Saturday, 9 May 2009

New article at VoxEU

I have a commentary up at VoxEU, outlining how financial regulators should use results from behavioural economics to stabilise the economy.

The article is here - highlights include:
...behavioural tests can give insight into accurate asset pricing. A sharp rise in house prices, for example, might originate partly in irrational buying decisions, and partly in by a genuine increase in the expected long-term return on property. While the long-term return cannot be tested today, the irrationality of consumers can, through specific experiments. Thus the change in expected returns can be deduced by subtracting the irrationality effect from the actual price rise.
There are many other tools which have been experimentally tested at the micro level but not yet applied to macroeconomics. Price anchoring, framing, endowment effects, confirmation bias and various social and peer effects all demonstrably allow us to influence behaviour in the lab; they should have applications to what we might call "macrorationality".
To properly understand this area, explicit models of decision-making need to be built that more closely match real behaviour but are still mathematically tractable.
Your comments are very welcome.

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