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). Available at SSRN: https://ssrn.com/abstract=477982 or http://dx.doi.org/10.2139/ssrn.477982

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