Instructor: ProfessorVincent Crawford
(vcrawfor at dss.ucsd.edu, 858-534-3452) Office hours: Wednesdays 2:00-3:00 or by
appointment, in Economics 319
Teaching
Assistant: Juanjuan "JJ" Meng (jumeng
at ucsd.edu), Sequoyah Hall 234 Office hours: M 9:00-10:00 and F 4:00-5:00,
in Sequoyah Hall 234
Description:The course is divided into two parts. The
first half, on behavioral decision theory, studies models in which
standard
economic rationality assumptions are combined with psychologically
plausible
assumptions on behavior. We consider whether the new models
improve
ability to predict and understand choice under uncertainty (and
certainty),
probabilistic judgment, and intertemporal choice. The second half, on
behavioral game theory, studies how players model others’ decisions in
initial
responses to games; and how players learn to predict others’ decisions
via
learning in repeated play of analogous games. (Each half leaves out
important
topics, some covered in Economics 141, Experimental Economics. For
example, the
first half leaves out overconfidence, procrastination, and
self-control; the
second leaves out altruism, spite, trust, and reciprocity.)
Prerequisites:
Econ 100B or 170B; Econ 100C is
recommended but not required.
Organization: Economics 142 meets from 12:30 -
1:50 p.m. on Tuesdays
and Thursdays, in Peterson Hall room 103. My
office hours and the TAs’ office hours are listed above. Your grade
will be based on a midterm in class Thursday, February 7,
the end of the fifth week; and a final on Tuesday, March 18 from 11:30
a.m
–2:30 p.m. The midterm will count as one-third of your grade, and the
final,
which will cover both halves of the class, as two-thirds. Exams will be
given
only at the scheduled times except for compelling
(and fully documented) medical excuses. It is your
responsibility to
avoid conflicts. You may use calculators
(but not other electronic devices) during exams, but you may not
consult notes,
books, or your classmates’ exam papers. I take violations of academic
honesty
seriously. Any act of academic dishonesty will be reported to
your
academic dean, and will lead to a failing grade in the course and
possibly
dismissal from the university. I have also posted two
optional problem sets, which should be good practice for
the exams.
Texts: There are no required
texts. I have ordered copies of two
recommended texts for the bookstore, which may be
useful to people who are seriously interested in behavioral
economics:
(“Advances”) Colin Camerer, George
Loewenstein, and Matthew Rabin, editors, Advances
in Behavioral Economics, Princeton,
NJ: Princeton University
Press, 2003.
“Advances”
(“CC”) Colin Camerer, Behavioral
Game Theory: Experiments on Strategic Interaction, Princeton, 2003
Copies of these are
also on reserve in Geisel Library.
Approximate mapping from midterm number (average: 49; low:
13; high 79) to letter grades: 0-24:
D or F; 25-44: C-, C, or C+; 45-59: B-, B, or B+; 60-100:
A-, A, or A+
Results
A (sample size: 23)
1. 40% choose to lose $500 for sure (option 1)
2. 70% choose to receive $3000 for sure (option 1)
3. 13 students out of 23 choose exactly 99% (2 chose 50, and 3 chose
below 50; the average was 73)
4. Average percentage 53.57%
5. Average money $ 154.1
B (sample size: 23)
1. 78% choose to receive $500 for sure (option 1)
2. 22% choose to receive $3000 with probability 0.25 (option 1)
3. 13 students out of 23 choose exactly 99% (1 chose 50, and 5 chose
below 50; the average was 76)
4. Average percentage 65.52%
5. Average money $ 108.1
Additional evidence (possibly not covered in lectures):
CGCB’s matrix games (pdf,
Figure 2, p. 11; Table II, p. 24); CGC’s two-person guessing games (pdf,
pp. 7, 9, 12, 13, 16); old Mehta,
Starmer, Sugden slides (not online); Roth’s
Nashbargaining.slides pdf, pp. 2-6, 10-16; Roth’s
pdf, pp. 1, 6-13, on Roth et
al.'s four-country bargaining experiments; old Ho and
Weigelt slides (not online)
Learning Theory (possibly not covered in
lectures):
reinforcement, beliefs-based, and
experience-weighted attraction learning; initial responses plus simple
basin of attraction evolutionary story: Nagore Iriberri's lecture
notes
on adaptive learning models (pdf, pp. 1-9; pdf,
pp. 15-17)
Our hero Westley, in the guise of the Dread Pirate Roberts, confronts
his foe-for-the-moment, the Sicilian, Vizzini. Westley challenges him
to a Battle of Wits. Two glasses are placed on the table, each
containing wine and one purportedly containing poison. The challenge,
simply, is to select the glass that does not lead to immediate death.
Roberts: All right: where is the poison? The battle of wits has begun.
It ends when you decide and we both drink, and find out who is right
and who is dead.
Vizzini: But it's so simple. All I have to do is divine from what I
know of you. Are you the sort of man who would put the poison into his
own goblet, or his enemy's? Now, a clever man would put the poison into
his own goblet, because he would know that only a great fool would
reach for what he was given. I'm not a great fool, so I can clearly not
choose the wine in front of you. But you must have known I was not a
great fool; you would have counted on it, so I can clearly not choose
the wine in front of me.
Roberts: You've made your decision then7
Vizzini: Not remotely. Because iocane comes from Australia, as everyone
knows. And Australia is entirely peopled with criminals. And criminals
are used to having people not trust them, as you are not trusted by me.
So I can clearly not choose the wine in front of you.
Roberts: Truly, you have a dizzying intellect.
The scene, beyond providing some comic relief on the theme of common
knowledge, also has an important lesson on strategic moves; if the
rules of the game may be changed, then the game can be rigged to one
player's advantage:
Vizzini: let's drink -- me from my glass, and you from yours.
[allowing Roberts to drink first, he swallows his wine]
Roberts: You guessed wrong.
Vizzini (roaring with laughter): You only think I guessed wrong --
that's what's so funny! I switched glasses when your back was turned.
You fool. You fell victim to one of the classic blunders. The most
famous is "Never get involved in a land war in Asia." But only slightly
less well known is this: "Never go in against a Sicilian when death is
on the line."
[He laughs and roars and cackles and whoops until he falls over dead.]
[Roberts begins to rescue Buttercup, the girl over whom this battle was
staged in the firstplace]
...
Buttercup: To think -- all that time it was your cup that was poisoned.
Roberts: They were both poisoned. I spent the last few years building
up an immunity to iocane powder.
Avinash Dixit on the credibility if threats in The Maltese Falcon:
Brinkmanship: Many movies have
scenes that deal with the question of how to get some vital information
that only your adversary possesses because he knows that the threat of
killing him in not credible. The situation plays out differently in
High Wind in Jamaica, Crimson Tide, The Maltese Falcon, and The Gods
Must Be Crazy... In The Maltese Falcon, the hero, Samuel Spade (played
by Humphrey Bogart), is the only person who knows where the priceless
gem-studded falcon is hidden, and the chief villain, Caspar Gutman
(Sydney Greenstreet), is threatening him for his information. This
produces a classic exchange, here cited from the book (Hammet 1930,
223-24) but reproduced almost verbatim in the movie.
Spade flung his words out with a brutal sort of
carelessness that gave them more weight than they could have got from
dramatic emphasis or from loudness. "If you kill me, how are you going
to get the bird? If I know you can't afford to kill me till you have
it, how are you going to scare me into giving it to you?"
Gutman cocked his head to the left and considered
these questions. His eyes twinkled between puckered lids. Presently, he
gave his genial answer: "Well, sir, there are other means of persuasion
besides killing and threatening to kill."
"Sure," Spade agreed, "but they're not much good
unless the threat of death is behind them to hold the victim down. See
what I mean? If you try something I don't like I won't stand for it.
I'll make it a matter of your having to call it off or kill me, knowing
you can't afford to kill me."
"I see what you mean." Gutman chuckled. "That is an
attitude, sir, that calls for the most delicate judgement on both
sides, because, as you know, sir, men are likely to forget in the heat
of action where their best interests lie and let their emotions carry
them away."
Spade too was all smiling blandness. "That's the
trick, from my side," he said, "to make my play strong enough that it
ties you up, but yet not make you mad enough to bump me off against
your better judgment."
Outline and
Readings I have listed many more readings than we can
possibly cover in class, in case you wish to read further; the most
important
readings are marked *. Those few readings for which online access may
be
difficult are available via email (+); the others should be easy to
find at
JSTOR (http://www.jstor.org/jstor/),
Google Scholar, or ScienceDirect. (I may be able to supply some of the
readings
myself if you cannot download them, but please try before asking me.)
Colin
Camerer, pages 617-673 of “Individual Decision
Making,” Chapter 8 in John Kagel and Alvin Roth,
editors, The Handbook of Experimental Economics, Princeton, NJ:
Princeton University Press, 1995, pp.
587-703
2. Choice under Uncertainty (or Certainty)
a. Classical Expected Utility Model
*J. Marschak, “Scaling of Utilities and Probability,” in Martin Shubik,
editor, Game Theory and Related Approaches to Social Behavior,
New York:
John Wiley and Sons, 1964 http://dss.ucsd.edu/~vcrawfor/ScalingOfUtilities.pdf (open and use pdf menu to rotate image one quarter turn)
*Mark Machina, “Expected Utility Hypothesis,”
in John Eatwell, Murray
Milgate, and Peter
Newman, editors, The New Palgrave:A
Dictionary of Economics, London:
Macmillan Press and New York: Stockton
Press, 1987, vol. 2, pp. 232-239 http://dss.ucsd.edu/~vcrawfor/ExpectedUtilityHypothesis.pdf
Paul
Samuelson, “Comments on the Favorable-Bet
Theorem,” Economic Inquiry 12 (1974),
pp. 345-55;
reprinted in
his Collected Scientific Papers, vol.
IV, pp. 550-560
Paul Samuelson, “Risk and Uncertainty: A Fallacy
of Large Numbers,” Scientia 98 (1963),
pp.108-113;
reprinted in
his Collected Scientific Papers, vol.
I, pp. 153-158
b. Loss Aversion, Reference Dependence, and
Prospect Theory
*Colin Camerer, “Three cheers--psychological,
theoretical, empirical--for loss-aversion,” Journal
of Marketing
Research, 42
(May 2005),
129-133http://www.hss.caltech.edu/~camerer/lossaversionJMR2.doc
Charles Plott and Kathryn
Zeiler, “The Willingness to Pay-Willingness to Accept Gap, the
‘Endowment Effect,’ Subject Misconceptions, and Experimental Procedures
for Eliciting Valuations,” American Economic
Review 95 (2005), pp. 530-45; available
through Ingenta Connect on campus: http://uclibs.org/PID/31653.
Colin
Camerer, “Prospect Theory in the Wild: Evidence from the Field,” in D.
Kahneman
and A. Tversky, editors, Choices,
Values, and Frames, Cambridge:
Cambridge University Press, 2002; Chapter 5 in “Advances”; http://www.hss.caltech.edu/SSPapers/wp1037.pdf.
+Botond Kőszegi and
Matthew Rabin, “Reference-Dependent Risk Attitudes,” American
Economic Review, 97 (2007), 1047-1073;
available soon through Ingenta Connect on campus: http://uclibs.org/PID/31653.
Colin Camerer, pages 590-616 of “Individual
Decision
Making,” Chapter 8 in John Kagel and Alvin Roth,
editors, The Handbook of Experimental Economics, Princeton, NJ:
Princeton University Press, 1995, pp.
587-703
*VC, Sections 1, “Introduction”; 2, “Theoretical
Frameworks and Unresolved
Questions”; 3, “Experimental Designs”; and 7, “Conclusion”
(“VC” is Vincent Crawford, “Theory
and Experiment in the Analysis of Strategic Interaction,” Chapter 7 in
David
Kreps and Ken Wallis, Editors, Advances
in Economics and Econometrics: Theory and Applications, Seventh World
Congress,
Vol. I, Cambridge
1997; Chapter 12 in “Advances”; manuscript at http://dss.ucsd.edu/~vcrawfor/ShortTh&Exp.pdf.)
Great Summer Reading: Thomas
Schelling, The Strategy of Conflict,Oxford 1960 or
Harvard
1980
6. Theory
and evidence on initial responses to games
6a. Iterated dominance and equilibrium in simultaneous-move games
Miguel Costa-Gomes and Vincent Crawford, “Cognition
and Behavior in Two-Person Guessing Games: An Experimental Study,” American Economic Review96
(December 2006), 1737-1768; athttp://dss.ucsd.edu/~vcrawfor/#GuessCamerer, Colin, Ho, Teck-Hua and Chong, Juin Kuan,
“A Cognitive
Hierarchy Model of Games,” Quarterly
Journal of Economics 119 (2004),
861-898; http://www.hss.caltech.edu/~camerer/qjefinal6.pdf
Vincent Crawford and Nagore Iriberri, “Fatal Attraction: Focality,
Naivete,
and Sophistication in Experimental
Hide-and-Seek Games,” American
Economic Review, 97 (2007), in press; at http://dss.ucsd.edu/~vcrawfor/#Hide
6b.Backward induction,
subgame-perfectness, and forward induction in extensive-form games
*VC,
Sections 4.2, “Ultimatum and alternating-offers bargaining”; 5.1,
“Signaling games”; and 6.3, “Simultaneous coordination revisited”;
http://dss.ucsd.edu/~vcrawfor/ShortTh&Exp.pdf. CC, Section 4.2, “Structured Bargaining”; Chapter 5,
“Dominance-Solvable
Games”; and Section 7.2, “Asymmetric Players: Battle of the Sexes”
T. Randolph Beard and Richard Beil, “Do People Rely on the
Self-interested Maximization of Others? An Experimental Test,” Management Science 40 (1994), 252-262;
at JSTOR
Alvin
Roth, Vesna Prasnikar, Masahiro Okuno-Fujiwara, and Shmuel Zamir,
“Bargaining and Market Behavior in Jerusalem,
Ljubljana, Pittsburgh,
and Tokyo:
An
Experimental Study,” American
Economic Review 81 (1991),
1068-1095; at JSTOR
6c.
Selection among multiple strict equilibria via structure, framing,
fairness, or complexity
Judith
Mehta, Chris Starmer, and Robert Sugden, “The Nature of Salience:
An Experimental Investigation of Pure Coordination Games,” American
Economic Review 84 (1994),
658-674; at JSTOR
Vincent
Crawford “Adaptive
Dynamics in Coordination Games,” Econometrica
63 (January 1995), 103-143: Section 2 (pp. 106-109, especially footnote
8); http://dss.ucsd.edu/~vcrawfor/Crawford95EMT.pdf
Alvin Roth,
"Bargaining Phenomena and Bargaining Theory," Chapter 2 (pp. 14-41)
in Roth (ed.), Laboratory Experimentation
in Economics: Six Points of View, Cambridge,
1987
Alvin Roth,
"Toward a Focal-Point Theory of Bargaining," Chapter 12 (pp. 259-268)
in Roth, (ed.), Game-Theoretic
Models of
Bargaining, Cambridge,
1985
Vincent
Crawford, “Learning
Dynamics, Lock-in, and Equilibrium Selection in Experimental
Coordination Games,” in Ugo Pagano and Antonio Nicita, editors, The Evolution of Economic Diversity, London
and New York:
Routledge, 2001, 133-163; UCSD Discussion Paper
97-19; at http://dss.ucsd.edu/~vcrawfor/ucsd9719.pdf
Vincent
Crawford and
Bruno Broseta, "What Price Coordination? The Efficiency-enhancing
Effect of Auctioning the Right to
Play,” American
Economic Review 88 (March 1998), 198-225; http://dss.ucsd.edu/~vcrawfor/CrawBro98AER.pdf
