Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [9]
I doubt whether the authenticity of prayer can be experimentally disproven. Prayer certainly has been shown to have a placebo effect. Whether the prayer itself can be deemed responsible for the success of the petition depends on whether the outcome can be identified with any certainty as not due to natural causes. Any negative results in an experiment designed for the purpose of testing the deity’s responsiveness would surely violate the Third Commandment and could be discarded on that account.
If we have now arrived at the junction of myth, superstition, and religion, it’s time for me to close.
P.S. A couple of months after Howard’s celebration my wife and I were in the security line at Copenhagen airport and realized that I had no wallet. We cancelled our flight, retrieved our luggage, returned to our hotel, cancelled my credit and ATM cards, talked to all the cab drivers, went back to the airport for a late flight to Warsaw. Our luggage didn’t arrive. On checking out of our hotel five days later, we needed to verify the date of our arrival. It turned out to have been Friday the thirteenth!
RECOMMENDED READING
Kahneman, Daniel, Paul Slovic, and Amos Tversky, eds. (1982). Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press, 1982.
Kahneman, Daniel, and Amos Tversky, eds. (2000). Choices, Values, and Frames. Cambridge: Cambridge University Press, 2000.
Langer, Ellen J. (1982). “The Illusion of Control.” In Daniel Kahneman, Paul Slovic, and Amos Tversky, eds. Judgment Under Uncertainty: Heuristics and Biases. Cambridge: Cambridge University Press.
Schelling, Thomas (1996). “Coping Rationally with Lapses from Rationality,” Eastern Economic Journal (Summer): 251-269. Reprinted in Thomas Schelling, Strategies of Commitment and Other Essays (Cambridge, MA: Harvard University Press, 2006.)
2
Berserk Weather Forecasters, Beauty Contests, and Delicious Apples on Wall Street
GEORGE A. AKERLOF AND ROBERT J. SHILLER
No one has ever made rational sense of the wild gyrations in financial prices, such as stock prices.1 These fluctuations are as old as the financial markets themselves. And yet these prices are essential factors in investment decisions, which are fundamental to the economy. Corporate investment is much more volatile than aggregate GDP, and it appears to be an important driver of economic fluctuations. If we recognize these facts, we are left once again with more evidence that animal spirits are central to the ups and downs of the economy.
The real value of the U.S. stock market rose over fivefold between 1920 and 1929. It then came all the way back down between 1929 and 1932. The real value of the stock market doubled between 1954 and 1973. Then the market came all the way back down. It then lost half of its real value between 1973 and 1974. The real value of the stock market rose almost eightfold between 1982 and 2000. Then it lost nearly 60 percent of its value between 2007 and early 2009, before rebounding again.2
The question is not just how to forecast these events before they occur. The problem is deeper than that. No one can even explain why these events rationally ought to have happened even after they have happened.
One might think, from the self-assurance that economists often display when extolling the efficiency of the markets, that they have reliable explanations of what has driven aggregate stock markets, which they are just keeping to themselves. They can of course give examples that justify the stock price changes of some individual firms. But they cannot do this for the aggregate stock market.3
Over the years economists have tried to give a convincing explanation for aggregate stock price movements in terms of economic fundamentals. But no one has ever succeeded. They do not appear to be explicable in terms of changes in interest rates, subsequent dividends or earnings, or anything