Arguably the newest field in economics, behavioral economics has gained acceptance by mainstream economists over the past 30 years, culminating with Richard Thaler winning the Nobel Prize in 2017. The basic premise of behavioral economics is that we cannot explain all human behavior by relying on the assumption that preferences are well-defined, rational, and consistent across time. While this may seem obvious to you and me, as we often make irrational decisions, economists refused to believe this premise for many years. Some economists argued that in the aggregate, preferences are stable, while others argued that irrationality is rather a problem of learning and understanding, thus calling into question behavioral results derived from experimental subjects.

Before Thaler, Daniel Kahneman and Amos Tversky pioneered the field of behavioral economics at Hebrew University in Tel Aviv. Our readings this week discuss their relationship, as well as, some of the main insights gained from behavioral economics to date.

Things to remember while reading:

  • Behavioral economics builds off what is called “prospect theory”. In their 1979 paper, Kaheman and Tversky argue against how we currently model expected utility theory. According to them, “Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty.” For those who are mathematically inclined, I would recommend looking up their paper in the journal, Econometrica.
  • Thaler is not just famous for his academic research in behavioral economics. In his book, Nudge: Improving Decisions about Health, Wealth, and Happiness, Thaler and his coauthor, Cass Sunstein, suggest that we can “nudge” people toward better decision-making (going to the doctor, paying taxes, etc.) by making subtle changes to the environments in which decisions are made.
  • Behavioral economics is entirely in debt to the work that psychologists have been doing for many years. Economists started testing theories that psychologists agreed were obvious for years, and then economists started to realize that economic models may capture less about how people make decisions that we thought they did.

You’ll response to 2 students i will post them later but you can do the discussion and reading response paper for now.

Discussion Posts (min 500 – max 515 word count) – Each week, all students will be responsible for posting to our discussion board and responding to at least two other students. As this is an online course, posting to the discussion board is crucial for the facilitation of class conversation and the understanding of course materials.

Reading response paper (500-1000 words) – Throughout the course, you will complete two responses to our weekly readings. This means reading all readings for a given week and thoughtfully responding to them, giving a brief summary of their content and your opinion. These responses may be done on your schedule,

Please make the discussion posts in a different file, Respond to 2 students in a different file, and reading response paper in a different file


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