Esther-Mirjam Sent

Behavioral Economics: How Psychology Made Its (Limited) Way Back Into Economics

Behavioral economics and its focus on the interrelations between economics and psychology is attracting increasing attention and recognition. In 1998, the Journal of Economic Literature published an article offering an overview of the connections between economics and psychology (Rabin 1998). In defense of his focus on the relevance of psychological findings for economics, the author noted: “Because psychology systematically explores human judgment, behavior, and well-being, it can teach us important facts about how humans differ from the way they are traditionally described by economists” (11). A year later, in 1999, Andrei Shleifer of Harvard University was awarded the John Bates Clark medal of the American Economic Association, which is a prize granted every other year to an exceptional economist under the age of forty. Shleifer was selected for the award for his research on securities markets and on the role of government in regulating markets and in fostering economic growth. In this work, he presented behavioral finance as an alternative to the efficient market hypothesis that has dominated finance for many years (Shleifer 2000). In particular, Shleifer demonstrated the oversimplification of the efficient

Some like it cold: Thomas Schelling as a Cold Warrior

Schelling was an unusual economist and game theorist, although some demur. In some respects, he was a typical Cold War product, but in other ways he deviated strongly. His game theory seems to have served strategic interests well when we consider nuclear deterrence, but not so well, when we look at his involvement in the more conventional war in Vietnam. Why was this so? Why did the success in one arena not transfer onto the other? This paper explores these issues and, in doing so, illuminates the nature of Schellings contribution to game theory.

Meaning of Life: Exploring the Relation between Economics and Religion

Abstract This paper starts from the perspective that giving meaning to life is a key function of religion: through its narratives, rituals, creeds, and practices, religion clothes life in a meaningful frame. Interestingly, though, meaning of life has not yet appeared in studies on the relation between religion and economic behavior. As meaning of life may prove to be a crucial factor in understanding this relation, this paper seeks to develop a new approach to understanding the link between religion and economic behavior from the viewpoint of meaning of life.

Consumer Capital as the Source of Happiness: The Missing Economic Theory Underlying the Income-Happiness Paradox

Abstract: Self-reported happiness does not generally increase with rising income, as established by Richard Easterlin. We argue that the current debate in economics about the income-happiness paradox has paid too little attention to the theoretical foundation of the expected positive relation between income and happiness, seeking an empirical resolution through better data and more elaborate estimating equations instead. We return to the history of economics and revisit the contributions of Irving Fisher and Kenneth Boulding for the missing economic theory that underlies the income-happiness paradox. According to both Fisher and Boulding, “consumer capital” is the ultimate source of welfare, whereby consumer capital is defined as an accumulated stock of tangible and intangible instruments that yield a stream of services over their useful life. In the view of Fisher and Boulding, it is the utilization of this capital stock that renders happiness to individuals. Moreover, income that pays for the goods of consumption can be a “bad,” reflecting the cost of maintaining the consumer capital stock. Therefore, Fisher and Boulding’s insights bring a new perspective to the Easterlin paradox, showing that the empirical finding that rising income contributes only little, if anything, to levels of happiness has been overemphasized at the expense of the theoretically more relevant relation between consumer capital and happiness, and the exact role of income therein.

A Nobel Prize for Empirical Macroeconomics: Assessing the Contributions of Thomas Sargent and Christopher Sims

This paper provides an assessment of the contributions of the 2011 Nobel Prize winners, Thomas Sargent and Christopher Sims. They received the prize ‘for their empirical research on cause and effect in the macroeconomy’. The paper illustrates that Sargent entertained different interpretations of rational expectations during distinct phases of his research. And it shows that Sims shifted the focus from theoretical identification restrictions to identifying the main characteristics of the time series data, a shift of focus from theory to time series.