This course offers an overview of the main contributions of behavioral economics and psychological to the analysis of human behavior under risk. It features the academic work of several Nobel Prize winning economists including Daniel Kahneman and Richard Thaler. The main thread of the course is the observation that risk is a least as much a psychological phenomenon as it is a mathematical notion. Thus, understanding human choices under risk requires understand ways in which human perceive (and often distort) it. First, we outline the classic findings on heuristics and biases in judgment and decision-making, drawn from several decades of research in economics and psychology. We then review one of the most important theories of human choice under risk: the prospect theory. We will analyse its development (i.e. how prospect theory refines the classical subjective expected utility model) and its applications (market distortions, contingent valuation, consumer behavior). Our analysis focuses on both empirical data (from experiments carried out in the laboratory or in the field, but also from natural environments) and on leading theoretical models.
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