Psychology for Decision-Making

Course Coordinator: Dr Arbitor Ma, BSocSc, MPhil, PhD (LU)

Aims
This course discusses the limitations of standard economic models and surveys the ways in which psychological principles have been used to learn about preferences, cognition and behaviour behind economic behaviour. Topics include: trust, vengeance, fairness, impatience, impulsivity, bounded rationality, learning, reinforcement, classical conditioning, loss aversion, overconfidence, self-serving biases, cognitive dissonance, altruism, subjective well-being and hedonic adaptation. Economic concepts such as equilibrium, rational choice, utility maximization, Bayesian beliefs, game theory and behaviour under uncertainty will be discussed in light of these psychological phenomena. Traditional economics typically uses the simple 'rational actor' model whereby people perfectly maximize their advantages. We will present models that are psychologically more realistic than this standard model and enrich it by incorporating psychological phenomena, including bounded rationality, bounded self-interest and bounded willpower. Applications will include decision theory, game theory, asset pricing, savings, portfolio allocation, stock market predictability and neuroeconomics.

Contents

• Introduction to psychological influences on decision-making
• Heuristics and cognitive biases
• Bounded rationality and learning
• Decision utility and experienced utility in applied settings
• Behavioural decision-making: Under risk and uncertainty
• Overconfidence, time discounting and self-control, and fairness
• Behavioural game theory in decision-making
• Neuroeconomics and cognitive psychology

Learning Support
Lectures and seminars are the main strategies employed in the course to help students achieve the learning outcomes and acquire a general understanding of the content materials. Student presentations and discussions on the case studies of social policy issues will take place during lectures.

Supplementary readings and lecture PowerPoints are available on the Online Learning Environment (OLE) for students. Also on the OLE is the Online Discussion Board which offers an additional platform for students to communicate with each other and to interact with the lecturer.

Assessment
There will be one assignment, one mid-term test and one individual term paper, altogether accounting for 50% of the total course score. The final examination will account for the remaining 50%. Students are required to submit assignments via the Online Learning Environment (OLE).

Set Book(s)
Cartwright Edward (2018) Behavioral Economics, 3rd Edition, Routledge.

Lee R. Beach, Terry Connolly (2005) The Psychology of Decision Making: People in Organizations, 2nd Edition, SAGE Publications.