Course Syllabus

Behavioral Economics:          European Case Studies

Course Description

Behavioral Economics is revising the standard economic model of human behavior by integrating psychological research and economic science. Observations of how people actually make decisions under the influence of psychological factors, lay the ground for the field of behavioral economics. The traditional view in economics (neoclassical) assume that every decision is rational. Even if some of the assumptions in economics is challenged, there are still useful links between neoclassical and behavioral economics.  This course study recent research in behavioral economics and expose how humans systematically deviate from rationality in our economic decision-making. We explore how this can be applied to financial markets, economic models and how to improve your own economic decisions. The analytical skills of the students will be developed through work with conflicting theories and with data that contradicts the strictly rational economic model. We focus also on cases and examples in order to detect new directions in understanding and predicting how people actually act and interact in the marketplace.

Course Modules

1. The brain and the "drain" – neuroeconomics. Neural activity in the brain affects how we perceive our own reality and consciousness. For instance, the effect of dopamine and the function of the amygdala. And due to the brain’s scarce resources it has to make short-cuts. Insights how the brain actually works lay the ground for this course in behavioral economics.
2. Cognitive psychology -heuristics and biases. Cognitive psychology examines what drives human behavior when it comes to memory, impression, learning, creativity and problem solving. Cognitive biases are how the brain perceives something “wrong”, a kind of misinterpretation. We examine how these biases affect our decision-making in economics, finance and everyday life.
3. Social psychology – social interaction, norms and group-behavior. One of the strongest forces for decision and behavior is social pressure, group-behavior and norms. We do imitate other people and often this is an unconscious influence. We study the behavior of groups and how it affects individual decisions, economy and other aspects of the society.
4. Neoclassical economic theory vs behavioral economics. The normative approach in economic and financial theory is based on rationality and efficient markets. With this assumed rationality, economic behavior can be measured mathematically and derived. Behavioral economics on the other hand, is descriptive and based on observations of how economic decision actually are made. Behavioral economics use inputs from different fields (as biology and psychology) but has no unified theory. In this part we study the difference between neoclassical and behavioral economics and its different view on rationality, theory, decisions and how they are linked together. 
5. Risk, uncertainty and decision-making. Uncertainty can change our way of making decisions in a profound way. Prospect Theory lay the ground for this important topic. What is the optimal choice under certainty and what are the preferred choice under uncertainty? We study judgement, decisions and how to improve your decision-making. 
6. Behavioral biases in financial markets. Financial markets are probably the best study subject for financial psychology and behavioral biases. Individual financial decisions are affected both from our own biases as well as the markets biases. Based on insights from cognitive and social psychology we study the boom and bust in asset bubbles, investment psychology and tools to improve your own financial decisions.

Learning Objectives       

By the end of this course students will:

• learn how risk and uncertainty affect your economic decisions, and get the tools to improve it.   
• learn to identify common cognitive biases, to improve decision-making in many aspects of life.  
• learn how to apply behavioral theories on financial markets and investments.
• identify how social norms affect behavior and how you can practice this insight in interaction with others. 
• analyze the differences between neoclassical economic theory and behavioral economics, but also how they are linked together.    

Faculty
Lars-Erik Boström is specialist and educator in behavioral finance and a financial consultant. He is author of a Swedish book about behavioral finance; "Börsens Psykologi - så vinner du över dina hjärnspöken och gör bättre aktieaffärer" (Sterners förlag, 2015). He is also a portfolio manager for a swedish foundation, with SEK 1 billion in managed capital. Lars-Erik has long work experience (+25) in asset allocation, portfolio management and financial advisory from Handelsbanken Asset Management (www.handelsbanken.com) in Stockholm. Educator in behavioral finance and portfolio theory at Handelsbanken.  M.Sc of Economics and Business, Economic Analysis, Örebro University, Sweden. Certified Financial Analyst (CEFA), Stockholm School of Economics, Sweden.

Readings

Misbehaving - the making of Behavioral Economics (2015) Richard H Thaler

The textbook will be supplemented with articles on current topics.

Field Studies

• Behavioral experiments in Stockholm City. In this field study we do some behavioral experiments using Stockholm city as a laboratory.
• Does Swedish asset managers and economists use behavioral insights? The students will meet different professional asset managers and economists in Stockholm. Based on these meetings the students investigate how forecasts are made, which models are used, how investment decisions are made and analyze the results. The analysis will explore if there are any behavioral biases in these processes.

Guest Lecturers

Erik Angner, Professor of Practical Philosophy at Stockholm University. PhD in both Philosophy and Economics. Author of "A course in behavioral economics".

Approach to Teaching

The course mixes theory from texts and research papers. The course combines discussion-based class sessions, projects, team work, field studies and team presentations through assignments. Your learning process depends on your active participation in class as well as outside the classroom. You are strongly encouraged to bring your observations into the classroom.

Expectations of the Students

We expect students to be curious and willing to engage in discussions and to come to class having done the readings so you can in fact participate.

Note on the Use of Electronic Devices in the Classroom

Laptop, tablets, and smartphones are NOT to be used in class. 

Evaluation & Grading

Academic Regulations  

Please make sure to read the Academic Regulations on the DIS website. There you will find regulations on: 

• Course Enrollment and Grading  
• Academic Expectations and Honor Code 

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