Keeping the dream alive

23 Feb, 2018 at 16:25 | Posted in Economics | 1 Comment

akerlof_photo_01For me, the study of asymmetric information was a very first step toward the realization of a dream. That dream was the development of a behavioral macroeconomics in the original spirit of Keynes’ General Theory. Macroeconomics would then no longer suffer from the ad hockery of the neoclassical synthesis, which had over-ridden the emphasis in The General Theory on the role of psychological and sociological factors, such as cognitive bias, reciprocity, fairness, herding, and social status. My dream was to strengthen macroeconomic theory by incorporating assumptions honed to the observation of such behavior …

Keynes’ General Theory was the greatest contribution to behavioral economics before the present era. Almost everywhere Keynes blamed market failures on psychological propensities (as in consumption) and irrationalities (as in stock market speculation). Immediately after its publication, the economics profession tamed Keynesian economics. They domesticated it as they translated it into the “smooth” mathematics of classical economics. But economies, like lions, are wild and dangerous. Modern behavioral economics has rediscovered the wild side of macroeconomic behavior. Behavioral economists are becoming lion tamers. The task is as intellectually exciting as it is difficult.

George Akerlof

1 Comment

  1. “Almost everywhere Keynes blamed market failures on psychological propensities (as in consumption) and irrationalities (as in stock market speculation).”

    The main risk for financial companies is psychology, but if they know what they are doing they can use mathematical techniques involving insurance and hedging to put lower bounds on any psychological risk and make money regardless. The only real risk is how much of a profit Goldman Sachs will make, not wether it will make a profit …


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