Working Paper: NBER ID: w10203
Authors: Edward L. Glaeser
Abstract: Prospect theory, loss aversion, mental accounts, hyperbolic discounting, cues, and the endowment effect can all be seen as examples of situationalism -- the view that people isolate decisions and overweight immediate aspects of the situation relative to longer term concerns. But outside of the laboratory, emotionally-powerful situational factors -- frames, social influence, mental accounts -- are almost always endogenous and often the result of self-interested entrepreneurs. As such, laboratory work and, indeed, psychology more generally, gives us little guidance as to market outcomes. Economics provides a stronger basis for understanding the supply of emotionally-relevant situational variables. Paradoxically situationalism actually increases the relative importance of economics.
Keywords: Behavioral Economics; Cognitive Errors; Situationalism
JEL Codes: H0; H8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Situational factors (D91) | long-run welfare (D69) |
| Situational factors (D91) | decision-making (D70) |
| Cognitive errors (D91) | political contexts (P16) |
| Cognitive errors (D91) | market contexts (D40) |
| Incentives of information suppliers (D83) | mistaken beliefs (D83) |
| False beliefs (D83) | emotional satisfaction (D91) |
| Situational factors (D91) | psychological outcomes (D91) |