INSTITUTIONAL AND BEHAVIOURAL ECONOMICS
(Econ 511)
Credit Hours: 2hrs
By Abdulaziz Mosa (PhD)
Department of economics, CBE,
Wolkite university
July 2021
Evaluation methods
– Assignment: 30%
– Exam:70%
Course content
Chapter 1: Introduction to Behavioral Economics
Chapter 2: Principles of Behavioral Economics
Chater 3: Institutions, Neoclasical and Institutional Economics
Chapter 4: Transaction cost economics and information
asymmetry
Chapter 5: Trust, collective action and social capital
Chapter 6: Economics of property right
Chapter 7: Resource Governance and Public Policy
Chapter 1
Introduction to Behavioral
Economics
1.1 What is behavioral economics?
Consider many of economics’ core principles: supply and
demand, opportunity cost, consumer behavior, etc. Behind these
concepts lies a dramatic (and inaccurate) assumption: People are
rigidly rational beings – calculating consistently in their own best
interest and behaving accordingly
Conventional economics assumes that economic agents are
perfectly rational, perfectly understand risk and uncertainty and
agents are assumed to be “self-interested”
In reality, people exhibit a number of departures from this
“rational agent” model of decision making
Behavioral economics (BE) – Branch of economics that
incorporates insights from human psychology into models of
economic behavior
1.1 What is behavioral economics?
1.1 What is behavioral economics?
BE attempts to find the patterns of how people act
irrationally and design systems that can prevent common
failures
BE is concerned with systematic departures from rational
choice and attempt to identify systematic “biases”
BE combines psychology, sociology and economics to
examine the effects of biases, habits, norms and perceptions
on economic decision-making.
Behavioral models typically integrate insights
from psychology, neuroscience and microeconomic theory.
Departures from rational choice can inform the development
of more general, descriptive models of economic behavior
Models can be used to develop testable hypotheses and
predict economic behavior
1.2 Traditional Vs. Behavioral economics
Behavioral Economics – A subfield of economics that seeks to
increase the explanatory power of traditional models by
incorporating more realistic psychological foundations
Behavioral economics uses variants of traditional economic
assumptions (often with a psychological motivation) to explain
and predict behavior, and to provide policy prescriptions
Behavioral economics augments standard economic analysis.
Behavioral economics adopts and refines the three core principles
of economics: optimization, equilibrium, and empiricism
(Acemoglu, Laibson, and List 2015).
Behavioral Economics is a natural extension similar to previous
fields:
– Relax perfect competition → Industrial Economics
– Relax perfect information→ Information Economics
– Relax perfect rationality→ Behavioral Economics
1.2 Traditional Vs. Behavioral economics
Both traditional and behavioral economists believe
that
(i) People try to choose their best feasible option
(optimization)
(ii) People try to choose their best feasible option
when interacting with others (equilibrium) and
(iii) Models need to be tested with data (empiricism).
1.2 Traditional Vs. Behavioral economics
BE uses psychological experimentation to develop theories
about human decision making and has identified a range of
biases as a result of the way people think and feel.
BE is trying to change the way economists think about people’
perceptions of value and expressed preferences
According to BE, people are not always self-interested, benefits
maximizing, and costs minimizing individuals with stable
preferences—our thinking is subject to insufficient knowledge,
feedback, and processing capability, which often involves
uncertainty and is affected by the context in which we make
decisions
Most of our choices are not the result of careful deliberation.
We are influenced by readily available information in memory,
automatically generated affect, and salient information in the
environment.
1.3 Does Behavioral Economics mean
everything we’ve learned is useless?
While the rational-choice model is not perfect, it
does an excellent job of predicting human behavior
in many circumstances
– This model can often be generalized or otherwise
extended to account for behavioral anomalies
– Provides a basis for thinking about seemingly
irrational behavior, often illuminating rational
motivations
Exposure to markets has been shown to reduce the
presence of biased actors and/or behavior
1.4 Testing economic theories with data
The evidence from psychology and behavioral economics
has placed an even greater emphasis on the importance of
testing economic models with real data
However, analyzing economic decisions in the real world is
very difficult. In response, two subfields of economics have
emerged as leaders in the evaluation of economic models:
econometrics and experimental economics
• Econometrics: Field that develops and uses statistical and
analytical techniques to test economic theory
• Experimental economics: Branch of economics that relies
on experiments to illuminate economic behavior
These two fields have helped turn economics into a more
evidence-based science