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A psychosocial explanation of economic cycles

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  • Lopes, Miguel Pereira
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    Abstract

    How human expectations and behaviors impact the economy has been of interest to economists since at least Adam Smith. However, recent advances in psychological and social psychological research have led to an improved level of knowledge about human adaptation processes, as well as about optimistic and pessimistic expectations and their consequences on human behavior. These developments allow us to understand these adaptive expectations and behaviors in a more integrated fashion. Based on these improvements, I develop a model of human adaptation under different external circumstances and apply it to explain the ups and downs of economic cycles. A central conclusion from the model is that optimistic expectations of economic agents might not always have a positive impact over the economy. I conclude by drawing theoretical implications, as well as potential consequences for financial and economic policy-making.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 40 (2011)
    Issue (Month): 5 ()
    Pages: 652-659

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    Handle: RePEc:eee:soceco:v:40:y:2011:i:5:p:652-659

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    Web page: http://www.elsevier.com/locate/inca/620175

    Related research

    Keywords: Economic cycles; Human adaptation; Optimism; Pessimism; Perceived control;

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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Katona, George, 1974. " Psychology and Consumer Economics," Journal of Consumer Research, University of Chicago Press, vol. 1(1), pages 1-8, June.
    3. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    4. Rosenberg, Nathan & Frischtak, Claudio R, 1983. "Long Waves and Economic Growth: A Critical Appraisal," American Economic Review, American Economic Association, vol. 73(2), pages 146-51, May.
    5. Swedberg, Richard, 1995. "Schumpeter's vision of socioeconomics," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 24(4), pages 525-544.
    6. Hillier, Brian & Rougier, Jonathan, 1999. "Real Business Cycles, Investment Finance, and Multiple Equilibria," Journal of Economic Theory, Elsevier, vol. 86(1), pages 100-122, May.
    7. Thomas Mayer, 1987. "U. S. monetary policy," Proceedings, Federal Reserve Bank of San Francisco, pages 201-225.
    8. Anderson, Michael A. & Goldsmith, Arthur H., 1997. "Mr. Keynes' theory of investment: Do forward looking expectations and weight really matter?," Journal of Economic Psychology, Elsevier, vol. 18(5), pages 547-573, September.
    9. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
    10. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
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