PBS has done an interesting and entertaining show on “rational” economic models vs. psychological models in the light of the recent crisis. Link here. The program gets into the pool player analogy, shows experiments like auctioning a dollar (which is a great example of an experiment that people very quickly learn not to be tricked by), and ends with John Cochrane and Bob Shiller (who gets the last word). What I see from inside finance and academia is a great surge of rational economic models on various features of the crisis. The study of psychology and economics has been moved to the back burner. We are studying models with moral hazard, adverse selection, informational asymmetries, and lack of knowledge rather than the psychological search to understand the actions of homo economicus and to identify which actions are self-interested and which are mistakes. In some sense, this is a condemnation of the previous models as at least incomplete. In another it reflects the fact that the “rational model” is an approach rather than a testable theory (apart from the unscientific concept of welfare commonly used in economics and at the heart of the psych-econ vs. rationalist debate). A question for those outside of these research debates. . . Do you think the American public is angry because it believes that the bankers, executives, etc. acted in their own, rational self-interest or because it believes they made mistakes that anyone could have made? I would guess the former, with perhaps the exception of the mortgages written “that people could not afford” where the public blames either the borrowers or the lenders.
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