AEM 3350

The Behavioral Economics of Firms

Course Description

Course information provided by the 2026-2027 Catalog.

Why do competing gas stations sometimes charge different prices for identical fuel? Why do airlines use pricing algorithms that leave seats empty? Why do some incentive schemes motivate workers while others backfire? Most behavioral economics research focuses on consumer biases or individual decision-making. Firms, in contrast, are often assumed to behave optimally because they’re guided by groups of decision makers and face market pressures to perform well. This course explores a different question: how do behavioral biases shape the decisions of even very large firms in both outward-facing decisions like pricing and inward-facing decisions like incentive design? Drawing on behavioral economics and evidence from real firms (gas stations, airlines, retailers, and warehouses), we’ll investigate how psychological factors like overconfidence, anchoring, and misspecified mental models affect firm behavior.

Prerequisites AEM 2600 or ECON 3030 or equivalent.

Last 4 Terms Offered 2026SP

Learning Outcomes

• Diagnose and analyze the role of behavioral biases in generating a pricing or incentive challenge facing a real company, or you will be able to propose a novel pricing strategy or incentive contract that harnesses insights from behavioral economics.
• Synthesize and employ the endings and key conclusions of case studies on behavioral biases in pricing and incentives.
• Develop novel theories about biases that affect managerial pricing decisions or employee responses to incentives.
• Articulate how behavioral biases affect managerial pricing decisions and worker responses to incentives.

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