The Psychology of Economic Behavior

The Psychology of Economic Behavior


Results in cognitive sciences show that our opinions and decisions often deviate from the rational actor paradigm. These anomalies are explained by invoking the role of several psychological factors. This “wealth of explanations” threatens the quest for an orderly understanding of social phenomena. Nicola Gennaioli’s (Department of Finance) project Psychology and Economic Behavior: Theory Tests and Applications (SalThApp), funded with an ERC Consolidator Grant, hosted by IGIER - Innocenzo Gasparini Institute for Economic Research, purports to unify many of these anomalies using a fundamental cognitive principle: our opinions are overly influenced by selective attention on irregular occurrences.
“We want to develop models founded on this principle. We will evaluate their ability to explain opinions and individual decisions and to shed light on economic, financial, and political phenomena”. Our perception of the Irish will serve as an example. We think of them as redheads, while only 10% of the Irish have hair of that color. According to the project’s hypothesis, our perception is influenced by the fact that the Irish have an abnormal incidence of red-haired compared to the rest of the world population, which is about 1%. Interestingly enough, this principle does not apply only to the formation of stereotypes. “Something similar could happen when we are asked to predict the future of the economy. An excessive emphasis on positive and negative news could indeed explain euphoria and pessimism in financial markets”.
The complexity of the project lies in the development of a model applicable to many different contexts and in the design of tests for reliability by using experimental, financial, and political data.

Read here the other articles on the ERC research projects:
The Dream Team of Research made in..ERC
University at the Time of Star Wars
The Culture That Influences Demography
For a History of Inequality in Europe
Fostering Solidarity in Times of Migrations
A Theory of Games and Emotions
Why with Broadband We will have More Children
How to Communicate Climate Science
At the Birth of Maritime Insurance
Even Distorted Choices can be Rational
Great Expectations for Great Objectives
What we are Certain about Uncertainty
Putting a Halt to the Spread of Infections
Wellbeing and Fertility, a Two-Way Relationship
The Role of Financial Imperfections
The World Through the Lens of Power
The Selection of the Political Class
How to Evaluate Innovative Ideas
A Help for Those who make Predictions
When a Government is Guided by Values


by Claudio Todesco


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