- #UNREALISTIC OPTIMISM AND SUSCEPTIBILITY TO TRICKERY SERIES#
- #UNREALISTIC OPTIMISM AND SUSCEPTIBILITY TO TRICKERY FREE#
Those who fail to exploit people will lose out to those who do. In their view, companies exploit human weaknesses not necessarily because they are malicious or venal, but because the market makes them do it.
#UNREALISTIC OPTIMISM AND SUSCEPTIBILITY TO TRICKERY FREE#
Like Akerlof, he is keenly interested in seeing what psychology can add to economic theory.Īkerlof and Shiller believe that once we understand human psychology, we will be a lot less enthusiastic about free markets and a lot more worried about the harmful effects of competition. He believes that investors make serious mistakes, and also that they run in herds, which can produce bubbles. A specialist in the financial system, Shiller has explored the role of “irrational exuberance” in producing wildly inflated stock, bond, and real estate prices, which are bound to come down. He has long been a proponent of integrating psychology and economics. Akerlof has been interested in the persistence of caste systems, involuntary unemployment, rat races, the effects of personal identity, and what happens when sellers know things that buyers don’t. They offer a much more general, and quite damning, account of why free markets and competition cause serious problems.īoth Akerlof and Shiller have won the Nobel Prize they rank among the most important economists of the last half-century. But George Akerlof and Robert Shiller want to go far beyond behavioral economics, at least in its current form.
#UNREALISTIC OPTIMISM AND SUSCEPTIBILITY TO TRICKERY SERIES#
Their catalog of errors on the part of consumers and investors can be taken to identify a series of “behavioral market failures,” each of them calling for some kind of government response (such as information campaigns to promote healthy eating or graphic warnings to discourage smoking).
But for economists, competitive markets are generally trustworthy, and so the old Latin phrase retains its relevance: caveat emptor.īy emphasizing human fallibility, the group of scholars known as behavioral economists has raised a lot of doubts about this view. If a company is really engaging in fraud or deception, government regulators might well get involved, and customers are likely to have a right to compensation. Companies that lie, deceive, and manipulate people are not going to last long. The first line of defense is competition itself-and the market’s invisible hand.
But from the standpoint of standard economic thinking, that’s nothing to panic about. It is true that companies might try to take advantage of consumers and investors, perhaps with outright lies, perhaps with subtler forms of deception, perhaps by manipulating their emotions. But otherwise, many economists tend to believe that people should fend for themselves. If a company is emitting air pollution, the government can legitimately respond. To be sure, things are different if someone is inflicting harms on third parties. Outsiders, and especially those who work for the government, have no right to intervene. If people are buying potato chips, candy, and beer, or making risky investments, that’s their business they know their own values and tastes.
Most economists celebrate free markets, invoking the appealing idea of consumer sovereignty. There is a strong argument that within the economics profession, these problems are closely linked, and that they have had unfortunate effects on public policy. And until recent years, most economists have not had much to say about the problem of inequality, which seems to be getting worse. People tend to be overconfident they display unrealistic optimism they often deal poorly with risks they neglect the long term (“present bias”) and they dislike losses a lot more than they like equivalent gains (“loss aversion”). Why not? Economists have long assumed that human beings are “rational,” but behavioral findings about human fallibility have put a lot of pressure on that assumption. Very few economists foresaw the great recession of 2008–2009. An advertisement for Rolls-Royce from the late 1950s
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