Mind over market: Economist confirms role of psychology in U.S. business cycle

Original source: SimoleonSense.com .

Additional examples of reflexivity? You decide.

Introduction (via Phys org)

Public attitude may be as important as public policy when it comes to the economy, according to UC Irvine’s Fabio Milani. A new economic model developed by the assistant professor of economics takes into account his finding that irrational optimism or pessimism is linked to a majority of booms and busts since the early 1970s.

Interesting Excerpt (via Phys Org)

“This quantitatively confirms what many have suspected – psychology is important for the economy and, sometimes, it can lead to self-fulfilling prophecies,” he says. On average, he says, it takes several quarters before the effects of these errors of unsubstantiated optimism or pessimism die off.

What does all this mean? For policy makers, he says, it points to a need for more proactive fiscal and monetary policy strategies.

“If you leave an economy open to market forces without intervention, it will be much more susceptible to these high levels of fluctuation that derive from psychological variables,” he says.

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