Syllabus academic year 2011/2012
(Created 2011-09-01.)
ECONOMIC AND FINANCIAL DECISION-MAKINGEXTN80
Credits: 7,5. Grading scale: TH. Cycle: A (Second Cycle). Main field: Technology. Language of instruction: The course will be given in English. EXTN80 overlaps following cours/es: NEKM61, NEKN22 and TEK090. Optional for: F4, F4fm, I4, I4fir, Pi4, Pi4fm. Course coordinator: Erik Wengström, Department of Economics. Prerequisites: TEK120 Microeconomic Theory or TEK135 Mikcoeconomic Theory or NEKB21 Microeconomic Analysis. Assessment: Examination consists of compulsory assignments and a final written exam which takes place at the end of the course. There will be further opportunities for examination close to this date. Other forms of examination may be used to a limited extent. Further information: For more information, please contact the Department of Economics. Home page: http://www.nek.lu.se.

Aim
The goal for education at this level is to instil a deeper understanding of economic theory and the application of scientific methods of analysis. The objective is also to instil an ability to handle empirical material in an independent and critical manner. The more specific aims of this course are to enhance students’ understanding of situations where individuals, firms and organizations operate in environments characterized by risk, uncertainty and imperfect information.

Knowledge and understanding
For a passing grade the student must

Students shall have a knowledge and understanding of:

· axiomatic theories of individual choice under risk and uncertainty,

· reference dependent utility theories,

· theories of inter-temporal decision making,

· how these theories contribute to the analysis of a wide range of fundamental problems in economics and finance

· psychological phenomena important for economic and financial decision making.

Skills and abilities
For a passing grade the student must

Students shall have the ability to independently apply models of decision making to problems in a wide range of economic and financial contexts. Students shall also be able to communicate to a layman how the models can explain various economic phenomena, for example the demand for insurance and investor behaviour.

Judgement and approach
For a passing grade the student must

develop an ability to pursue further studies in the field and to seek and evaluate information with a high degree of independence

Contents
The course gives an introduction to decision making under risk and uncertainty with special attention to the case of asymmetric information. The course will introduce the core theoretical concepts and present applications and examples from different areas of economics.

A fundamental component in most economic analysis is a description of how individuals make decisions. The objective of the course is to introduce students to the study of economic and financial decision making. The course will review the classical models of decision under risk and uncertainty and confront the models with empirical evidence. Several behavioral regularities have been established concerning how individuals make decisions. In response to this evidence there is growing body of theoretical and applied work which will be examined.

Psychological research has pointed out a number of heuristics or rules of thumbs that are important for decision making. These heuristics give raise to series of biases in probably judgments and self-perceptions, which will be discussed in the course. The implications for behavior in economic and financial contexts will be analyzed as well as the potential for these biases to have an effect on aggregate market outcomes.

The last part of the course is devoted to the study of inter-temporal decision making. The course will cover the standard economic model based on exponential discounting, which assumes that behavior is time-consistent. However, there is empirical evidence that people sometimes behave in a time-inconsistent manner, postponing activities with immediate costs and being too eager on performing actions with immediate rewards. The course will review this evidence and discuss extensions of the standard model that can account for these phenomena.

Throughout the course, the theoretical discussions of decision making will be complemented with numerous economic and financial applications illustrating the underlying ideas and showing how they can be used in economic analysis.

Literature
Eeckhoudt, Louis, Christian Gollier and Harris Schlesinger (2005): Economic and Financial Decisions under Risk, Princeton University Press
Wilkinson, Nick (2007): Introduction to Behavioral Economics, Palgrave MacMillan
Supplementary material