A behavioral economics course covering bounded rationality, temptation and self control and reference dependent preferences. Please email me if you spot any typos

Course Details and Syllabus

UTILITY MAXIMIZATION:

Lecture 1: In this first lecture we did a very rapid tour of revealed preference theory and the testable implications of utility maximization. We began with a discussion of why representation theorems can be useful for testing models with latent variables (i.e. variables which are not directly observable, such as utility, beliefs, information costs etc). We illustrated this point with a reminder of how to test for utility maximizing behavior (notes on which are here). We then started to provide extensions to this result which cover the cases of incomplete data, choice functions and infinite choice sets, which are covered here. Some useful mathematical background on order theory can be found in these notes. We also discussed the fact that representation theorems provide a very 'sharp' test of a model: either the data satisfies a set of axioms or it does not (usually the latter). Some ways of dealing with this issue are discussed here.

I finished the lecture by (starting to) go through some of the well documented violations of utility mazimization which will motivate the section of the course on bounded rationality. The slides for that presentation are here.

For further details on these topics you can check out the readings discussed in the syllabus. For more details on utility maximization and preferences, chapters 2 and 3 of the Kreps book are great. The book Lecture Notes in Microeconomic Theory by Ariel Rubenstein is freely available for download and also has some great stuff.

For next week's class, I want you to prepare a 15 minute presentation on the paper "Who is (More) Rational? by Choi et. al.

BOUNDED RATIONALITY:

Lecture 1: In this lecture, I provided a quick introduction to the study of bounded rationality, and introduced the concept of consideration sets. The slides from the lecture are available here.

The key theme of this lecture was that marketers think that people do not seriously think about all the available options when making a choice: instead they focus their attention on some 'consideration set', from which they make their choice (seminal marketing articles on this idea are here and here). While this seems like an intuitively plausible idea, testing a model of choice with consideration sets is tricky, requiring either more structure or additional data. We followed one approach, which links consideration set formation to sequential search and satisficing - based on materiel from papers available here and here. We used the 'choice process' data set to perform our tests, which has also been used here and here. Other interesting papers on sequential search can be found here and here.

Other interesting approaches to studying choice with consideration sets are provided by Masatlioglou et al. [2012], De Los Santos et al. [2012] and Manzini and Marrioti [2014]. You can see another recent approach by me here

For next week, please prepare a 15 minute presentation on the paper "What do Consumers Consider Before They Choose? by Abaluck and Adams

Lecture 2: Next, we considered the broader class of `Rational Inattention' models, in which the decision maker wants to learn about some underlying state of the world which will affect the value of subsequent decisions. We modelled the choice of information in an abstract way, through the choice of information structures. A big free parameter in this class of models is the nature of information costs. In this lecture, we took a 'revealed preference' approach, asking under what circumstances could behavior be explained by any underlying information cost function. We also introduced the concept of state dependent stochastic choice data as a useful tool for testing models of limited information.

The slides for this lecture are available here. Most of the materiel for this lecture was drawn from this paper and the experimental follow up here. The paper which drops the assumption of additive separability is here. An alternative approach we discussed, based on choice from menus, is available here.

For next week's class, you have a choice. Please prepare a 15 minute presentation on EITHER "Attention Discrimination: Theory and Field Experiments with Monitoring Information Acquisition" by Bartos et al. OR "Electoral Competition with Rationally Inattentive Voters" by Matejka and Tabellini

Lecture 3: This lecture covered the specific case of rational inattention when costs are the based on the Shannon Mutual Information between state and signal. Shannon costs have been immensely popular since they were introduced into the literature by Sims (see for example here and here for early Sims articles). They have been justified on axiomatic and information theoretic grounds (although, as discussed in class the latter is a bit dubious). We can think of the Shannon model as akin to the 'Cobb Douglas' approach to information costs, rather than the 'revealed preference' approach taken in the previous lecture. Like Cobb Douglas utility, Shannon costs can make life very easy, and much is know (as can be determined from this excellent text book.)

The notes from today's lecture are here. The key paper is Matejka and Mackay [2015]. Details of the posterior based approach can be found here. Two other papers that look at aspects of the Shannon model are here and here. For those who are interested, a recent paper by Steiner, Stewart and Matejka looks at a dynamic variant of the problem.

For next week's class, please prepare a 15 minute presentation on the paper "A Sparsity Based Model of Bounded Rationality" by Xavier Gabaix.

Problem Set 1 and necessary Data

TEMPTATION AND SELF CONTROL:

Lecture 1: The introductory lecture gave a summary of why temptation is an important topic for behavioural economists. The relevant slides are here.

As well as providing evidence on the ubiquity of behaviours which we might intuitively think of as relating to temptation (obesity, smoking, drug use, credit card debt etc), we discussed some of the literature linking self control to economic outcomes. On the one hand, the classic marshmallow experiment suggests that self control measured in childhood may be linked to later life outcomes. On the other, recent work has suggested that poverty may impede cognitive function, which in turn has been linked to the ability to exert self control. We also discussed some of the evidence suggesting that self control might be a depletable resource (see eg Galliot et al. [2007]). However, we also noted more recent replicability concerns, discussed here.

I concluded by saying that there were two established ways of behaviourally studying temptation and self control. The first was through preference for commitment, the second was through preference reversals in time preferences. These topics will form the basis of the next two lectures

For next week's class, please prepare a 15 minute presentation on the paper "Contracting with Diversely Naive Agents" by Kfir Eliaz and Ran Spiegler.

For next week's class, please prepare a 15 minute presentation on a paper that discusses further the interaction between temptation and preference uncertainty: Commitment Vs Flexibility by Amador, Werning and Angeletos.

Lecture 2: This lecture covers in detail the idea that temptation problems might manifest themselves as a 'preference for commitment', or a desire to have tempting alternatives removed from one's choice set. The classic example is that a dieter might prefer to go to a restaurant which has only salad on the menu, rather than one which has both salad and a burger. The slides from the lecture are available here.

My treatment of the subject comes mainly from the excellent survey article by Lipman and Pesendorfer, which is in turn largely based on the seminal article by Gul and Pesendorfer. This is a model of menu preferences in which a preference for commitment can stem from two different possible sources: the fact that the decision maker may succumb to temptation, or the fact they may not succumb, but that they have to exert costly self control in order to avoid doing so.

For next week's class, please prepare a 15 minute presentation on the paper "Eliciting Temptation and Self Control Through Menu Choices" by Séverine Toussaert

Lecture 3: Which covered models of time preference. The starting point for this lecture was the observation that 'preference reversals' are often taken as evidence of temptation problems (for example, I will choose to watch an action film rather than a documentary today, but if I am choosing what to watch in a week's time, then I will choose to watch the documentary). The central theme of the lecture is to show the equivalence between non-exponential discounting, preference reversals and demand for commitment. The slides from the lecture are available here.

We began by considering the behavioral implications of different models of discounting for preferences over streams of consumption, following Olea and Strzalecki. This allowed us to show that preference reversals were inconsistent with the standard model of exponential discounting, and in particular violated the assumption of stationarity. We showed how the quasi-hyperbolic (or beta-delta) model popularized by Laibson can be characterized by weakening stationarity in the appropriate way.

While preferences over consumption streams are theoretically useful, often we observe people making dynamic choices, for example amount of consumption today , which then leads to an amount of wealth tomorrow. We considered the implications of the quasi-hyperbolic model for such a data set. Useful in this regard is the hyperbolic Euler equation of Harris and Laibson. In terms of fully characterizing the behavior consistent with such a model, useful (but incomplete) results are provided by Barro [1999], Blow, Browning and Crawford [2015] and Echenique, Imai and Saito [2016].

Problem Set 2