Psychology for Decision-Making

This course discusses the limitations of standard economic models and surveys the ways in which psychological principles have been used to learn about preferences, cognition and behaviour behind economic behaviour. Topics include: trust, vengeance, fairness, impatience, impulsivity, bounded rationality, learning, reinforcement, classical conditioning, loss-aversion, over-confidence, self-serving biases, cognitive dissonance, altruism, subjective well-being and hedonic adaptation. Economic concepts such as equilibrium, rational choice, utility maximisation, Bayesian beliefs, game theory and behaviour under uncertainty are discussed in light of these phenomena. Traditional economics typically uses the simple “rational actor” model, where people perfectly maximise their advantages. We will present models that are psychologically more realistic than this standard model. We will enrich the standard model by incorporating psychological phenomena, including bounded rationality, bounded self-interest and bounded willpower. Applications will include decision theory, game theory, asset pricing, savings, portfolio allocation, stock market predictability and neuroeconomics.