lecture: Behavioral Biases II (Slides 10) Second Lecture: Exploiting Consumers (Slides 11) Calendar Week 46 First Lecture: Libertarian Paternalism (Slides 12) Second Lecture: Tutorial II (Problem Sets 3+4) Calendar Week 47 First Lecture: Pay for Performance (Slides 13) Second Lecture: Multitasking, Crowding Out (Slides 14) Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 8 / 15

Syllabus Calendar Week 48 First Lecture: Identity and Motivation (Slides 15) Second Lecture: Bargaining (Slides 16) Calendar Week 49 First Lecture: Questions & Answers Second Lecture: Tutorial III (Problem Sets 5+6) Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 9 / 15

Nobel Prices Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 10 / 15

Nobel Prices Vernon L. Smith, 2002, for “having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.” Daniel Kahneman, 2002, for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” Richard Thaler, 2017, for “his contributions to behavioral economics.” Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 11 / 15

Literature Complementary Literature - Books Osborne, Martin (2009): An Introduction to Game Theory , Oxford University Press, Chapters 2, 4 and 5. Ackert, Lucy, and Richard Deaves (2009): Behavioral Finance , Cengage Learning Emea, Chapters 1, 3, 5, 8, 11, 14, 17. Kahneman, Daniel (2011): Thinking, Fast and Slow , Farrar, Straus and Giroux, New York, Part 2 (“Heuristics and Biases”). Fisher, Roger, William Udry, and Bruce Patton (2011): Getting to YES , Penguin Books, London. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 12 / 15

Literature Complementary Literature - Papers O’Donoghue, Ted, and Matthew Rabin (1999): “Doing it now or later,” American Economic Review 89(1), 103 - 124. Dana, Jason, Roberto Weber, and Jason Xi Kuang (2007): “Exploiting moral wiggle room: experiments demonstrating an illusory preference for fairness,” Economic Theory 33, 67 - 80. Akerlof, George, and Rachel E. Kranton (2005): “Identity and the Economics of Organizations,” Journal of Economic Perspectives 19(1), 9 - 32. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 13 / 15

Literature Lighter Fare Ariely, Dan (2009): Predictably Irrational , Harper. Gneezy, Uri, John List, and Steven D. Levitt (2013): The Why Axis , PublicA¤airs. Mullainathan, Sendhil, and Eldar Sha…r (2014): Scarcity: The True Cost of Not Having Enough , Penguin Books. Thaler, Richard, and Cass Sunstein (2008): Nudge - Improving Decisions About Health, Wealth and Happiness , Penguin Books. History of Behavioral Economics Lewis, Michael (2017): The Undoing Project: A Friendship That Changed Our Minds , W. W. Norton & Co. Thaler, Richard (2016): Misbehaving: The Making of Behavioral Economics , W. W. Norton & Co. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 14 / 15

How can you prepare for the exam? Try to solve all problem sets on your own. Answer all questions on the slides. Follow recent events and connect them to contents from “Incentives and Behavior” (if possible). Find applications for each theory, ask why it is relevant (or not). Try to …nd connections (what has theory X to do with theory Y , are there contradictions?). Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior Introduction 15 / 15