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The Effects of Demand and Interest Rates on Investments, Evidence of Overinvestment from Two Behavioral Experiments

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  • Christian A. Conrad

Abstract

This article analyzes the causes of overinvestment and thus investment cycles with two behavioral experiments. In the experimental simulations increases in demand and cuts in interest rates increased unit profits, which led to uncoordinated and thus collectively too high investments (collective error). This made it possible to demonstrate collective errors that led to overinvestment and investment cycles (boom and bust cycles). Central banks and companies should take this into account when making their decisions. The experiments show the fundamental problem of uncoordinated supply adjustment and a tendency on the part of market participants to neglect the behavior of other actors and to underestimate the influence of the market on their own investment decisions.

Suggested Citation

  • Christian A. Conrad, 2022. "The Effects of Demand and Interest Rates on Investments, Evidence of Overinvestment from Two Behavioral Experiments," Applied Economics and Finance, Redfame publishing, vol. 9(1), pages 19-28, December.
    • Handle: RePEc:rfa:aefjnl:v:9:y:2022:i:1:p:19-28
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    References listed on IDEAS

    as
    1. Jason Shachat & Zhenxuan Zhang, 2017. "The Hayek Hypothesis and Long‐run Competitive Equilibrium: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 127(599), pages 199-228, February.
    2. Hayek, F. A., 2012. "Hayek on Hayek," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226321202 edited by Kresge, Stephen & Wenar, Leif, September.
    3. Morishima,Michio, 1996. "Dynamic Economic Theory," Cambridge Books, Cambridge University Press, number 9780521563246.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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