Indian Institute of Management Bangalore

Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

Behavioral Economics
Understanding human behavior for better decision making

EPGP - Term VI

Faculty: Ritwik Banerjee Class Time:

Office: Faculty Block A- 201 Class Room:
Email: [email protected] Quizzes
Office hours:
Teaching Assistant:
Email:

wwwCOURSE DESCRIPTIONwww

The purpose of this course is to inform future managers, analysts and consultants of the deeper
psychological processes which underlie decision making. The course will enable the students to
incorporate the insights into marketing, human resource practices, finance and business strategies.
How a woman (or a man) fares in life depends to a large extent on a series of decisions that she takes.
However, the process of how we arrive at decisions is often very complex. To keep things simple,
economists assumed away much of the complexity and developed a rather simplistic framework for
analyzing human behavior. The framework came to be known as the Rational Actor Model, where
human beings were assumed to have many super human power. Let’s call them homo economicus or
simply, Econs. Econs are willful, selfish and have perfect foresight while also possessing extraordinary
abilities to make complex calculation at very short period of time. Behavioral Economics was born as an
antithesis to the Rational Actor Model. In this alternative paradigm, human beings were assumed to be
less selfish and smart, prone to mistakes and procrastinations and often times myopic. Let’s call them
homo behavioralis or Humans. Do Humans sound more like you and me or for that matter, your
neighbor next door?
Consider the following: ask the person on your left the answer to the following: 1 x 2 x 3 x 4 x 5 x 6 x 6 x
7 x 8 x 9 = ? To the one on your right: 9 x 8 x 7 x 6 x 5 x4 x 3 x 2 x 1=? Chances are that the one on your
right will quote a higher number. The reason is they are Humans. If they were all Econs, the answer they
would give would all be the same and it would indeed be the correct answer.
Each topic covered in this course will have two facets. First, students will get a broad overview of important
results from behavioral economics and psychological aspects of economic decision making. Second, the
students will see applications corresponding to these results. The course will also introduce the students
the idea of experimentation - the methodological tool in which one thing is changed at a time which in
turn makes causal inference possible. Overall, the participants will have a better understanding of people
and how they make decisions, which in turn will allow them to take effective managerial decisions.

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India
 Indian Institute of Management Bangalore
Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

wwwCOURSE OBJECTIVESwww

The objective of this course is to deliver:

• Conceptual fundamentals governing how decisions are made.
• Ample business applications of important results and principles of behavioral
economics.
This course will enable students to have a better understanding of people and how they take decisions,
which in turn will lead to effective decision making in the context of management.

wwwCOURSE PEDAGOGYwww

A variety of approaches will be used – lectures will contain short cases or caselets, presented in the form of
Business Applications and newspaper articles. In class exercises in the form of Demonstration Problems
and Examples will also be used. Performance in this course will depend on three quizzes and a class
activity. How well you do on ALL these components will determine your final grade.

wwwREADINGSwww

The lecture slides will contain the essential elements needed for the course. Readings and handouts will
be given throughout the course.
The following are some suggested readings:
1. Thinking Fast and Slow by Daniel Kahneman
2. Judgement in Managerial Decision Making by Max. H Bazerman and Don A. Moore
3. Misbehaving by Richard Thaler
4. Nudge by Richard Thaler
5. Personnel Economics by Peter Kuhn
6. Personnel Economics in Practice by Edward Lazear and Michael Gibbs
7. World Development Report 2013

wwwCLASS DISCUSSIONSwww

Students should ideally contribute regularly to the class discussion, either when called upon by the
instructor (a.k.a. ‘warm’ calling) or on a voluntary basis. To a substantial extent, the benefit that a student
derives from the course will be related to his/her willingness to expose his/her viewpoint to the critical
judgment of the class, and to his/her active participation in building upon the ideas of others.

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India
 Indian Institute of Management Bangalore
Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

wwwEVALUTAIONwww

Quiz 1 (end of the 10th session) : 30%

Quiz 2 (end of the 18th session) : 30%
Team based activity : 40%

All the three quizzes are compulsory. A quiz will be of about 1 hour duration and will consist of MCQs
and/ or descriptive questions/numerical problems. All quizzes will be closed book.

www TEAM BASED ACTIVITYwww

As part of this course, you are expected to work in groups of up to four members for a team based activity.
The purpose of this activity is to apply some of the principles you learn on some real-life issues. At the
end of the course, each group will be invited to make an 8-minute presentation and a activity report will
have to be submitted. The activity report should be no more than 2000 words (excluding references).
Students are expected to note the following:
1) Be concise and to the point. There should be a strong logical flow in your analysis.
2) You should be explicit with your assumptions whenever necessary.
3) The analysis should be thorough and should draw on the material covered in class or
assigned in readings.
4) Your write up should offer specific recommendations on the problem you are analyzing.

The activity may comprise of one of the following:

a) Conducting an actual experiment, online or offline.
b) Analyzing a problem faced by a firm/customer/consumer using the lenses of behavioral
economics (Example: Should Uber show its customer 1.8X of the base fare or simply
quote the total fare?)
c) Discussion of cases or simple papers which solve a specific managerial decision-making
problem using some of the principles of behavioral economics.

www MAKE UP EXAMSwww

As a general rule, there will be no make-up exam. All related issues will be decided in accordance to the
PGP guidelines.

wwwPLAGIARISM AND CHEATINGwww

Significant amount of learning happens outside class room by interaction among your class mates.
However, the same MUST not be carried forward in class. You must not be found talking with any class
mate, looking at books/notes or chits of any kind in class room during the exams. Failure to do so would
imply cheating. Violation of these norms would attract penalty as per instructor’s discretion. Such

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India
 Indian Institute of Management Bangalore
Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

instances in the past have led to a F. Your project report will go through anti plagiarism software such as
Turnitin. Be very careful when you write it. Do not copy any sentence from anywhere.

wwwCELL PHONE AND LAPTOP POLICYwww

Please make sure that your cell phones/tablets/laptops are switched off before the class begins and
remain in switch off mode for the entire duration of the class.

wwwCOURSE ROADMAPwww

Session Topic

1 Introduction to Behavioral Economics

In class experiment
Econs and Humans
Reading: “Humans and Econs” Chapter 1, Nudge

2-3 Heuristics, Biases, Emotions and Affect

In class experiment
How do consumers use heuristics to make decisions? What are the biases in
their decision-making process?
Reading: “Part II: Heuristics and Biases” Chapter 10-13, Thinking Fast and
Slow

3 Exponential Growth Bias and COVID-19

In class experiment
What is exponential growth bias?
Application: personal finance
Application: COVID-19

4-5 Loss Aversion

Why are losses more painful than gains pleasurable?
Applications of loss aversion
Reading: Chapter 26 and 27, Thinking Fast and Slow
Case: Why Consumers Don’t Buy: The Psychology of New Product
Adoption (HBR) (Gourville, 2003)
6-7 Mental Accounting
How do we partition payment streams and set prices?
Reading: Part II – Mental Accounting, Misbehaving, Richard Thaler
8 Perceptions of Risk, Confidence and Consistency

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India
 Indian Institute of Management Bangalore
Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

Why do people buy lotteries when they are not worth it?
Why do people not buy insurance when they are worth it?
Reading: Chapter 19, 30, 31, Thinking Fast and Slow

9-10 Impatience and self-control

How people really discount the future?
Why do we buy alarm clocks when we actually prefer to sleep in the morning?
Reading: Chapter 11 and 12, Misbehaving

10-11 Strategic Thinking among Humans

Level-k thinking
How strategic do strategic people think others are
Reading: Lecture Slides, Ch 21, Misbehaving

12 Perceptions of fairness
Is UBER’s surge pricing fair?
Is it fair for a hospital to charge surge pricing in times of dengue?
Reading: Chapter 8, Judgement in Managerial Decision Making

13 Social Preferences
Peer effects, charitable contribution, cooperation, social norm
How does Apple leverage social preferences to push the sale of iPhones?
Reading: Chapter 8, Judgement and Managerial Decision Making
In class experiment

14 Discrimination
Why does a Black/Dalit/Muslim/Female get paid less than an equally able
White/Upper caste/Hindu/Male worker?
Explicit and Implicit biases among managers
Gender differences in self-confidence, competition, risk preference, leadership
Reading: Chapter 16 Personnel Economics

15 Nudges and Public Policy: Defaults and Choice Architecture

How do we design lunchrooms so that children opt for healthier food?
How do we make people save more without changing the interest rates?
Reading: Chapter 4, 5 and 16, Nudge

16 Behavioral Finance: Asset Pricing

Breakdown of EMH, bubbles, equity premium puzzle
How does a consumer make financial decision?
Reading: Chapter 21-23, Misbehaving

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India
 Indian Institute of Management Bangalore
Bannerghatta Main Road, Bengaluru, Pin – 560 076, India

17 Behavioral Finance: Corporate Finance

Managers’ over confidence, overconfidence in mergers and acquisitions
Reading: Chapter 24-26, Misbehaving
The End of Behavioral Finance, Thaler

18 Happiness Economics
What makes us happy? How good are we at predicting what will make us
happy? Does money make us happy?
Reading: Chapter 35, 37 and 38, Thinking Fast and Slow

19, 20 Student presentations on the team-based activity

Ritwik Banerjee

Office: A 201, Main Building Office Number.(+91) 080 2699 3319

Indian Institute of Management Email: [email protected]
Bangalore, Bangalore, Karnataka Web: www.ritwikbanerjee.in
560076, India