The economics of wishful thinking and the adventures of rationality
Replying to Queen Elizabeth II who in November 2008 asked why so few economists had warned about the emerging financial crisis, a group of eminent economists of the British Academy, claimed that while this failure had many causes, the most important was principally a failure of the collective imagination of many bright people, to understand the risks to the system as a whole. The paper suggests that this failure is due also to the still heavy influence of the paradigm of rational expectations, that did not provide the intellectual tools to grasp the signs of the impending financial crisis. The paper explores the development of Muth’s rational expectations hypothesis and the parallel development of Simon’s idea of bounded rationality—two opposite views about economic behavior that originated in the same context, during the early 1960s at Carnegie Mellon. It is shown that the latter, while marginalized for decades from the core economic ideas, generated a wide development in cognitive psychology, problem solving and experimental economics that grew up in the last decades and now permit a more profound analysis of human behavior in economic and organizational contexts, that can be the seed of a new thinking in economics. The challenge for economists is to use this new toolbox to incorporate in their models real human behaviors, getting out from the economy of wishful thinking. Copyright Springer-Verlag Berlin Heidelberg 2014
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 13 (2014)
Issue (Month): 1 (June)
|Contact details of provider:|| Web page: http://www.springer.com/economics/journal/11299Email: |
More information through EDIRC
|Order Information:||Web: http://link.springer.de/orders.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mark J Machina, 1982.
""Expected Utility" Analysis without the Independence Axiom,"
Levine's Working Paper Archive
7650, David K. Levine.
- Machina, Mark J, 1982. ""Expected Utility" Analysis without the Independence Axiom," Econometrica, Econometric Society, vol. 50(2), pages 277-323, March.
- Ritter, Jay R., 2003. "Behavioral finance," Pacific-Basin Finance Journal, Elsevier, vol. 11(4), pages 429-437, September.
- Daniel A. Levinthal, 1997. "Adaptation on Rugged Landscapes," Management Science, INFORMS, vol. 43(7), pages 934-950, July.
- Kenneth A. Froot & Emil Dabora, 1998.
"How are Stock Prices Affected by the Location of Trade?,"
NBER Working Papers
6572, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Dabora, Emil M., 1999. "How are stock prices affected by the location of trade?," Journal of Financial Economics, Elsevier, vol. 53(2), pages 189-216, August.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991.
"The Survival of Noise Traders in Financial Markets,"
3725470, Harvard University Department of Economics.
- De Long, J Bradford, et al, 1991. "The Survival of Noise Traders in Financial Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
- Hommes, C.H., 2000.
"Financial Markets as Nonlinear Adaptive Evolutionary Systems,"
CeNDEF Working Papers
00-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
- Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
- repec:dgr:uvatin:20010014 is not listed on IDEAS
- Robert J. Shiller, 2002.
"From Efficient Market Theory to Behavioral Finance,"
Cowles Foundation Discussion Papers
1385, Cowles Foundation for Research in Economics, Yale University.
- Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
- Waterman, Robert Jr. & Peters, Thomas J. & Phillips, Julien R., 1980. "Structure is not organization," Business Horizons, Elsevier, vol. 23(3), pages 14-26, June.
- Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279.
- repec:dgr:uvatin:2001014 is not listed on IDEAS
- Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
- Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58, pages 211.
- Esther-Mirjam Sent, 2002. "How (Not) to Influence People: The Contrary Tale of John F. Muth," History of Political Economy, Duke University Press, vol. 34(2), pages 291-320, Summer.
When requesting a correction, please mention this item's handle: RePEc:spr:minsoc:v:13:y:2014:i:1:p:9-27. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.