03/29/2017
By Katharine Webster

Do people make rational economic decisions? Are they guided by a sense of fair play, or by simple calculations of profit? How much are people willing to pay toward things that benefit everyone, like roads and schools?

Students in Behavioral Economics aren’t just studying those questions. They’re playing games with virtual money to understand what kinds of economic decisions people make — and why. Once a month, they have class in a computer lab and run experiments on themselves, bringing their theoretical studies to life.

“It shows how people think,” says Raffah Siddiqui, a junior economics major and finance minor from Lexington. “We look at articles and economic theories, but how do they hold up in practice? This class gives us a first-person perspective on what we’re learning.”

The new class is the brainchild of David Kingsley, an assistant professor who specializes in experimental economics. Behavioral economics is rarely taught at the undergraduate level, but Kingsley, who just won a Faculty Award for Teaching Excellence, wants UMass Lowell’s economics majors to learn hands-on research skills in an important, emerging field.

“In traditional economics, we try to explain markets and behavior within them. But it’s difficult, because in the real world, we don’t control the incentives. It’s all based on observations after the fact,” he says. “In experimental economics, we can test the relationships between incentives and actions. Behavioral economics is making inroads in policy circles because purely rational economic theory is incapable of predicting real-world behavior.”

Image by K. Webster

In early March, Kingsley had his students play the ultimatum game, an anonymous, two-person game in which the “proposer” has 20 virtual dollars and must decide how much to offer the “responder.” If the responder accepts the amount offered, both walk away with some money. If the responder rejects the offer, neither one gets anything.

“A core concept of game theory says you always do what’s in your best interest, and the proposer should realize that and offer the responder $1,” Kingsley says. “As the responder, you should be willing to accept any positive offer, because if you don’t, you walk out with nothing.”

But people aren’t purely rational, Kingsley says. On average, responders reject lowball offers, even though they will get nothing. And proposers generally offer responders a little less than half the total, typically $9.

“If I think you’re going to reject that $1, I have to offer you more. I have to think, what’s the minimal amount I can give you that you’ll accept?” Kingsley says.

The students played the game once, then again in six rounds with the same partner, which made it more like a salary negotiation. Next, they played the dictator game, designed to figure out whether proposers offer a nearly even split out of fairness or because they fear rejection of a lowball offer. Answer: some of each.

Image by K. Webster

Elizabeth Mahoney, an Honors College junior double-majoring in economics and math, says the class is helping prepare her for her ultimate career goal: working in economic development with an agency like the World Bank or the International Monetary Fund.

“Economics is interesting because it’s all based on human behavior,” she says. “For what the World Bank and the IMF do, you have to understand why people make the choices they do — and those could be different in developing countries than they are in wealthy countries.”

For their final project, each student must decide on a research question and design a game to test it. Siddiqui plans to construct some kind of "public goods" game, while Mahoney is considering a "prisoner's dilemma" game.

Kingsley’s own research revolves around public goods games, which look at self-interest vs. social cooperation — for example, how much people will pay voluntarily into a group fund for public goods like highways and schools.

He’s found that when incomes are equal, cooperation is high. Over repeated rounds of a game, most people will agree to put all their money in a common fund. But cooperation and peer pressure don’t work when incomes are unequal, because the incentives vary, he says; those with lower incomes will vote to impose a strong, central authority that’s costly, but that ensures fairness.