Psychology and the Market

26 Pages Posted: 10 Dec 2003

See all articles by Edward L. Glaeser

Edward L. Glaeser

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2003

Abstract

Prospect theory, loss aversion, mental accounts, hyperbolic discounting, cues, and the endowment effect can all be seen as examples of situationalism - the view that people isolate decisions and overweight immediate aspects of the situation relative to longer term concerns. But outside of the laboratory, emotionally-powerful situational factors - frames, social influence, mental accounts - are almost always endogenous and often the result of self-interested entrepreneurs. As such, laboratory work and, indeed, psychology more generally, gives us little guidance as to market outcomes. Economics provides a stronger basis for understanding the supply of emotionally-relevant situational variables. Paradoxically, the rise of situationalism actually increases the relative importance of economics.

Suggested Citation

Glaeser, Edward L., Psychology and the Market (December 4, 2003). Harvard Institute of Economic Research Discussion Paper No. 2023. Available at SSRN: https://ssrn.com/abstract=477982 or http://dx.doi.org/10.2139/ssrn.477982

Edward L. Glaeser (Contact Author)

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