Behavioural Decision Theory

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Behavioral decision theory incorporates commonly found deviations from rationality in decision models.  People are driven by emotions and use simplifying heuristics rather than advanced optimization.  Thus we observe excessive risk aversion in overly prudent investments and in the equity premium puzzle.  At the same time, risk seeking underlies public lotteries, speculation, entrepreneurial activities, and the absence of sufficient security measures in health and business.  People systematically lose money due to inconsistencies in their intertemporal decisions (arbitrage).  We analyze these phenomena quantitatively, indicating possibilities to benefit from irrationalities in decisions, or to improve them.  Applications concern finance, marketing, management science, health economics, and: your private life.  Relative to “Behavioral Foundations,” this course is more advanced, quantitative, and prescriptively oriented.