Statistics

# Behavioral Economics and In-class Exercizes

I wanted to spend a moment to report on the incredible success I have been having using in-class exercises. Students have been engaging the content more directly, understanding of the immediate subject matter has improved, and much to my surprise, interest continues onto subjects beyond that immediate exercise.  This continuation of interest for the entire 2-hour class period suggests more than mere amusement is involved, actual interest in the subject has been created. Perhaps the activities have moved their reference point to a more engaged and interested one.

I would like to share some of the excellent exercises that have been done with our student body.  This is not a limiting set of these activities, there are many more available. Many thanks to Virgina Econ Lab for its excellent work in digitizing some of these classical class exercises.

The first exercise, best as an opening exercise, describes the opening idea that individuals are well-described by the rational model, and shows how the rational class naturally arrives at the results that we expect in classical economics.   We have some of the class as suppliers, some of the class as buyers, and random values for the good are assigned. They enter a mock market place and trade goods among themselves.   Output of the program is very good visually (although a little too colorful for my tastes). Learning is very visible.

Total time was maybe 15-20 minutes of execution, 5-10 minutes of setting up and logging into the computer, costs that have reduced after multiple exercises.

I thought it was best to lead the exercise with:

• Review of PPFs
• Refresh basic supply and demand model.
• Review of basic rational model for firms $(MC=MR)\ or\ (M\pi =0)$.

I thought the gains from the exercise included:

• More confidence in the idea of rational agents having validity.
• More interest in rational agents
• Students put idea of rationality into contrast with behavioral models and procedurally rational models.
• Strong retention and application of supply and demand, rational model for firms.

We have, since then, conducted several simulations where students interacted directly with rational (and procedurally rational) models. I have programmed these simulations myself and they are available here: Simulating Optimization Problems and Production Possibility Frontiers  and Simulations of Optimization over Time. I would recommend these to any undergraduate body that has easy access to a PC lab, and more detailed interaction with the models is suitable for earlier graduates. I note that the programs do not generate exact correct answers, so one can still ask homework questions on the subject.

Most recently, we have conducted auctions to examine how individuals handle different auction schemes.   Rational results suggest that individuals bid under their valuation in first-price sealed-bid auctions, and bid their valuation in second price sealed-bid auctions. But people do not always perform to those expectations, and it should be illustrated to students.

Some sample output from this program might look like below:

We would hope it would clearly show variation between the two auctions, like the plot above.  The second-price auctions lead to significantly higher prices overall, and will often lead students bidding higher than their valuation.

I thought it was best to lead the exercise with:

• Complete teview of behavioral ideas, particularly:
• Transactional Utility
• Risk Aversion
• Reference Points
• Mental Accounting

I thought the gains from the exercise included:

• Better identification among each auction type:
• Vickry
• English
• Dutch
• Students correctly identified explanations for behavior.
• Students internalized the optimal bidding value for first-price sealed-bid auctions over uniform distributions, $\frac{n-1}{n}$