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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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10203.

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Date of creation: Jan 2004
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Publication status: published as Glaeser, Edward L. "Psychology And The Market," American Economic Review, 2004, v94(2,May), 408-413.
Handle: RePEc:nbr:nberwo:10203

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Cited by:
  1. Niclas Berggren, 2012. "Time for behavioral political economy? An analysis of articles in behavioral economics," The Review of Austrian Economics, Springer, vol. 25(3), pages 199-221, September.
  2. Marcus Berliant, 2010. "Misbehavioral Urban Economics," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 93-101.
  3. Matthew Gentzkow & Jesse Shapiro, 2005. "Media Bias and Reputation," NBER Working Papers 11664, National Bureau of Economic Research, Inc.
  4. 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.
  5. Matthew A. Gentzkow & Jesse M. Shapiro, 2004. "Media, Education and Anti-Americanism in the Muslim World," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 117-133, Summer.
  6. Christian Gollier, 2005. "Optimal Illusions and Decisions under Risk," CESifo Working Paper Series 1382, CESifo Group Munich.
  7. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.
  8. Gollier, Christian, 2007. "Optimal expectations with complete markets," IDEI Working Papers 463, Institut d'Économie Industrielle (IDEI), Toulouse.
  9. Edward L. Glaeser & Bryce A. Ward, 2005. "Myths and Realities of American Political Geography," NBER Working Papers 11857, National Bureau of Economic Research, Inc.
  10. Edward L. Glaeser & Cass R. Sunstein, 2007. "Extremism and Social Learning," NBER Working Papers 13687, National Bureau of Economic Research, Inc.
  11. Andy Dickerson & Francis Green, 2009. "Fears and realisations of employment insecurity," Working Papers 2009016, The University of Sheffield, Department of Economics, revised Nov 2009.
  12. Christine Jolls & Cass R. Sunstein, 2005. "Debiasing through Law," NBER Working Papers 11738, National Bureau of Economic Research, Inc.
  13. 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.
  14. 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).

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