a) Describe how economists traditionally model decision-making under risk. In particular,
discuss expected utility theory (EUT, hereafter) as a normative theory of rational decision
making. Cite an example of a research paper that uses this decision-making tool to model or
explain an economic phenomenon. [25 marks]
b) Briefly discuss criticisms against EUT by providing evidence from behavioural economics and
psychological research. The evidence cited can be, but not limited to, from laboratory or field
experiments. Note that you are not expected to summarize the cited research papers. [25
marks]
c) Explain briefly prospect theory. In particular, state the ways it differs from EUT. [25 marks]
d) Find an application of prospect theory / loss aversion or related notions (e.g., reference
dependent utility) in microeconomics and/or macroeconomics. Summarize the research
paper you find. Explain how the authors apply prospect theory/loss aversion or related
notions in explaining a particular economic phenomenon / individual behaviour. Compare
also the authors’ findings with the EUT predictions of behaviour within the same context.
State the policy implications, if there is any. [25 marks]
Faculty of Business and Law
Assignment Brief 2018/19
- 2 –
Unit Learning Outcomes Assessed.
- Appreciate the strengths and weaknesses of Macroeconomic and Microeconomic modelling,
with an understanding of the associated economic phenomena. - To interpret the impact of Macroeconomic and Microeconomic policies, and the constraints
to which they are subjected. - Organise and communicate relevant arguments and evidence in a clear, accurate and concise
manner.