This course is available with permission as an outside option to students on other programmes where regulations permit. This course uses controlled access as part of the course selection process. For information on controlled access courses, including eligibility, application processes, deadlines, and departmental contact details, please refer to the Controlled Access Courses webpage.

New course for 2027/28 academic session.

Any external student must have successfully completed EC400 or EC451 in September and/or have approval from the Department of Economics.

Deadline for application: Please apply as soon as possible after the opening of course selection for all courses.

For queries, contact: Econ.msc@lse.ac.uk

Pre-requisites:

Students must have completed EC400 before taking this course.

Additional requisites:

Students should also have completed courses in intermediate level microeconomics and econometrics.

In exceptional circumstances, students may take this course without EC400 provided they meet the necessary requirements and have received approval from the course conveners, the MSc Economics Programme Director and their own Programme Director. Contact the Department of Economics for more information (econ.msc@lse.ac.uk) regarding entry to this course.

The course exposes students to major topics in Behavioural Economics and Behavioural Political Economy linking theory with empirical applications.

The course covers biases from neoclassical preferences as well as from rational expectations. Some topics to be covered include, among others: Reference Dependent Preferences and Loss Aversion, Social Preferences, Naiveté and Self-Control, Heuristics and Biases (e.g., correlation neglect, selection bias, confirmation bias).

The course will focus on the implication of these biases not only to individual behaviour and welfare but also to society as a whole, e.g., in the form of political outcomes and the ability of political stake holders to take advantage of such biases.

20 hours of lectures and 9 hours of seminars in the Winter Term.
1 hour of seminars in the Spring Term.

This course has a reading week in Week 6 of Winter Term.

Two pieces of formative work will be assessed and feedback provided. 

Illustrative reading in key areas:

Introduction

• Kahneman, Knetsch, Thaler (1991) “Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias”, Journal of Economic Perspectives, 5(1): 193–206
• Congdon, Kling, Mullainathan (2011) “Chapter 2: Psychology and Economics”, Policy and Choice

Loss Aversion

• Kahneman and Tversky (1979) “Prospect Theory: An Analysis of Decision Under Risk”, Econometrica, 47(2): 263–291.
• List (2003) “Does Market Experience Eliminate Market Anomalies?”, Quarterly Journal of Economics, 118(1): 41–71

Expectations as The Reference Point

• Koszegi and Rabin (2006), “A Model of Reference-Dependent Preferences”, Quarterly Journal of Economics, 121(4): 1133–1165.

Social Preferences I: Distributional Preferences

• Charness and Rabin (2002) “Understanding Social Preferences with Simple Tests”, Quarterly Journal of Economics, 117(3): 817–869.
• DellaVigna, List, Malmendier. 2012. “Testing for Altruism and Social Pressure in Charitable Giving”, Quarterly Journal of Economics, 127(1): 1–56.

Social Preferences II: Intentions and Fairness

• Rabin (1993) “Incorporating Fairness into Game Theory and Economics”,  American Economic Review, 83(5): 1281–1302.
• (optional) Fehr and Gachter, (2000),“Fairness and Retaliation: The Economics of Reciprocity”, Journal of Economic Perspectives, 14(3): 159–181.

Anomalies and Hyperbolic Discounting

• Frederick, Loewenstein, and O’Donoghue (2002) “Time Discounting and Time Preference: A Critical Review”, Journal of Economic Literature, 40(2): 351–401
• Laibson, David. "Golden eggs and hyperbolic discounting." The Quarterly Journal of Economics 112, no. 2 (1997): 443-478. 
• O’Donoghue and Rabin (1999) “Doing it now or Later”, American Economic Review, 89(1): 103–124.

Projection Bias

• Loewenstein, O’Donoghue, and Rabin (2003) “Projection Bias in Predicting Future Preferences”, Quarterly Journal of Economics, 118(4): 1209–1248

Heuristics and Biases

• Tversky and Kahneman (1974) “Judgment Under Uncertainty: Heuristics and Biases”, Science, 185(4): 1124–1131
• Gennaioli and Shleifer (2010) “What Comes to Mind”, Quarterly Journal of Economics, 125(4) 1399–1433

Inattention

• Gabaix and Laibson (2006) “Shrouded Attributes, Consumer Myopia, and Information
• Suppression in Competitive Markets”, Quarterly Journal of Economics, 121(2): 505–540

Nudges and Welfare

• Thaler and Sunstein (2003) “Libertarian Paternalism” American Economic Review (Papers and Proceedings), 93(2): 175–179.
• Bernheim and Rangel (2009), “Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Analysis” Quarterly Journal of Economics, 124(1): 51–104

Behavioural Political Economy

• Levy and Razin (2015) “Correlation Neglect, Voting Behaviour and Information Aggregation”, American Economic Review (2015), vol. 105, no. 4, April 2015.
• Levy, Moreno de Barreda and Razin (2022) Persuasion with Correlation Neglect: A Full Manipulation Result, with Ines Moreno de Barreda and Gilat Levy. AER Insights (2022), Vol. 4, NO. 1, March (pp. 123-38)

Exam (100%), duration: 120 minutes, reading time: 15 minutes in the Spring exam period.