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Symposium 2013

Proposal - Teaching Microeconomics in the face of the behavioral revolution

The Challenge

Economists are asking the great questions that motivated the discipline when it began – questions of growth, distribution, behavior and instability. The field is booming in terms of methods. Field a ...

Economists are asking the great questions that motivated the discipline when it began – questions of growth, distribution, behavior and instability. The field is booming in terms of methods. Field and lab experiments have been introduced and advances in empirical analysis allow policy interventions to be evaluated. Economics has never been more central to the discussion of the major policy issues that animate the public. But economists are in disrepute. And economics teaching is under pressure to change. There are three sources of pressure. The public, policy-makers and employers blame economists for complacency prior to the crisis. Some complain that the undergraduate curriculum is training candidates for admission to PhD programs and is too narrow and technical for the majority who will work in business and government. Students are forming new student societies to press for teaching more relevant to today’s serious economic problems. Teachers themselves feel the pressure from students. They are discomforted by the gap between what they teach and the last 3-decades of developments that frame their research, and are anxious about the potential of the new disruptive technology of MOOCs (massive open on-line courses).

Standard economic theory maintains that individuals are perfectly rational, strictly selfish and have time-consistent preferences. Twenty years worth of research has shown that this is not (always) the case, and that the departures from these behavioral assumptions can often be big: After a tough day, we may not have the willpower to exert self-control, and indulge in ice cream, beer or worse. Non-selfish individuals may contribute to public goods, may punish free-riders and thus also alter the strategic incentives of selfish individuals. Present-biased individuals may be willing to pay to constrain future choices because they know they may be more impatient than is good for them.

However, integrating such insights into microeconomics is not easy. One has to tread a fine line between integrating new and important results without making the standard theory look completely useless to students. This is often advanced as an argument not to integrate newer results at all. I tend to disagree with this view. It supposes that students are unable to hold two opposing thoughts in their head, which I find more than a little patronizing.

I teach microeconomics in the second year to 400 students of a bachelor program with, both, economics and management majors. The course is compulsory, as we believe at HEC Lausanne that all of our graduates need a rigorous training in economics. Yet, in particular for the two thirds who pursue their specialization in management, the new insights from behavioral economics are important. Students already have a solid background in microeconomics from our first-year course. Thus, rather than pushing into more technical areas such as general equilibrium, or advanced (i.e., technical) topics in consumer choice, we spend about one quarter of this 6-ECTS course on behavioral economics. Therefore, we added a discussion of present-biased preferences, with motivating evidence and simple formal models to the content of the course. We also talk about prospect theory on equal footing with expected utility, and describe the type of evidence that causes big problems for expected utility. We also devote three sessions to the discussion of non-selfish preferences to help the students understand under what conditions non-selfish preferences will make a difference for outcomes and when they will not be able to affect equilibrium.

The students’ reaction to these new elements is very positive. They see that the method of economic analysis is useful, but that we sometimes need to make simplifying assumptions that turn out to be completely wrong. Integrating more behavioral elements focuses the students also more on the method of economic analysis, rather than the assumptions that have become mainstream. It introduces an element of critical thinking that is all too rare in our curricula. Several comments from students on the evaluation forms indicate that they appreciated these elements the most in the entire course, and so far I have never had the opposite comment. It also gives them a better sense that economics and management are sciences that are evolving and that not everything is set in stone. The modification of the course was particularly welcomed with students more interested in management: as I emphasize throughout the course, these additions make economics no easier in terms of mathematical rigor and, yes, pain, but more realistic and applicable, not more theoretical and ivy-towerish.

Overall, I am very happy with the type of modified course. Of course, some material, such as general equilibrium or more mathematical treatments of utility theory and production theory, are now relegated to the third-year course. But in the particular context of our program, this seems to work very well. It has made the course more applied, has introduced experiments as a useful source of empirical evidence, and also allows one to connect the things we teach to recent developments in research.

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