Lecture 1 - Methodology

Question 1

Behavioural Economics is the study of:

Answer 1

how people make decisions under scarcity

Question 2

Normative (perspective) theory

Answer 2

sets a benchmark for behaviour if certain assumptions are met
e.g., a rational consumer will choose the optimal bundle given their preferences and budget constraint.
- captures how people should make decisions

Question 3

Positive (descriptive) theory

Answer 3

aims to describe behaviour
e.g. describe how social identities influence our decision making and behaviour.
- captures how people actually make decisions

Question 4

What are “As-if” models not concerned with?

Answer 4

not concerned with the process
e.g.. Model of utility maximization

Question 5

What do Process models do?

Answer 5

• predict choices
• model the processes that produce them

Question 6

What are the roles of economic theories?

Answer 6

1. make predictions
2. describe and explain human behaviour

Question 7

What are the criteria for “good” theory?

Answer 7

1. congruence with reality: explain + predict correctly
2. Generality: applicable to different phenomena
3. Tractability: complex theories may have more parameters(by making fewer assumptions) - difficult to represent as models
   Parsimony: having fewer parameters (by making more assumptions) - potential trade-off with descriptive accuracy
4. Precision (giving exact numerical predictions about behaviour

Question 8

What are the types of empirical evidence?

Answer 8

. Observational data/naturally occurring: (e.g. data on wages or unemployment rates)
. Experimental data:
- Randomized control trials (e.g. effect of 4-day working week on productivity)
- Field experiments (e.g. sending resumes with African-American or white-sounding names)
- Lab experiments (e.g. framing effects on individual choice)
- Lab-in-the-field experiments (e.g. dictator games and ultimatum games in a field context)
. Neuroscientific evidence: (e.g. MRI scans)
. Biological markers: (e.g. stress markers)
. Surveys: (e.g. who do you intend to vote for)

Question 9

Observational Data Pros

Answer 9

• Ecological validity (relevant for the population studied)
• Often cheap to obtain
• Does not involve interference
• Often large datasets available

Question 10

Observational Data Cons

Answer 10

• Internal Validity is not clear (there may be confounding factors that do not allow a causal interpretation of the findings)
• External Validity not clear - to what extent do the findings apply to other populations, places, time, environments
• Researcher has no control over data collection process

Question 11

What is an experiment?

Answer 11

A method to collect data in a controlled environment

Question 12

Why is randomization crucial?

Answer 12

It’s crucial for establishing a causal effect of treatment on outcome

Question 13

(Lab) experimental studies pros

Answer 13

• Researcher can design the data generating process
• Internal validity - if study is well-done it allows for a causal interpretation
• Often less costly than other methods
• Can systematically vary features of decision situation and are therefore suitable for testing theories (keeping all else equal)

Question 14

(Lab) experimental studies cons

Answer 14

• Need to think about external validity in other contexts, with other populations

Question 15

Neuroscientific evidences pros

Answer 15

may learn more about “process” of decision making

Question 16

Neuroscientific evidence cons

Answer 16

• small sample sizes
• Non-neuroscientists have difficulty interpreting an MRI scan

Question 17

Biological markers pros

Answer 17

Learn more about physiology of decision making

Question 18

Biological markers cons

Answer 18

• difficult to interpret by non-specialist
• difficult to collect

Question 19

Surveys pro

Answer 19

learn more about what people think (beliefs that are not revealed through choices)

Question 20

Surveys cons

Answer 20

• people may not be honest when answering questions
• people may behave differently than they say they would

Question 21

What can theory do for experiments?

Answer 21

• provide models to be tested
  guide for identifying key variables, potential confounds, competing explanations
• Derive new explanations

Question 22

What can experiments do for theory?

Answer 22

• Experiments can test predictions of a theory
• Test which of several competing theories best explains the data
  Help define the scope of a given theory
  Refine theories & suggest/construct new theories

Question 23

Interpreting empirical evidence

Answer 23

Theories can be proven false but they can never be shown to be correct

Question 24

Internal Validity

Answer 24

• statistically significant
• statistical credibility of the empirical analysis
• refers to the extent to which a study accurately establishes a causal relationship between the treatment and the outcome

Question 25

Something is internally valid if it’s

Answer 25

• internally valid
• statistically significant
• theory

Question 26

External Validity

Answer 26

• Relevance of empirical analysis for example to policy
• Refers to the extent to which the results of a study can be generalized to other contexts, populations, and times

Question 27

Causal Impact

Answer 27

Introduction of a program brings an outcome that would not have been achieved in the absence of the policy