The role of inertia in financial bubbles

What Behavioral Economics Teaches Us About The Great Recession

Consumer optimism, as measured by the University of Michigan consumer sentiment index, has rebounded this year to its highest levels since 2007. Overall, this is very positive news about rebounding consumer sentiment, one macroeconomic variable that along with wage growth has been significantly hampered since the global financial crisis. Along these lines, much interesting and useful behavioral economics research has been done in recent years, examining the role of psychology in response to macroeconomic events like recessions. For instance, a recent study by University of California Berkeley economics professor Ulrike Malmendier finds that individuals who lived through the Great Depression have been much less likely to invest their money in the stock market compared to the generations thereafter that did not live through the Great Depression. An increasing amount of behavioral research like this is helping to improve public policy from optimal tax policy to understanding the underlying causes of financial asset bubbles. ….[READ]


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