Postrel’s Corollary

One upshot of the experiments Virginia Postrel has described could be the following: the more investors believe behavioral economics to be true, the more likely bubbles will develop in markets trading in assets.  As long as I’m overly confident in my own rationality and knowledge (a bias behavioral economics confirms) and as long as I [...]

Not Irrational Exuberance But Irrepressible Effervescence

Meanwhile, Virginia Postrel has a fascinating article in the newest Atlantic on how bubbles develop in finance. She elucidates their nature by describing some recent findings in experimental economics. The nut: it turns out that even fully informed investors will inflate the value of an asset by trying to fleece dummies in the market before [...]

Behavioral Economics Explains All and Saves All

So says David Leonhardt in the Times. But let’s say you work for a firm that specializes in applying the latest theories in management and organizational behavior.  Idea factories, like HBS and Wharton, spew out cutting edge techniques and models, sending them to dealerships like Boston Consulting Group and McBain. Hordes of 22 year olds [...]

The Normative Claims of Behavioral Economics

It is often unstated, but nonetheless true, that the fundamental normative claim of behavioral economics is that people should be rational. The guiding aim of every “nudge” is to make neoclassical economics true.The behavioral economic utopia coincides with the neoclassical. Insofar as it seeks to make people better, it makes them better self-interested rational maximizers. What [...]

To What Extent Does Behavioral Economics Explain Mania in Finance?

I say very little, but I’m willing to be convinced. One very implausible, but popular line of reasoning runs along these lines: neoclassical economics assumes every agent is rational and fully informed; the euphoria inflating the real estate bubble was obviously not rational; therefore, neoclassical economics fails to explain the current crisis. Having reached this [...]