The unifying theme of this ambitious and potentially far-reaching proposal is the investigation of non-standard theories of economic behaviour under risk and ambiguity. Over the past 20 years, and increasingly so over the past decade, economists have been active in producing theories of behaviour built on less stringent concepts of ?rational' behaviour. There is an increasing acceptance of what is now termed Behavioural Economics, both from hard-liners coming from the conventional wisdom and from those approaching the idea from outside mainstream economics. This proposal is to investigate these new ?non-standard' theories, both at their foundational levels, and also in terms of their ability to help us understand how markets operate, and how we might design appropriate institutions in a world
of risk and ambiguity.
What we call ?non-standard theories' are those theories which depart from ultra-strict definitions of rationality in behaviour. Two decades ago, economics was dominated by standard theories with strict ideas of rationality: for example, (subjective) Expected Utility theory for behaviour under (ambiguity) risk; exponential discounting for dynamic decision making; strong Nash Equilibrium for behaviour in games; and strict self utility maximising for behaviour involving groups of people. In all these areas, the past 20 years have seen a proliferation of new non-standard theories: non-expected utility theory in individual decision making; Non-exponential discounting models in dynamic decision making; non-Nash behaviour in games; and other-regarding preferences in models of group behaviour. These non-standard theories, while departing from strict concepts of rationality, still embody some notion of rationality, albeit of a weaker form.
The purpose of this proposal is to investigate, within a common framework, a number of these new non-standard theories. Clearly we cannot cover the whole field in a single project, but we can focus on key issues. We propose to test the implications of these theories, and compare their performance with the standard theories. Moreover we propose to explore and test their implications in the context of markets and in the context of institutional design. Our prime empirical tool will be that of experiments, in which the members of the various units of this proposal have a strong comparative advantage compared with others in Italy.