BEHAVIOURAL ECONOMICS AND PSYCHOLOGY

This course introduces students to behavioral economics as a bridge between economics, psychology, philosophy, and political science. Its central goal is to teach students how to use rational choice theory as a benchmark while understanding why real agents often depart from it in systematic and institutionally consequential ways. Students will first learn the foundations of the core normative models of choice under certainty, risk, and uncertainty, including utility theory, expected utility, subjective probability, and Bayesian updating. They will then examine major behavioral departures from these models, including Prospect Theory, reference dependence, loss aversion, framing, heuristics, biases, anchoring, availability, overconfidence, and bounded rationality. The course also develops the social and institutional implications of behavioral economics. Students will study how judgment and choice operate in markets, legal settings, public policy, democratic politics, strategic interaction, social norms, and collective decision-making. Particular attention is given to the distinction between descriptive, normative, and prescriptive analysis: how people do behave, how they should reason or choose, and how institutions can be designed around realistic psychological assumptions. By the end of the course, students should be able to analyze behavioral evidence critically, apply behavioral concepts to PPE problems, and evaluate the ethical and political stakes of behavioral public policy.

Microeconomics

By the end of the course, students will be able to explain the main rational-choice benchmarks used in economics, including utility theory, expected utility, subjective probability, and Bayesian updating. They will be able to distinguish normative, descriptive, and prescriptive approaches to judgment and choice, and to use this distinction when evaluating behavioral evidence. Students will understand major behavioral models and findings, including Prospect Theory, heuristics and biases, framing, anchoring, availability, bounded rationality, and social preferences. Students will also be able to apply behavioral concepts to problems in PPE, including voting, legal judgment, market behavior, public policy, risk regulation, social norms, and institutional design. They will learn to interpret experimental and empirical findings critically, assessing both their theoretical significance and their limitations. Finally, students will be able to evaluate behavioral interventions, including nudges and related policy tools, with attention to effectiveness, legitimacy, autonomy, welfare, and democratic accountability.

This course introduces behavioral economics as a central tool for PPE. It studies how real agents judge, choose, cooperate, and respond to institutions when they face uncertainty, limited attention, cognitive constraints, social expectations, and political environments. Rational choice theory is used not as a realistic psychological description of human beings, but as a benchmark. Against that benchmark, the course examines systematic departures in judgment and choice and asks what they imply for markets, law, democracy, public policy, and institutional design. The course is organized in three parts. The first part focuses on individual decision-making. It begins with rational choice under certainty, introducing preferences, ordinal utility, and rationality as coherence. It then moves to decision under risk, where outcomes are uncertain but probabilities are given, and studies expected value, expected utility, and the von Neumann–Morgenstern framework. The course then examines behavioral violations of this benchmark, including the Allais paradox, framing effects, the certainty effect, and the development of Prospect Theory. Particular attention is given to reference dependence, loss aversion, probability weighting, status quo bias, the endowment effect, mental accounting, and intertemporal choice. The aim is to understand both the power of formal models and the reasons why actual behavior often departs from them. The second part turns to judgment under uncertainty. Here the central problem is no longer simply how agents choose given their beliefs, but how those beliefs are formed in the first place. Students study subjective probability, Bayesian rationality, and the attempt to represent beliefs as coherent degrees of confidence. The course then examines the psychological mechanisms that shape judgment when people do not calculate explicitly: bounded rationality, heuristics, accessibility, attribute substitution, representativeness, base-rate neglect, regression to the mean, anchoring, availability, affect, and risk perception. This part connects formal models of belief with the empirical study of how citizens, experts, officials, voters, investors, and judges reason under uncertainty. The third part moves from the individual to society. It studies collective decision-making, social choice, strategic interaction, fairness, cooperation, coordination, equity, and social norms. Social choice theory shows why aggregating individual preferences into collective decisions is difficult, leading to problems such as majority cycles and Arrow’s theorem. Game theory provides the grammar of strategic interaction: bargaining, trust, prisoner’s dilemmas, public goods, coordination games, conventions, and conflicts over equilibrium selection. Behavioral and experimental evidence on ultimatum games, trust games, public-goods games, punishment, reciprocity, and fairness shows that social behavior cannot be reduced to narrow self-interest. The course then examines how norms emerge, stabilize, and change, drawing on work on coordination, cooperation, common-pool resources, and expectations-based theories of social norms. Throughout the course, three questions recur: what would rational judgment and choice require; how do human beings actually judge and choose; and how should institutions and policies be designed once realistic psychology is taken seriously? The course culminates in behavioral public policy, including nudges, sludge, boosts, norm-based interventions, and critiques of individualizing approaches to policy.

There is no single required textbook for the course. A course package will be made available by the instructor on MyLuiss. The package will include selected academic papers, excerpts from relevant textbooks, and original lecture notes prepared for the course. These materials will constitute the required readings for each week and will be updated or supplemented when appropriate. Students are expected to complete the assigned readings before class and to use the lecture notes as the main guide to the conceptual structure of the course. Additional optional readings may be indicated for students who wish to explore specific topics in greater depth.

Lectures and Discussions. Throughout the semester we will hold “experimental sessions” in which students will be called to replicate classic experiments from behavioral economics and behavioral game theory as opportunities to deepen the understanding of both concepts and methodologies.

Midterm written exam (45%), Final written exam (45%), Attendance (10%).

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