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    Practical information

    Fridays from 1:30 pm till 12:30 pm.

    Onsite if possible, online otherwise.

    On-site: D105 (Note the change of classroom!)

    Zoom Meetings: https://ceu-edu.zoom.us/j/93024052014?pwd=M1c2N0ZGV3FtcVQyakNnQUVKWk80Zz09

    Meeting ID: 930 2405 2014                          Passcode: 623798

    Spreadsheet about presentations: https://docs.google.com/spreadsheets/d/1nUf-e4j8qquMMg62BtHLecUPq_I7ccCD-rE4uuwTWVM/edit?usp=sharing


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    Course description

    In this course, we will read and discuss papers about the psychological factors that underpin decision-making, focusing on decisions taken when interacting with others. The course has four parts:

    1. An introduction to decision theory and behavioural economics 

    Behavioral game theory is a subfield of behavioral economics, in which behavior is analyzed in terms of the costs and benefits it brings about. We will  dedicate the first sessions to explaining the framework and its key notions, such as ‘bounded rationality’ and ‘cognitive biases’.

    2. Studies on cognitive biases 

    We will review the experimental literature documenting some of the most important cognitive biases: decoy effect, sunk cost effect, ambiguity aversion.

    3. Studies on other-regarding preferences 

    We will see what decisions are likely to be based on social, other-regarding preferences. which we will attempt to specify what these preferences are.

    4. Strategic decision making--coordination

    We will then look at choices in strategic contexts: that’s where game theory is relevant, because the benefits of the choices made also depend on what others’ choose.

    Learning outcome

    • Acquaintance with the problems and methods of experimental economics, especially concerning bounded rationality, the study of pro-social motives and how we coordinate.

    • Knowledge about the psychological bases of economic behaviour 

    At the end of the course, students should master a number of concepts and models used in decision sciences and game theory, such as ‘preference’, utility function, maximisation of expected utility, and Nash equilibrium. They will know about a number of findings in behavioural economics: the most famous biases, such as the ‘sunk cost fallacy’, and theories of social preferences, such as inequity aversion. Last, they will become familiar with the experimental method used in experimental and behavioural economics. 

    Course requirements

    • Two one-page essays: the essays will consist of 

      1. an empirical hypothesis about what preferences people have and/or what cognitive processes are at work when taking a decision,

      2. an experimental protocol (or the description of a computer simulation, or a mathematical model) meant to test the hypothesis.  

    60% of the final grade.

    • Articles presentations: students will be asked to write hands-out and stimulate discussion during two sessions with discussion format. 

    20% of the final grade.

    • Participation to the class and homework: students are expected to actively engage with the questions raised in the course, challenge or defend the psychological theories presented in the readings, question the methodology, etc.  Students will also be asked to solve some exercises in decision and game theory. 

    20% of the final grade.

    Homework due: Exercises will be due the week after they are given. The first one-page essays should be handed in before November 26th (midnight), and the second by January 9th (midnight).




  • An intro to decision theory

    Suggested readings:

    Levitt and Dubner (2005) Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. New York: William Morrow.

    Frank, Robert H. (2008) Microeconomics and Behavior. McGraw-Hill.  Or any microeconomics textbook.

  • Some key results in behavioural economics

  • Sunk cost fallacy

    Main reading

    Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of management Review, 6(4), 577-587.

    To go further

    Arkes, Hal R. (1985) and Catherine Blumer. "The psychology of sunk cost." Organizational behavior and human decision processes 35.1 : 124-140.

    Heath, C. (1995). Escalation and de-escalation of commitment in response to sunk costs: The role of budgeting in mental accounting. Organizational Behavior and Human Decision Processes, 62(1), 38-54.

    Friedman, D., Pommerenke, K., Lukose, R., Milam, G., & Huberman, B. A. (2007). Searching for the sunk cost fallacy. Experimental Economics, 10(1), 79-104.

    Olivola, C. Y. (2018). The interpersonal sunk-cost effect. Psychological science, 29(7), 1072-1083.

    Sweis, B. M., Abram, S. V., Schmidt, B. J., Seeland, K. D., MacDonald, A. W., Thomas, M. J., & Redish, A. D. (2018). Sensitivity to “sunk costs” in mice, rats, and humans. Science, 361(6398), 178-181.

  • Decoy effect and ambiguity aversion

    Ambiguity aversion

    Main reading

    Fox, C. R., & Tversky, A. (1995). Ambiguity aversion and comparative ignorance. The quarterly journal of economics, 585-603. 

    To go further

    Rode, C., Cosmides, L., Hell, W., & Tooby, J. (1999). When and why do people avoid unknown probabilities in decisions under uncertainty? Testing some predictions from optimal foraging theory. Cognition, 72(3), 269-304.

    Ghirardato, P., & Marinacci, M. (2002). Ambiguity made precise: A comparative foundation. Journal of Economic Theory, 102(2), 251-289.



    Decoy effect

    Main reading

    Ariely D, Wallsten TS. 1995 Seeking subjective dominance in multidimensional space: An explanation of the asymmetric dominance effect. Organ. Behav. Hum. Decis. Process. 63, 223–232. (doi:10.1006/obhd.1995.1075)

    To go further

    Lea AM, Ryan MJ. 2015 Irrationality in mate choice revealed by túngara frogs. Science (80-. ). 349, 964–966. (doi:10.1126/science.aab2012)

    Trimmer, P. C. (2013). Optimal behaviour can violate the principle of regularity. Proceedings of the Royal Society of London B: Biological

    Sciences, 280(1763), 20130858.



  • Models of social preferences: inequity aversion, social welfare, competition

    Main reading

    Charness G., Rabin M. (2002) Understanding social preferences with simple tests. Quarterly Journal of Economics, 117 (3), p. 817-869.


    Supplementary readings:

    Engel, C. (2010) Dictator games: a meta-study. MPI Collective Goods Preprint No. 2010/07

    First part of Guala, F. (2005) The Methodology of Experimental Economics, Cambridge University Press.

    Camerer (2003) p. 43 to 101

  • The evolution of prosociality

    Goal: introducing the problem of cooperation, from an evolutionary perspective. Specifying the ultimate causes and proximate mechanisms of prosocial choices, including Strong Reciprocity.

    Main reading

    E Fehr, U Fischbacher and S. Gätcher (2002) Strong reciprocity, human cooperation, and the enforcement of social norms. Human nature, vol. 13, num. 1, pp. 1--25

    Supplementary readings

    E. Fehr, S. Gächter (2002) Altruistic punishment in humans. Nature, vol. 415, pp. 137—140

    Guala, F. (2011) “Reciprocity: Weak or Strong? What Punishment Experiments Do (and Do Not) Demonstrate”, DEAS Working Paper 2010-23. BBS.

    • url icon
      Evolution of trust Link

      A nice funny game, with some lessons on the evolution of trust and prosociality

  • Attitude towards social norms

    Main readings

    Krupka, E. L., & Weber, R. A. (2013). Identifying social norms using coordination games: Why does dictator game sharing vary? Journal of the European Economic Association, 11(3), 495–524. https://doi.org/10.1111/jeea.12006

    Supplementary readings

    Chapter 1 and 2: Bicchieri, C. (2005). The grammar of society: The nature and dynamics of social norms. Cambridge University Press.

    Heintz, C., Karabegovic, M., & Molnar, A. (2016). The co-evolution of honesty and strategic vigilance. Frontiers in psychology, 7.

    Bicchieri, C., & Muldoon, R. (2011). Social norms. Stanford Encyclopedia of Philosophy.

    Available: https://seop.illc.uva.nl/entries/social-norms/


  • Mind-directed preferences

    Question: what are the ultimate motives behind prosocial choices? The main hypotheses include:

    - people prefer to abide by the social norm, and some of these norms prescribe specific distributions of costs and benefits

    - people prefer specific distributions of cost and benefits per se: they are inequity averse or have a sense of fairness

    - people desire their partners to have specific mental states, especially that these partners think they are good cooperators yet cannot be trifled with. They want their partner to know what they consider acceptable or not.


    Main reading

    Molnar, A., Chaudhry, S., & Loewenstein, G. (2021). 'It's Not About the Money. It's About Sending a Message!': Unpacking the Components of Revenge. 


    Further readings

    Ho, M. K., Cushman, F., Littman, M. L., & Austerweil, J. L. (2019). People teach with rewards and punishments as communication, not reinforcements. Journal of Experimental Psychology: General, 148(3), 520-549.

    Heintz, C., Celse, J., Giardini, F., & Data, S. M. (2015). Facing expectations: Those that we prefer to fulfil and those that we disregard. Judgment and Decision Making, 10(5), 442.

  • How to coordinate: focal points

    Main reading

    Mehta, J, Starmer, C., & Sugden, R. (1994). The nature of salience: An experimental investigation of pure coordination games. The American

    Economic Review.

    Further readings:

    Mehta, Judith, Starmer, C., & Sugden, R. (1994). Focal points in pure coordination games: An experimental investigation. Theory and Decision, 36(2), 163–185.

    Bardsley, N., Mehta, J., Starmer, C., & Sugden, R. (2006). The nature of salience revisited: cognitive hierarchy theory versus team reasoning. Economic Journal.

    Crawford, V. (2008). The power of focal points is limited: even minute payoff asymmetry may yield large coordination failures. The American Economic Review, 98(4), 1443–1458.

    Janssen, M. (2001). Rationalizing focal points. Theory and Decision, 50, 119–148.

  • Online sessions in small groups: about the essays

    We will discuss in small groups of five your ideas for the final essays.
    There will be three sessions of one hour.

    Put your name in one of the three available sessions:
    https://docs.google.com/spreadsheets/d/1nUf-e4j8qquMMg62BtHLecUPq_I7ccCD-rE4uuwTWVM/edit?usp=sharing
    (See tab: Groups for session)
    Please try to get evenly distributed (I count on self-emerging order ... )


  • On the value of information

    Dewan, A., & Neligh, N. (2020). Estimating information cost functions in models of rational inattention. Journal of Economic Theory, 187, 105011.