Sunday, May 27, 2012

The economics of hope

The Economist's "Free Exchange" column summarizes some recent research by Esther Duflo and others on the potential importance of the mental state of the very poor to their willingness to undertake investments.

I would argue that economics does a relatively poor job of integrating how agents think about actions from top - the role of beliefs expectations in macro fluctuations - to middle - the role of beliefs in political behavior or in consumption choices - to bottom - as in the studies of the very poor described in the economist piece. Getting better at this, even if the price is having to work with scholars outside of economics, would make economics a stronger discipline and increases its ability to effectively explain real-world behavior.

To be sure, some work along these lines is going on under the rubric of behavioral economics, but much more remains to be done. The good news is that behavioral economics has been getting less faddish and more serious over time, at least such is my perception from a modest distance. You can no longer just mumble something about "hyperbolic discounting" and get published in a top journal (or should that be one particular top journal?). That's a good thing.

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