ADVANCED MICROECONOMICS

This is a combination course of Advanced Game Theory and Prospect Theory for Risk and Uncertainty

1. Advanced Game Theory Course Outline
The course may briefly review some fundamental concepts of game theory, depending on the need for such a review.
Then it will address a few selected topics, with economic applications:

1. Games of incomplete information (and auctions)
2. Repeated games (and collusion issues)
3. Cooperative games and matching theory
4. Behavioral and experimental game theory

2. Prospect Theory Course Description
Experimental investigations dating from the early 1950s have revealed a variety of violations of expected utility (EU), the standard model of rational choice under uncertainty. Since the end of the 70's, an enormous amount of effort was devoted to elaborate descriptively viable (fitting the facts) and formally sound generalizations of EU (*). These alternatives are named "Non-expected utility" models. The course will focus on Prospect Theory (PT), one of the most popular descriptive generalization of EU (extensively used in behavioral economics/finance). More specifically, the course have two objectives: (i) providing a formal setup that can help easily understanding where PT deviated from EU and rank-dependent utility (RDU); and (ii) giving the basic tools allowing to test and/or measure individual preferences under risk and uncertainty without assuming EU (**).

(*) There is no overlap between this courses and the course given by Prof. Gilboa (Introduction to Decision under Uncertainty). The two courses are complementary.
(**) This included explaining few economic implications of the introduction of probability weighting and loss aversion.

Courses outline
1. Formal setup
(Preference relations on Cartesian Products, monotonicity, coordinate independence, tradingoff
outcomes, additive representation of preferences).
2. Consistent tradeoffs under uncertainty
(How to measure utility using tradeoffs with known and unknown probabilities; how to test
consistency; consistency conditions for EU and RDU).
3. From rank-dependent utility to Prospect Theory
(Final asset positions versus gains and losses, reference point, loss aversion, Rabin's paradox).
4. Prospect Theory under Risk
(Axioms and empirical elicitation of preferences under risk, i.e. utility, probability weighting functions
and loss aversion).
5. Prospect Theory under Uncertainty
(Axioms and empirical elicitation of decision weights when probabilities are unknown).
6. Empirical Evidence on Ambiguity under PT
(How to elicit ambiguity attitudes under PT, attitudes towards different sources of uncertainty).


Textbooks
Additive representation of preferences
-Krantz, David H., R. Duncan Luce, Patrick Suppes, & Amos Tversky (1971), Foundations of Measurements, Vol. 1 (Additive and Polynomial Representations). Academic Press, New York (2nd editions 1999, Dover).
-Keeney, Ralph & Howard Raiffa (1976): Decisions with Multiple Objectives. Wiley, New York (2nd edition 1993, Cambridge University Press, Cambridge).
-Wakker, Peter (2010): Prospect Theory for Risk and Ambiguity, Cambridge.

Theoretical and experimental results on RDU and Prospect Theory
-Wakker, Peter (2010): Prospect Theory for Risk and Ambiguity, Cambridge.

Course material
You will receive by e-mail a link allowing to download the available material.


Course taught in English at HEC

Modalités d'évaluation : Course requirements A final examination will take place at the end of the course. The participant will also be asked to prepare a short research report (about 10 pages) on a recent research paper (theoretical or experimental).

Dernière mise à jour : mardi 31 juillet 2012