Module Code and Title:       DEV306          Behavioural Economics

Programme:                          BA in Development Economics

Credit Value:                         12

Module Tutor:                       Sanjeev Mehta

General objective: This module examines the psychological underpinnings of economic behaviour. It aims to develop a better understanding of the human responses to public policies and intervention programmes. It focuses on accurate assumptions about cognitive ability, social interaction, moral motivation, and emotional responses into economic modelling and explores the implications of these for human behaviour and economic outcomes.

Learning Outcomes – On completion of this module, learners should be able to:

1. Identify important foundations to behavioural economics.
2. Assess the importance of the behavioural foundation for the understanding of economic behaviour.
3. Describe assumptions about human behaviour.
4. Examine the importance of economic behaviour.
5. Discuss policy implications of behavioural aspects.
6. Discuss research papers and articles that make use of the concepts and methods that are introduced in the module.
7. Apply the behavioural foundation to analyse the mainstream theoretical framework.
8. Describe how actual choices are made by economic agents.

Learning and Teaching Approach: This module will be taught by means of lectures, tutorials, classroom workshops and self-directed study. Lectures will aim at explanation of various concepts and theories aided by tutorials. In classroom workshops, groups of students will be given an article to critically review and discuss their opinions on with other groups, and also identify how the behavioural postulates are different from the conventional positions.

Assessment Approach:

A. Individual Assignment: Portion of Final Marks: 15%

Students will complete an assignment on the critical evaluation of the validity of the assumption of rationality and behavioural psychological foundations. The assignment should have a maximum limit of 500 words.

• 2%       Introduction
• 3%       Identification of relevant assumptions
• 5%       Critical evaluation
• 3%       Justification with suitable examples
• 2%       References

B. Class Test: Portion of Final Marks: 10%

• One written test will be conducted that will comprise 45 min duration and cover 4 weeks of material, on the basic understanding of the concepts.

C. Case study: Portion of Final Mark: 25%

Students will individually complete a case study on the how the actual choices are made by economic agents. Students can select the topic from among the options provided by the tutor. The cases, preferably, be related to policy response of the agents. Report word limit: 700 words. The report will be followed by a 5-10 min presentation and Q&A.

• 1%       Adequacy of data collected
• 1%       Situation analysis
• 2%       Methodology
• 6%       Analysis of the information/data
• 1%       Data presentation
• 1%       Reasoning on the deviation of behaviour from the ‘rationalist’ perspective
• 1%       Identification of policy implications
• 1%       Timely submission of the report
• 1%       Structure of the report
• 5%       Presentation of the report
• 5%       Defence of the findings in Q&A session

D. Midterm Examination: Portion of Final Mark: 20%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites: CET101 Introductory Microeconomics, DEV201 Development Problems and Policies, DEV202 World Economic History

Subject Matter:

1. Introduction
   • Nature and scope, methods
   • Guessing game & rationality
   • Reference Dependent Preferences and Loss Aversion
   • Social Preferences, Hyperbolic Discounting, Naiveté and Self-Control
   • Projection Bias, Happiness and Adaptation, Heuristics and Biases
   • Inattention and Shrouding
   • Nudging and Framing
   • Behavioural Welfare Analysis
2. Individual Choice
   • Decision making factors, Biases and paradoxes in decision-making
   • Probability judgments& Monty Hall problem, Altruism
   • Fairness, dictator and ultimatum games, voluntary payments
   • Trust and trust game, Honesty
   • Determinants Cooperation, prisoners' dilemma, public goods game
   • Ways to cooperate
3. Discrimination
   • Based on gender, race, religion, attractiveness
   • Salience of nudge, policy intervention and less visible price components
4. Markets
   • Competitive equilibrium, robustness, fairness, status concerns and repugnance as constraints on profit maximization
   • Auctions: winner's curse, late bidding end rules

Reading List:

1. Essential Reading
   • Congdon, W., Kling, J., & Mullainathan, S. (2011). Policy and Choice: Public Finance Through the Lens of Behavioral Economics. Brookings Institution Press: Washington, D.C.
   • World Bank (2015). World Development Report 2015: Mind, Society and Behaviour.
2. Additional Reading:
   • Behavioural Insights Team (n.d.). Retrieved from https://www.gov.uk/government/organisations/behavioural-insights-team
   • Bernartzi, Shlomo & Thaler, R. (2004).Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Journal of Political Economy, 112(1), pp. 164-S187.
   • Camerer, C., Babcock, L., Loewenstein, G. & Thaler, R. (1997). Labor Supply of New York City Cabdrivers: One Day at a Time. The Quarterly Journal of Economics, 112, pp. 407-441.
   • Fehr, E. & Gachter, S. (2000). Fairness and Retaliation: The Economics of Reciprocity. Journal of Economic Perspectives, 14(3), pp.159-181.
   • Gabaix, X, & Laibson, D. (2006). Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets. The Quarterly Journal of Economics, 121(2):505-540.
   • Kahneman, D. & Tversky. A. (1979). Prospect Theory: An Analysis of Decision under Risk. Econometrica, 47(2), pp. 263-292.
   • Laibson, D. (1997). Golden Eggs and Hyperbolic Discounting. The Quarterly Journal of Economics, 112(2), pp. 443-477.
   • Rabin, M. (1998). Psychology and Economics. Journal of Economic Literature. 36(1), pp.11-46.
   • Stefano, D. (2009). Psychology and Economics: Evidence from the Field. Journal of Economic Literature 47(2),:pp. 315-372. 

Date: January 15, 2016