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The Causes Of Economic Crisis. A Behavioral Foundation

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  • Soim Horatiu Florin

    () (Western University, Faculty of Economics)

Abstract

The cyclical path of economy is a common place in the economic theory. The economic crisis that started in 2007 was not only one of the most severe since the WWII but it came unexpectedly. The cause of the crises and of the surprise consists in the economic models and theories that were founded on the rationality and maximization behavior of the economic actor. People lack the rationality the mainstream economics assume. This is why both economists and simple people do not act as theory predicts and finally economy does not tend toward equilibrium but suffers recurrent crises. This crisis started as a financial one, because of the subprime loans made in USA, but have spread in production sector because of credit frozen, is now in transforming into a social crisis because of austerity measures taken by governments. The paper analyzes the theoretical foundation of economic theory and how the facts that characterize the recent economic evolution fit with the non mainstream theories. It presents the figures of the economic evolution in the last 3 years and explains them based of the agentâ€(tm)s behavior described by Herbert Simon and Daniel Kahneman. Their challenge of mainstream economics is based on an analyze of human behavior. Herbert Simon introduced the concept of bounded rationality as opposed to perfect rationality postulated by neoclassic economics and Daniel Kahneman realized experiments that proved that people cannot stick with the performances assumed by mainstream economics. Their conclusion permit to understand the approach of George Soros who says that people actions are bounded by reflexivity and as a consequences sometimes economy move not toward but far from equilibrium, creating bubbles that end in financial and economic crises. As Akerlof mention the cause of the crisis is the reliance of a false theory which said that we are safe. The conclusion is that we need new theories more close to the real life and an agent description that capture the limited characteristics of the human being despite the abstract “homo oeconomicus†.

Suggested Citation

  • Soim Horatiu Florin, 2012. "The Causes Of Economic Crisis. A Behavioral Foundation," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 421-426, July.
  • Handle: RePEc:ora:journl:v:1:y:2012:i:1:p:421-426
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    File URL: http://anale.steconomiceuoradea.ro/volume/2012/n1/061.pdf
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    References listed on IDEAS

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    1. Denzau, Arthur T & North, Douglass C, 1994. "Shared Mental Models: Ideologies and Institutions," Kyklos, Wiley Blackwell, vol. 47(1), pages 3-31.
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    More about this item

    Keywords

    economic crisis; efficient markets; behavior; rationality; ideology;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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