Required Textbooks

Shleifer, Andrei. Inefficient Capital Markets: An Introduction to Behavioral Finance. Oxford UP, 2000. (This book is henceforth referred to as ICM.)

Thaler, Richard. The Winner's Curse: Paradoxes and Anomalies of Economic Life. Princeton, N. J.: Princeton University Press, 1994. (This book is henceforth referred to as TWC.)

A good source is also:

Kahneman, Daniel, and Amos Tversky, eds. Choices, Values and Frames. Cambridge University Press, 2000. (This book is henceforth referred to as CVF.)

The remainder of reading assignments are listed below. Required readings are denoted by an asterisk (*).


*Kahneman, D. "Maps of Bounded Rationality: Psychology for Behavioral Economics." American Economic Review (December 2003): 1449-1475.
This is Kahneman's Nobel lecture. See a video of it.

*Mullainathan, Sendhil, and Richard Thaler. "Behavioral Economics." MIT Department of Economics Working Paper 00-27. (September 2000).

Discussion of Traditional Objections

*Gabaix, Xavier, and David Laibson. "Competition and Consumer Confusion." (It's a difficult paper - no need to read everything.)

ICM. Chapter 2.

*Thaler, R. "The Psychology and Economics Conference Handbook: Comments on Simon, on Einhorn and Hogarth, and on Tversky and Kahneman." J of Business 59, no. 4. Part 2 (October 1986): S279 - S284.

Heuristics and Biases

Thaler, R. "Mental Accounting." In Quasi-Rational Economics. Russell Sage, 1991.

*Tversky, A., and D. Kahneman. "Judgement Under Uncertainty: Heuristics and Biases." Science 185 (1974): 1124-31.

———. "The Framing of Decisions and The Psychology of Choice." Science 211 (1981): 453-8.

Risk Aversion and Prospect Theory

*Kahneman, D., and A. Tversky. "Prospect Theory: An Analysis of Decision Under Risk." Econometrica 47, no. 2 (March 1979): 263-91.CVF. Chapter 2.

Rabin, Matthew. "Diminishing Marginal Utility Cannot Explain Risk Aversion." CVF, Chapter 11. (You can consult also: Rabin, Matthew. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem." In Notes and Comments. Econometrica 68, no. 5 (September 2000): 1281-1292.)

Bounded Rationality and Learning

Bounded Rationality

*Camerer, Ho, and Chong. "A Cognitive Hierarchy Theory of One-Shot Games and Experimental Analysis." Forth, QJE.

*Gabaix, Xavier, and David Laibson. "Competition and Consumer Confusion." (It's a difficult paper - no need to read everything.)

*———. "Shrouded Attributes and Information Suppression in Competitive Markets."

*Kahneman, D. "Maps of Bounded Rationality: Psychology for Behavioral Economics." American Economic Review (December 2003): 1449-1475.

TWC. Chapter 5.

TWC. Chapter 7.


Erev, Ido, and Alvin Roth. "Predicting How People Play Games." American Economic Review 88, no. 4 (September 1998): 848-81.


*Barber, Brad, and Terrance Odean. "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors." 2003. (PDF)

DellaVigna, Stefano, and Joshua Pollet. "Attention, Demographic Changes, and the Stock Market." 2003.

Gabaix, Xavier, David Laibson, Guillermo Moloche, and Stephen Weinberg. "The Allocation of Attention: Theory and Evidence." Mimeo.

*Gabaix, Xavier, and David Laibson. "Shrouded Attributes and Information Suppression in Competitive Markets."

Decision Utility and Experienced Utility

*Gilbert, D. T., E. C. Pinel, T. D. Wilson, S. J. Blumberg, and T. P. Wheatley. "Durability Bias in Affective Forecasting." In Heuristics and Biases: The Psychology of Intuitive Judgment. Edited by T. Gilovich, D. Griffin, and D. Kahneman. Cambridge: Cambridge University Press, 2002, pp. 292-312.

*Kahneman, Daniel, et al. "Back to Bentham?" QJE 112, no. 2 (May 1997): 375-405.

Kahneman, Daniel. Experienced Utility and Objective Happiness: A Moment-Based Approach. CVF, Chapter 37.

*Frey, B., and A. Stutzer. "What Can Economists Learn from Happiness Research?" Journal of Economic Literature 40, no. 2 (2002): 402-35.


*Weinstein. "Unrealistic Expectations About Future Life Events." Journal of Personality and Social Psychology 39 (1980): 806-820.

Malmendier, Ulrike, and Geoffrey Tate. "CEO Overconfidence and Corporate Investment." May 2003.

Time Discounting and Self Control

Modeling Tme Discounting and Self-control

*Akerlof, G. "Procrastination and Obedience." American Economic Review 81, no. 2 (1991): 1-19.

*Laibson, D. "Golden Eggs and Hyperbolic Discounting." QJE 112, no. 2 (May 1997): 443-77.

*O'Donoghue, Ted, and M. Rabin. "Doing It Now or Later." American Economic Review 89, no. 1 (March 1999): 103-24.

Some Psychological Evidence on Time Discounting

*Frederick, Shane, and G. Loewenstein, and T. O'Donoghue. "Time Discounting: A Critical Review." Forth. JEL.


Angeletos, M., D. Laibson, A. Repetto, and J. Tobacman. "The Hyperbolic Buffer Stock Model: Calibration, Simulation, and Empirical Evaluation." JEP (2002).

*Thaler, and Bernatzi. "Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving." (PDF)

Behavioral Economics and Paternalism

Thaler, T., and C. Sunstein. "Libertarian Paternalism."  The American Economic Review 93, no. 2 (2003): 175-179.


*Henrich, Fehr, Boyd, Bowles, Gintis, Camerer, and McElreath. "In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies." American Economic Review 91 (2001): 73-78. (PDF)

Fehr, and Fischbacher. "The Nature of Human Altruism."  Nature 425 (23 October 2003): 785-791. (PDF)

 *Fehr, and Gächter. "Fairness and Retaliation: The Economics of Reciprocity." Journal of Economic Perspectives 14 (2000).

*Fehr, and Schmidt. "A Theory of Fairness, Competition and Cooperation." Quarterly Journal of Economics 114 (1999): 817-868. 

Rabin, M. "Incorporating Fairness into Game Theory and Economics." American Economic Review no. 5 (1993): 1281-1302.


*Camerer, Loewenstein, and Prelec. "How Neuroscience Can Inform Economics." JEP. (Under revision.)

Sanfey, A. G., J. K. Rilling, J. A. Aronson, L. E. Nystrom, and J. D. Cohen. "The Neural Basis of Economic Decision Making in the Ultimatum Game." Science 300 (2003): 1755-1757.

Behavioral Finance

*Barberis, Nicholas, and Richard Thaler. "A Survey of Behavioral Finance." NBER Working Paper W9222 (2002).

*ICM. Chapter 1.

Direct Evidence on Investor Behavior

Benartzi, S., and R. Thaler. "Naive Diversification Strategies in Defined Contribution Savings Plans." American Economic Review (2001).

Barber, and Odean. "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors." (PDF) See other papers.

*Odean, T. "Are Investors Reluctant to Realize Their Losses?" Journal of Finance (1998): 1775-1798. See other papers.

———. "Do Investors Trade too Much?" American Economic Review (Dec 1999): 1279-98.

Limits to Arbitrage

*Inefficient Markets. Chapters 2, 3 and 4.

Lamont, and Thaler."Can the Market Add and Subtract? Mispricing in Tech Stock Carve-Outs." Journal of Political Economy (April 2003).

Excess Volatility and the Relation between Volume and Price Movements

*Gabaix, Xavier, Parameswaran Gopikrishnan, Vasiliki Plerou, and H. Eugene Stanley. "A Theory of Power Law Distributions in Financial Market Fluctuations." Nature 423 (2003): 267-70.

———. "A Theory of Large Fluctuations in Stock Market Activity."

Background Reading

Gabaix, Xavier. "Zipf's Law for Cities: An Explanation." Quarterly Journal of Economics 114, no. 3 (August 1999): 739-67.

Aggregate Equity Premium

*Benartzi, S., and R. Thaler. "Myopic Loss Aversion and the Equity Premium Puzzle." QJE 110, no. 1 (February 1995): 73-92.CVF. Chapter 17.

Gabaix, Xavier, and David Laibson. "The 6D Bias and the Equity Premium Puzzle." NBER Macro Annual (2002).

Earnings Announcements and Underreaction

Bernard, V. "Stock Price Reactions to Earnings Announcements: A Summary of Recent Anomalous Evidence and Possible Explanations." Chapter 11 in Advances in Behavioral Finance. Edited by Thaler. NY, Russell Sage Foundation, 1993, pp. 303-340.

Experimental Finance

Smith, Vernon, Gerruy Suchanek, and Arlington Williams. "Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets." Econometrica 56, no. 5 (1988): 1119-1151.

Bubbles and Crashes

Baker, Malcolm, and Jeffrey Wurgler. "Investor Sentiment and the Cross-Section of Stock Returns." 2003.

Kindleberger. "Mania, Panics and Crashes: A History of Financial Crises." 3rd ed. Wiley, Paperback, 2000.

Shiller, R. Irrational Exuberance. Princeton U. Press, 2000.

A Theory of Investor Sentiment

*ICM. Chapter 5.

Corporate Finance

*Barker, M., and J. Wurgler. "Market Timing and Capital Structure." Journal of Finance (February 2002).

Landier, Augustin, and David Thesmar. "Contracting with Optimistic Entrepreneurs: Theory and Evidence."

*Malmendier, Ulrike, and Geoffrey Tate. "CEO Overconfidence and Corporate Investment." May 2003.

Further Readings

Cialdini, R. Influence, The Psychology of Persuasion. Quill, 1993. (Particularly easy and nice)

Camerer, Colin F., George Loewenstein, and Matthew Rabin, eds. Advances in Behavioral Economics. Princeton University Press, 2003.