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Psychology and the Market

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  • Edward L. Glaeser

Abstract

Prospect theory, loss aversion, mental accounts, hyperbolic discounting, cues, and the endowment effect can all be seen as examples of situationalism -- the view that people isolate decisions and overweight immediate aspects of the situation relative to longer term concerns. But outside of the laboratory, emotionally-powerful situational factors -- frames, social influence, mental accounts -- are almost always endogenous and often the result of self-interested entrepreneurs. As such, laboratory work and, indeed, psychology more generally, gives us little guidance as to market outcomes. Economics provides a stronger basis for understanding the supply of emotionally-relevant situational variables. Paradoxically situationalism actually increases the relative importance of economics.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 94 (2004)
Issue (Month): 2 (May)
Pages: 408-413

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Handle: RePEc:aea:aecrev:v:94:y:2004:i:2:p:408-413

Note: DOI: 10.1257/0002828041302208
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References

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Citations

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Cited by:
  1. Berggren, Niclas, 2011. "Time for behavioral political economy? An analysis of articles in behavioral economics," Ratio Working Papers 166, The Ratio Institute.
  2. Andy Dickerson & Francis Green, 2009. "Fears and realisations of employment insecurity," Working Papers 2009016, The University of Sheffield, Department of Economics, revised Nov 2009.
  3. Berliant, Marcus, 2009. "Misbehavioral urban economics," MPRA Paper 14140, University Library of Munich, Germany.
  4. Christine Jolls & Cass R. Sunstein, 2005. "Debiasing through Law," NBER Working Papers 11738, National Bureau of Economic Research, Inc.
  5. Gollier, Christian, 2007. "Optimal expectations with complete markets," IDEI Working Papers 463, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Matthew A. Gentzkow & Jesse M. Shapiro, 2004. "Media, Education, and anti-Americanism in the Muslim World," Microeconomics 0402005, EconWPA.
  7. Burnham, Terence C. & Cesarini, David & Wallace, Björn & Johannesson, Magnus & Lichtenstein, Paul, 2007. "Billiards and Brains: Cognitive Ability and Behavior in a p-Beauty Contest," Working Paper Series in Economics and Finance 684, Stockholm School of Economics.
  8. Edward L. Glaeser & Cass R. Sunstein, 2007. "Extremism and Social Learning," NBER Working Papers 13687, National Bureau of Economic Research, Inc.
  9. Matthew Gentzkow & Jesse Shapiro, 2005. "Media Bias and Reputation," NBER Working Papers 11664, National Bureau of Economic Research, Inc.
  10. Gollier, Christian, 2005. "Optimal Illusions and Decisions under Risk," IDEI Working Papers 340, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Edward L. Glaeser & Bryce A. Ward, 2005. "Myths and Realities of American Political Geography," NBER Working Papers 11857, National Bureau of Economic Research, Inc.
  12. Amanor-Boadu, Vincent, 2008. "On the Development of an Ethical Demand Theory," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6236, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  13. Adeline Delavande & Basit Zafar, 2012. "How deeply held are anti-American attitudes among Pakistani youth? Evidence using experimental variation in information," Staff Reports 558, Federal Reserve Bank of New York.
  14. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.

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