Behavioural economics

Learning Objectives: Apply a range of examples of behavioural anomalies to real business situations. Understand behavioural anomalies in light of an ecologically rational framework.
Lecture handout: Behavioural economics*

Here is an explanation of the Birthday Paradox. Notice that the probability calculation assumes a uniform distribution (i.e. that there’s a 1/365 chance of being born on any given day). In fact, birthdays in July, August and September are more common than other months.

This applet allows you to play multiple games of the Monty Hall problem. An article in the Smithsonian Magazine asks “When Did Girls Start Wearing Pink?

Case:Sun: A CEO’s Last Stand”, Business Week, July 26th 2004

The purpose of the case is to find examples that allow you to complete:

Here’s a nice poster of cognitive biases:

One of my favourite uses of behavioural economics is to reflect on the design of a menu when I am eating in a restaurant. This analysis by William Poundstone is truly fascinating.

Although I take behavioural economics seriously, I don’t think it majorly restricts the usefulness Efficient Market Hypothesis:

The reason for this is (partly) explained in Vernon Smith’s Nobel prize address:

  • Smith, V. L. (2003). “Constructivist and Ecological Rationality in Economics†”. American Economic Review93 (3): 465–508

Further videos on the implication for stock picking are: “The psychology behind irrational decisions“, “Understanding Unconscious Bias” (Royal Society) and from Marginal Revolution University: “How expert are expert stock pickers?” (and subsequent videos such as “Can you beat the market?” “Investing: Why You Should Diversify” and “Who Is More Rational? You or the Market?“)

These resources form part of my Managerial Economics course map. You can watch the full YouTube playlist here. This page ties into Chapter 11 of ‘Economics: A Complete Guide for Business‘.
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