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Endogenous preference formation on macroeconomic issues: the role of individuality and social conformity

  • Guido Baldi

    ()

Macroeconomic events often require individuals and policy-makers to make decisions that they are not accustomed to making. For example, a sovereign debt crisis makes it necessary to either default on government debt, increase taxes, cut public spending or to impose a mixture of these measures. I argue that decisions on such matters are not derived from deep preferences; they require reflections and judgement under uncertainty. Past experiences and the interaction with other individuals are likely to influence the salience of preferences in the situations of decision making. Using a simple model, I illustrate how the salience of preferences changes with different degrees of individuality and conformity. Individuality is associated with the importance of private habits, while conformity is related to the perceived dissonance between initial intuitions and social opinions. The results obtained from simple simulation exercises stress that a high degree of conformity or a low degree of individuality may lead to overreactions when social opinion makers err for a short period of time. At the same time, a low degree of conformity or a high degree of individuality or leads to delayed adjustments to new circumstances. Copyright Springer-Verlag Berlin Heidelberg 2014

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File URL: http://hdl.handle.net/10.1007/s11299-014-0137-9
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Article provided by Fondazione Rosselli in its journal Mind & Society.

Volume (Year): 13 (2014)
Issue (Month): 1 (June)
Pages: 49-58

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Handle: RePEc:spr:minsoc:v:13:y:2014:i:1:p:49-58
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  1. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
  2. Ravn, Morten O & Schmitt-Grohé, Stephanie & Uribe, Martín, 2004. "Deep Habits," CEPR Discussion Papers 4269, C.E.P.R. Discussion Papers.
  3. Matthew Rabin, 2013. "Incorporating Limited Rationality into Economics," Journal of Economic Literature, American Economic Association, vol. 51(2), pages 528-43, June.
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  5. Dani Rodrik, 2013. "When Ideas Trump Interests: Preferences, World Views, and Policy Innovations," NBER Working Papers 19631, National Bureau of Economic Research, Inc.
  6. Karla Hoff & Joseph E. Stiglitz, 2010. "Equilibrium Fictions: A Cognitive Approach to Societal Rigidity," American Economic Review, American Economic Association, vol. 100(2), pages 141-46, May.
  7. Knack, Stephen & Keefer, Philip, 1997. "Does Social Capital Have an Economic Payoff? A Cross-Country Investigation," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1251-88, November.
  8. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
  9. Matthew Rabin., 1991. "Cognitive Dissonance and Social Change," Economics Working Papers 91-180, University of California at Berkeley.
  10. Hodgson, Geoffrey M., 2004. "Reclaiming habit for institutional economics," Journal of Economic Psychology, Elsevier, vol. 25(5), pages 651-660, October.
  11. Ronald M. Harstad & Reinhard Selten, 2013. "Bounded-Rationality Models: Tasks to Become Intellectually Competitive," Journal of Economic Literature, American Economic Association, vol. 51(2), pages 496-511, June.
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