9781839107948.00010.pdf

Business cycles have historically been an important topic for behaviourally oriented economists. The concept of an economic and financial cycle based on interlocking mechanisms leading from the recession to the boom was developed in the 18th and 19th centuries. The early behavioural economics of the cycle came in the form of human foibles affecting business people and investors, such as the tendencies towards mania (excitement in the boom) and panic in the crisis. The turn to the 20th century brings an explicit treatment of the notions of time and uncertainty in economic decisions. Hence, the view of businesses as forecasters and the notion of optimism and pessimism take centre stage in business cycle theory. As mathematics enters business cycle economics around the 1930s, expectations become an ever more important topic. Starting with notions of simple extrapolation, it becomes possible to make explicit the cumulative mechanisms behind economic tides. The 1960s see rising tensions between views of rationality and lead to the introduction of rational expectations. This development in turn initiates important work on bounded rationality. Interestingly, this competition of views on rationality is historically intertwined with the business cycle itself. Times of deep recessions and crises are also times when economics becomes receptive to psychological views on human decision-making.