Predictability Irrational

By: Daniel Ariely

This course describes how the use of evidence from psychology can improve the predictive power of standard economic theories. Standard economic theories represent human beings in ways that are often different from how they really behave. Evidence suggests that human behavior diverges often from standard notions of economic rationality in predictable ways. Predictions about individual behavior are more accurate and the policies of governments are more effective when this evidence is effectively used. This course is a non-technical introduction to the intersection of psychology and economics.

This new course seeks to provide a wide-ranging but non-technical survey of behavioral economics, which is a relatively new but rapidly developing field. Experimental evidence on behavior collected by psychologists and, increasingly, economists will be presented. Observed behavior will be compared and contrasted with the behavior assumed in standard economic theory. The ways in which the predictions of economic theory can be improved when evidence on the characteristics of human behavior are added will be discussed. The course will also discuss how the combination of economic and psychological theory improves the design of governmental policies.

As a result of taking this course, students should be able to cite evidence of human behavior that represent predictable departures from basic economic theory. Students should also be able to cite examples where the predictions of standard economic theory are improved when psychological principles are incorporated into the theory.

This explain the meaning of the following concepts in the economic and psychological study of decision making, and demonstrate an awareness of the available evidence on them: mental accounting, anchoring, the endowment effect, the default bias, framing, dynamic inconsistency, pre-commitment, the sunk cost fallacy, projection bias, hot-hand fallacy, gambler’s fallacy, prospect theory, loss aversion, and diminishing sensitivity.

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