Lecture Plan: First, we will run the ultimatum game experiment in class. Then we will analyze the game, using tools from game theory to solve the game. Then we will discuss the mismatch between theory and experimental outcomes. There are two levels to this discussion. First, what is wrong with the theory, and how can it be fixed? Second, this problem has been known to economists for decades - why is it never mentioned in textbooks? This second deeper question leads into a discussion of methodology: what kinds of theories are acceptable, what do we do in case there is conflict between theories and evidence, how do we build and revise theories.
In connection with the Ultimatum experiment, students should do the following reading:
REQUIRED:
1: Behavioral Versus Neoclassical Economics (WEAP Blog)
RECOMMENDED:
2: Game Theory for Humans with Hearts (WEAP Blog)
Background Reading for Greater Depth (Optional)
3: Zaman, Asad and Karacuka, Mehmet," The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature," International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414, Available at SSRN: https://ssrn.com/abstract=2033641
Second part of the lecture will consist of a discussion of the housing rental market - both the real lived experiences of the students, and also the theory, as discussed in Varian Chapter 1. In particular, we will focus on Reservation Prices. Varian Chapter 1 also has an excellent discussion of methodology of conventional economics which we will use and compare with ABM methodology, which we will develop later on in the course. Before reading Chapter 1 of Varian, it will be useful for the students to read the Structured Summary of Varian Chapter 1. This summary brings out the important element of the discussion in Varian, which we would like students to notice, and remember, for later use.
PLANNED ADDITIONAL CLASS ON MONDAY 28th September: Detailed Discussion of the Housing Rental Market. Reality versus Theory. Homework Exercise: talk to fellow students, as well as others, about their experiences with renting houses or apartments. Focus on understanding how people decide on which house to rent, and also on how much rent to pay. In particular, try to assess the extent to which Varian's description of the market for rental housing is in conformity with real world rental markets. Make a list of similarities and differences - not from your head, but from interviews you have done to see how people decide on rentals - and bring this to the Monday session for discussion.
ALSO: After you have done your interviews, and made your notes comparing real world rental markets to Varian's theory, read Chapter 1 of our textbook for this course ABM Based Microeconomics.