|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.
|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:
- A List of Behavioural Anomalies, March 2011
Here’s a nice poster of cognitive biases:
The UK government are so concerned with “excessive optimism” that they released guidance on how to mitigate it.
- HM Treasury, 2013 Supplementary Green Book Guidance: Optimism Bias
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 Review. 93 (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?“)
- Audio: “Brilliant vs Boring“, Planet Money
|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‘.|