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Psychology and the Market

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  • Edward L. Glaeser
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    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, the rise of situationalism actually increases the relative importance of economics.

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    Bibliographic Info

    Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 2023.

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    Date of creation: 2003
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    Handle: RePEc:fth:harver:2023

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    Cited by:
    1. Matthew A. Gentzkow & Jesse M. Shapiro, 2004. "Media, Education, and anti-Americanism in the Muslim World," Microeconomics 0402005, EconWPA.
    2. Adams, Renée B. & Ferreira, Daniel, 2008. "Do directors perform for pay?," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 154-171, September.
    3. Ulrike Malmendier & Devin Shanthikumar, 2004. "Are Investors Naive About Incentives?," NBER Working Papers 10812, National Bureau of Economic Research, Inc.
    4. Franziska Rischkowsky & Thomas Döring, 2008. "Consumer Policy in a Market Economy Considerations from the Perspective of the Economics of Information, the New Institutional Economics as well as Behavioural Economics," Journal of Consumer Policy, Springer, vol. 31(3), pages 285-313, September.

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