The summer went by quickly and in preparation for my Honours year at university I have read a lot. My reading list contained mostly books on Behavioural Economics. Thereby one of the jewels is Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George Akerlof and Robert Shiller. I came across this book in the first place because I intend to apply prospect theory and reference dependence to risk attitudes in my dissertation in order to explain dynamic risk taking behaviour of economic actors over time. This includes a discussion of why my hypothesis matters for the macro-economy. I see important links between individuals’ risk attitudes at micro-economic level and market outcomes in aggregate. For this Akerlof and Shiller’s book has proven to be a gold mine. Inspired by pure Keynesian Macroeconomics it is packed with behavioural theories and real world economics.
In Behavioral Macroeconomics and Macroeconomic Behavior Akerlof makes his behavioral approach even more explicit in calling the field Behavioral Macroeconomics. In discussing six macroeconomic phenomena inconsistent with New Classical Economics he sets the scene for a return to behavioral microfoundations in Macroeconomics. Rather than boring undergrads to death with efficient market hypotheses, rational agent models, the natural rate theory or universal optimising behaviour in all aspects of economic life, our standard Macroeconomics education should take a leaf out of Akerlof’s book and start becoming real- world economics, that is Behavioural Macro… In adopting such a perspective I would expect positive externalities, such as reduced student absenteeism. Hence a more behavioural perspective on Macroeconomics would actually become a positive-sum game; for lecturers as well as students.
I encourage you to check out Akerlof’s paper and his book co-authored with Robert Shiller if Behavioural Macro sounds like your thing!
Akerlof, G.A. (2002). Behavioral Macroeconomics and Macroeconomic Behavior. The American Economic Review, 92(3), 411-433.
Akerlof, G.A., and Shiller, R.J. (2009). Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton, NJ: Princeton University Press.