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Behavioural Economics and Finance EC3601: Methodology

This document outlines the methodology used in behavioral economics and finance. It discusses theories and how they are evaluated, as well as the use of reductionism. It also describes different types of empirical studies used like field studies and experiments. Field studies are used to study real world choices but lack control while experiments have more control but less ecological validity. Neuroeconomics combines neuroscience and economics and uses methods like fMRI and EEG to study the neural basis of economic decisions. Consilience across disciplines provides more robust evidence for theories.

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Mohammed Muazzam Chaudhri
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60 views

Behavioural Economics and Finance EC3601: Methodology

This document outlines the methodology used in behavioral economics and finance. It discusses theories and how they are evaluated, as well as the use of reductionism. It also describes different types of empirical studies used like field studies and experiments. Field studies are used to study real world choices but lack control while experiments have more control but less ecological validity. Neuroeconomics combines neuroscience and economics and uses methods like fMRI and EEG to study the neural basis of economic decisions. Consilience across disciplines provides more robust evidence for theories.

Uploaded by

Mohammed Muazzam Chaudhri
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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BEHAVIOURAL ECONOMICS AND FINANCE

EC3601

LECTURE 2:
 
METHODOLOGY
LECTURE PLAN
METHODOLOGY
 Theories
Theories and assumptions
Evaluating theories
Reductionism

 Methodology in Economics
Types of empirical study
Field studies
Issues

 Methodology in Behavioural Economics


 Neuroeconomics
 Consilience
THEORIES
• Theories and assumptions
• Evaluating theories
• Reductionism
THEORIES AND ASSUMPTIONS
1. Reality of assumptions – Friedman (1953)

2. Interpretation of assumptions – methodological stance


EVALUATING THEORIES
• Congruence With Reality
– Behavioural theory wins here
• Generality
– A tie perhaps
• Tractability
– Standard theory wins here
• Parsimony
– Standard theory wins here
REDUCTIONISM

‘All science is either physics or stamp-collecting.’ Ernest Rutherford


(1871-1937)

Explanations for relationships at different levels


METHODOLOGY IN ECONOMICS

• Types of empirical study


• Field studies
• Issues
TYPES OF EMPIRICAL STUDY
• Field studies
• Experimental studies
• Between-subjects studies
• Within-subjects studies
FIELD STUDIES
Examples
• Choices involving buying different electrical appliances, where some are
more expensive, but save electricity and reduce costs during their lifetime
• Life-cycle saving behavior
• Choices of betting in horse races
• Investment choices, involving buying and selling stocks and bonds
• Choices of smokers and drug addicts which involve trade-offs between
current benefits and long-term costs
• Shopping choices where consumers respond to different promotional offers

Ecological validity
Confounds
METHODS IN BEHAVIOURAL ECONOMICS

Experimental studies

• Advantages of experiments
Control – testing under ceteris paribus condition; reduces
confounds

• Disadvantages of experiments
Design problems - control
Interpretation of results – ecological validity
NEUROECONOMICS
‘An interdisciplinary line of investigation that combines
research from neuroscience, neurobiology, and economics.’
Brocas and Carillo (2008)

Methods – fMRI, PET, EEG, TMS

Issues
1. Relevance to economics (the case for mindless economics)
2. Problems of reverse inference
CONSILIENCE
Horizontal and vertical integration between disciplines

Example – the role of emotions in decision making


Similar conclusions from game theory, evolutionary biology,
neurology

• Behavioural sufficiency
• Constraints on economic theory
• Game theory
READING
• Essential
– Wilkinson Ch. 2 (2E)

• Further
Brocas and Carillo (2008)
Camerer, Loewenstein, and Prelec (2005)
Fudenberg (2006)
Gul and Pesendorfer (2008)

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