View Full Version : behavioral economics/finance intro text

01-31-2012, 06:48 AM
What book would you recommend as a first book in behavioral economics/finance?

01-31-2012, 08:44 AM
I liked Andrei Shleifer's "Inefficient Markets: An Introduction to Behavioral Finance".

01-31-2012, 10:41 PM
Thanks for the tip, I'll look it up. What kind of economics background would you suggest as a prerequisite to studying behavioral econ/finance?

01-31-2012, 10:50 PM
You may also be interested in: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by: George Akerlof and Robert Shiller Honestly, I've been meaning to read it for a while, and even borrowed it, but haven't gotten around to reading any of it. It doesn't look like a textbook, though. I think its marketed to the general public, but it seems to cover how behavioral economics can explain what went wrong with finance.

01-31-2012, 11:56 PM
It's not a textbook and it is not an advanced mathematical or enything. The peculiar thing is that you should have read Keynes's General Theory at least 12th chapter (this is my opinion I would guess majority would differ). It is theoretical discussion with in tepth analysis that untrained eye might omitt.

02-10-2012, 08:17 PM
I assume you have read Kahneman and Tversky's papers on prospect theory and on cumulative prospect theory (advances in prospect theory)? They're both fairly easy to read and particularly the former will give you a good intuitive understanding of what it's all about. After that, I'd start looking at work by Richard Thaler, particularly for behavioral finance. Things like "save more tomorrow" or his work on default options are wonderful examples of why behavioral economics/finance is useful.

An obvious reading list would include Thaler and Sunstein's "Nudge," Dan Ariely's "Predictably Irrational," and Danny Kahneman's new book "Thinking, Fast and Slow." However, all of these are aimed at a general audience. For something technical, Peter Wakker's "Prospect Theory: for risk and ambiguity" makes for a good start. If you're interested in the kind of applications, check out Colin Camerer's "Prospect Theory in the Wild: Evidence from the Field." My interest is in probabilities, so I can't help but recommend Wu and Gonzalez work "on the shape of the probability weighting function" and "curvature of the probability weighting function". This is, after all, a fundamental difference between behavioral economics and classical economics: people don't have a linear probability weighting function, that is they respond more to a change from 2% to 3% than from 50% to 51%.

If you're interested in experimental, Camerer's "The promise of lab-field generalizability in experimental economics: a reply to Levitt and List (2007)" is well worth reading. There's also a really nice paper by Goeree and Holt, "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions" that I would add to the reading list. That should be enough to keep you busy for a little.

As for economics background: game theory is absolutely crucial. Aside from that, there isn't really a formal economics requirement to understanding the papers or coming up with ideas. You should have some intuition about economic principles, which is what's going to set you apart from psychologists doing the same work. Microeconomics doesn't hurt either - the more, the better. You want to be able to construct models, although I don't think that's really covered until graduate school. For experiments, you also need a considerable background in statistics (not one of the statistics for social scientists substitutes). Personally, I think you need psychometrics on top of econometrics. Psychologists have more experience working with small samples and the kind of considerations that apply in lab experiments are foreign to non-experimental economists. The tools you need to deal with session effects and sample sizes of 60 people are very different from those used to analyze household-level data. I ended up with a psychology minor, and while I thought the courses were very helpful for my understanding of behavioral economics, I don't know yet whether admissions committees agree.

Hope that helps!