Cultural Abstraction

Friday, April 30, 2010

Economics Explained by Social Phenomena

Compelled by my last post, I began to consider the social phenomena studied through behavioral economics. Behavioral economics attempts to explain why we do the things we do and how it affects the economy. It looks at how we think basing decisions on a rule of thumb or how the information is framed. While there is difficulty in explaining and measuring our behavior, we can see its impact on the economy. It explains why we hold out on making purchases during deflation and further devalue the dollar and how we assume our past decisions were right and hence we continue to make those decisions. Many times we rely on intuition and act irrationally…so we continue down a destructive path.
A crisis arises because humans are social beings—the cause of irrationality. Our behavior is contagious; in our minds, something that is so widespread and under mass consideration could not be wrong. While the US is not a collective society, there is still a tendency to think and act collectively. And hence there is a domino effect, rather, a downward spiral where information is passed, believed, and followed. In the case of the economic crisis and burst of the housing bubble, such observations were disastrous. Many believed the boom would last forever and housing prices would only appreciate. Being surrounded by ideas that the boom would continue, how could citizens believe otherwise? In response to the housing boom, Robert Shiller, author of “The Subprime Solution,” compared the social epidemic to disease. He explains how the media even had its influence in the bursting bubble and the subsequent collapse of the economy. If our source of information is wrong and widespread, it can cause short and long term consequences…some of which may even be beyond repair. Think of things such as the Milgram experiment where people unethically abided by a social influencer—in this case and authoritative figure. Jim Jones, The Holocaust, and the list of horrendous acts due to mass consideration carries on. While we may be suffering economically from this social phenomenon, this should be yet another opportunity to learn from a historic event…and this time take actions to prevent further tragedy. We should no longer allow our speculations—our belief in the collective—to become our detriment.

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