Microfoundations for finite beings in a world of boundless possibilities

10 Mar, 2014 at 18:19 | Posted in Economics | 1 Comment

People are not, and cannot be, the infinitely foresightful, unbounded rational utility maximizers assumed in DSGE models. On the contrary, economic behavior, even that of highly sophisticated actors like the ‘rocket scientists’ who design financial instruments for investment banks, is inevitably driven by a partial view of the world. Heuristics and unconsidered assumptions inevitably play a crucial role. For finite beings in a world of boundless possibilities, nothing else is possible …

The problem is to focus on behavioral foundations that are most relevant to the problems of macroeconomics. An obvious place to start is with attitudes toward risk and uncertainty.