UCSD Department of Economics


Economics 142, Behavioral Economics, Winter 2008

Instructor: Professor Vincent 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,

Copies of these are also on reserve in Geisel Library.


Course materials (download free Foxit Reader for pdf files; read Preston McAfee on why it's better (it is: a lot) and on the also-free PDF Forge Creator to make your own pdf files)

Behavioral Decision Theory (first half)
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

Behavioral Game Theory (second half)

Quoted from a review by Mike Shor:

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.

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.)

1. Overview of Behavioral Decision Theory

 *Matthew Rabin, “A Perspective on Psychology and Economics,” European Economic Review 46 (2002), pp. 657-685; http://dx.doi.org/10.1016/S0014-2921%2801%2900207-0.

*Colin Camerer and George Loewenstein, “Behavioral Economics: Past, Present, Future,” Chapter 1 in “Advances”; manuscript at http://www.hss.caltech.edu/~camerer/ribe239.pdf

*Daniel Kahneman, “Maps of Bounded Rationality: Psychology for Behavioral Economics,”American Economic Review 93 (2003), 1449-1475; http://links.jstor.org/sici?sici=0002-8282%28200312%2993%3A5%3C1449%3AMOBRPF%3E2.0.CO%3B2-%23


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

Matthew Rabin, “Psychology and Economics,” Journal of Economic Literature 36 (1998), pp. 11-46; http://links.jstor.org/sici?sici=0022-0515%28199803%2936%3A1%3C11%3APAE%3E2.0.CO%3B2-B  

Daniel Kahneman, “A Psychological Perspective on Economics,” American Economic Review Papers and Proceedings 93 (2003), pp. 162-168; http://links.jstor.org/sici?sici=0002-8282%28200305%2993%3A2%3C162%3AAPPOE%3E2.0.CO%3B2-5  

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


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,”
of Marketing Research
, 42 (May 2005), 129-133 

*Daniel Kahneman, Jack Knetsch, and Richard Thaler, “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias,” Journal of Economic Perspectives 5 (1991), pp. 193-206;

*Matthew Rabin and
Richard Thaler, “Anomalies: Risk Aversion,” Journal of Economic Perspectives 15 (2001), pp. 219-232; http://links.jstor.org/sici?sici=0895-3309%28200124%2915%3A1%3C219%3AARA%3E2.0.CO%3B2-B

*Jeremy Siegel and Richard Thaler, “Anomalies: The Equity Premium Puzzle,” Journal of
Economic Perspectives 11 (1997), pp. 193-205; http://links.jstor.org/sici?sici=0895-3309%28199724%2911%3A1%3C191%3AATEPP%3E2.0.CO%3B2-0

*+Botond Kőszegi and Matthew Rabin, “A Model of Reference-Dependent Preferences,”
Quarterly Journal of Economics 121 (2006), pp. 1133-1165; http://www.mitpressjournals.org/doi/pdf/10.1162/qjec.121.4.1133

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.

Justin Sydnor, “Abundant Aversion to Moderate Risk: Evidence from Homeowners Insurance,” manuscript http://wsomfaculty.case.edu/sydnor/deductibles.pdf

Colin Camerer, Linda Babcock, George Loewenstein, and Richard Thaler, “Labor Supply of New
York City Cabdrivers: One Day at a Time,” Quarterly Journal of Economics 112 (1997), pp. 407-441; Chapter 19 in “Advances”;

+Botond Kőszegi and Matthew Rabin, “Reference-Dependent Risk Attitudes,” American Economic
Review, 97 (2007), 1047-1073; available soon through Ingenta Connect on campus:

3. Probabilistic Judgment

*Amos Tversky and Daniel Kahneman, “Judgment under Uncertainty: Heuristics and Biases,”
Science 185 (1974), pp. 1124 – 1131; http://links.jstor.org/sici?sici=0036-8075%2819740927%293%3A185%3A4157%3C1124%3AJUUHAB%3E2.0.CO%3B2-M

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

Mahmoud El-Gamal and David Grether, “Are People Bayesian? Uncovering Behavioral Strategies,” Journal of the American Statistical Association, 90 (1995), pp. 1137-1145;

Matthew Rabin, “Inference by Believers in the Law of Small Numbers,” Quarterly Journal of
Economics 117 (2002), pp. 775 – 816; http://www.mitpressjournals.org/doi/pdf/10.1162/003355302760193896 

Matthew Rabin and Dimitri Vayanos, “The Gambler's and Hot-Hand Fallacies in a Dynamic-Inference Model,” manuscript, 2005; http://elsa.berkeley.edu/~rabin/HotHand8.pdf

Linda Babcock and George Loewenstein, “Explaining Bargaining Impasse: The Role of Self-Serving Biases,” Journal of Economic Perspectives 11 (1997), pp. 109-126
; Chapter 11 in “Advances”; http://links.jstor.org/sici?sici=0895-3309%28199724%2911%3A1%3C109%3AEBITRO%3E2.0.CO%3B2-T

4. Intertemporal Choice 

*George Loewenstein and Richard Thaler, “Anomalies: Intertemporal Choice,” Journal of
Economic Perspectives 3 (1989), pp. 181-193; http://links.jstor.org/sici?sici=0895-3309%28198923%293%3A4%3C181%3AAIC%3E2.0.CO%3B2-K

*David Laibson, “Golden Eggs and Hyperbolic Discounting,” Quarterly Journal of
Economics 112 (1997), pp. 443-478; Chapter 15 in “Advances”; http://links.jstor.org/sici?sici=0033-5533%28199705%29112%3A2%3C443%3AGEAHD%3E2.0.CO%3B2-D

Shane Frederick, George Loewenstein, and Ted O’Donoghue, “Time Discounting and Time Preference: A Critical Review,” Journal of Economic Literature 40 (2002), pp. 351-401;
Chapter 6 in “Advances”; http://www.hss.caltech.edu/~camerer/NYU/03-LowensteinODonoghueFrederick+.pdf; at JSTOR

Ted O’Donoghue and Matthew Rabin, “Doing it now or later,” American Economic Review 89 (1999), 103–124; Chapter 7 in “Advances”; http://links.jstor.org/sici?sici=0002-8282%28199903%2989%3A1%3C103%3ADINOL%3E2.0.CO%3B2-E

Ted O’Donoghue and Matthew Rabin, “Choice and Procrastination,” Quarterly Journal of Economics 116 (2001), 121-160; http://links.jstor.org/sici?sici=0033-5533%28200102%29116%3A1%3C121%3ACAP%3E2.0.CO%3B2-%23 


5. Overview of Behavioral Game Theory

*CC, Chapter 1, “Introduction”; Appendix 1.1, “Basic Game Theory”; and Appendix 1.2, “Experimental Design”; http://dss.ucsd.edu/~vcrawfor/Camerer_Ch1intro.pdf

*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

Theory and evidence on initial responses to games

6a. Iterated dominance and equilibrium in simultaneous-move games

*CC, Chapter 5, “Dominance-Solvable Games”

*VC, Section 4, “Dominance and Iterated Dominance”;
manuscript at http://dss.ucsd.edu/~vcrawfor/ShortTh&Exp.pdf.

Adam Brandenburger, “Knowledge and Equilibrium in Games,” Journal of Economic
Perspectives 6 (1992), 83-101;

Rosemarie Nagel, “Unraveling in Guessing Games: An Experimental Study,” American E
conomic Review 85 (1995), 1313-1326; http://links.jstor.org/sici?sici=0002-8282%28199512%2985%3A5%3C1313%3AUIGGAE%3E2.0.CO%3B2-V

Miguel Costa-Gomes and Vincent Crawford, “Cognition and Behavior in Two-Person Guessing Games: An Experimental Study,” American Economic Review
96 (December 2006), 1737-1768; at http://dss.ucsd.edu/~vcrawfor/#Guess

Camerer, 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

*VC, Section 5, “Simultaneous Coordination”; http://dss.ucsd.edu/~vcrawfor/ShortTh&Exp.pdf.

CC, Section 4.1, “Unstructured Bargaining”; Chapter 7, “Coordination”

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, Uri Gneezy, and Yuval Rottenstreich, “The Power of Focal Points is Limited: Even Minute Payoff Asymmetry May Yield Large Coordination Failures,” manuscript, 2007; http://dss.ucsd.edu/~vcrawfor/MS20050181CrawfordGneezyRottenstreichResubmission.pdf  

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

7. Equilibrium selection via learning

*VC, Section 6, “Dynamic Evidence”;

John Van Huyck, Joseph Cook, and Raymond Battalio (1997): “Adaptive Behavior and Coordination Failure,” Journal of Economic Behavior and Organization 32, 483-503; http://erl.tamu.edu/jvh_gtee/os3.pdf;

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 "Adaptive Dynamics in Coordination Games," Econometrica 63 (January 1995), 103-143; http://dss.ucsd.edu/~vcrawfor/Crawford95EMT.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

Vincent Crawford / UCSD Department of Economics / last modified 19 March 2008.

Copyright © Vincent P. Crawford, 2008. All federal and state copyrights reserved for all original material presented in this course through any medium, including lecture or print.