Dustin Tracy

Syllabus Econ 421/521: Behavioral Economics and Behavioral Finance Econ421/521

I teach to enrich the lives of students. I endeavor to help them not only understand economics, but how to apply the knowledge they gain to better understand the world around them. Economic principles extend to transactions and decisions not mediated by money. I help my student to understand how these principles apply to any commodity that is scarce, including their time. Fundamentally, every decision weighs costs versus benefits. I would like my passion for economics to inspire students to take up economics as a major. For those that do not, I hope that the class is not just another distribution requirement they trudge through, but an experience that through which they gain a perspective on the world that helps them be effective in their chosen field.

My teaching style has been shaped by the pedagogy course I took during my graduate training as well as my previous teaching--adult ESL, employee training, special needs classes, and basic dialy living skill to adults with mental illness. I believe my first job is to peak students' interest with examples that is stimulating and relevant to them. I bring real world decision into the classroom in the examples and illustrations I present, and in the problems I assign. To facilitate learning, I organize the material to ensure that it is digestible, and engage students in active learning multiple way in interact with the material; I recognize that students are unique in their learning styles, backgrounds, academic strengths, and preferred learning modalities.

I have been co-teaching Behavioral Economics and Behavioral Finance, a class cross-listed at the bachelors and masters level, for the last two years. My co-instructor trained as an anthropologist and has made significant contributions to the understanding the barter-based economies of tribal communities. We created an interdisciplinary syllabus, appealing to economics and non-economics majors alike. We supplement the more traditional Behavioral Economics materials focusing on how heuristics can lead us astray with papers from anthropology and biology and research that bridges fields. It surveys the literature, through the lens of evolutionary advantage, asking why these heuristics and traits would evolve. We read original research, emphasizing critical thinking and the scientific process in the classroom discussion.

We incorporate class exercise that mimic some of the field’s seminal experiments, such as the 'coffee mug' demonstration of the endowment effect—gifting half the students in a class with a coffee mug caused them to value it higher than their classmates. The exercises engage students, give them insight into behaviors and catalyze class discussion. Our instruction style starts with concrete examples be it classroom exercise or data from empirical studies, to provide students with tangible understanding of the phenomena before proceeding to the theory which helps to model and explain what has been observed. We emphasize the many levels of theory, from mathematical descriptions of behaviors, to explanations of (various reasons) why the behavior occurs, and how they can inform each other.

The discussion of theory starts by reviewing the neoclassical model. In the case of the coffee mugs, one's valuation of a good should not be affected by ownership of that good—if a classroom is randomly divided into two groups, there is no reason, aside from chance, why one group should value a good more than the other group. With a large enough class or enough repetitions of the exercise, valuations of the mug should be equal. If students were categorized as high or low valuers based on being above or below the median value, then randomly formed groups on average should be half high and half low. The low valuers in the group that was given mugs should sell their mugs to the high valuers in the group who did not get mugs, and half the mugs should be sold. However, in the classroom demonstration, just as in the experiments in the classic paper less than half the mugs sold, implying that being endowed with the object impacted the perceived value.

Our teaching of theory proceeds along the same path as scientific debate. Are the results replicable, and under what circumstances? In the case of the endowment effect, a central question has been: is the effect robust to experience particularly in the market? Students read the original paper. They also read a latter paper, which replicates the experiments and finding a smaller effect size, and shows that in the number of mugs are sold in double auctions, is closer to the neoclassical prediction.

We then proceed to investigate if the bias provides any evolutionary advantage. Students read and discuss papers that offer tests of hypothesis originating from biology and advocated by Robert Sugden among others. Biologist have observed that within species violent conflicts over territory, rank, food or mates are often avoided. At least one party, chooses not to fight, the 'Dove' strategy. However, a population of all Doves is not stable. If fighter, 'Hawk' entered this population it would win every contest and increase in numbers. However, if there are too many Hawks, the damage from all the conflict is too great. A mix of hawks and doves is stable as a type which alternated strategies. Signaling strength is a common solution to determine who plays which role, but often requires some tie-breaking rule. A second avoidance convention is for players agree on a coordination rule whereby each plays the possessor strategy: if you start with the contested item, and are defending, play Hawk; if challenging, play Dove. If conflict is costly enough this strategy is dominant. Students in class discussion are able to connect the findings to the endowment effect phenomenon, recognizing that it could either drive or rationalize the possessor strategy. We read a paper which offers a model in which a trader strategy is available. Values for the object are heterogeneous and players can trade a price between the two values. The trader strategy dominates the possessor strategy. We discuss how the endowment effect could prevent trades that might otherwise occur impacting welfare.

The class examines many other behavioral economic findings: hyperbolic discounting and other intertemporal choice anomalies, risk attitudes, health behaviors, gender. We also teach behavioral finance topics: bubbles, crashes, cascades and herding, using the same basic approach. The goal is that students develop an understanding of behavioral economics, behavioral finance and the anomalies reported, and critical thinking skills to evaluate and contextualize the reports.

By training students to read, analyze, present and discuss scientific findings, they develop valuable skill no matter what career path they progress upon. Some might continue in academia, in which case, they are learning to recognize what new questions findings raise and think about how those questions could be answered, and advance science. For some students the insight into how academia operates will help them make more informed choices about whether they want to remain in academia. Students pursuing careers in business or policy administration become more informed consumers of scientific research and gain insight into applying scientific discovery. They develop the ability to understand the actual data and analysis and not just read the authors’ interpretation; understanding of how likely that the finding is ephemeral, robust or context specific; and intuition into what might be causing the behavior and how it might generalize, which could help them apply the findings. At the completion of the course, student have learned valuable communication skills and critical thinking. Skills which give them an edge no matter what they do beyond university.

I have drawn from my research experience to develop the class, and assigned papers that were seminal and are pushing at the frontier of research or that I have coauthored. I feel there is a deep synergy between teaching and research. The class and what I have learned teaching it has also influenced me as a researcher, inspiring multiple projects. My research experience would be an asset to multiple other potential classes, such as health economics (supply or demand), experimental economics, and microeconomics.