Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions

As a long-time student of the public sector, I welcomed the opportunity to come to Washington as a member of the Council of Economic Advisers and later to become the Chairman of the Council, partly because it gave me an opportunity to study at first hand this immensely important part of our economy and society and to test my ideas against the reality of government in action

Rationale Marktübertreibungen im Zusammenhang der aktuellen Finanzmarktkrise

Der Untersuchungsgegenstand der Arbeit ist die Darstellung der wichtigsten Anlegermotive bei Marktübertreibungen. Es wird dabei auf Konzepte der verhaltensorientierten Kapitalmarktforschung zurückgegriffen. Basierend auf den gewonnenen Erkenntnissen werden Lösungsansätze zur Vermeidung von Marktübertreibungen abgeleitet. Untersuchungen, beispielsweise durch Bikhchandani und Sharma (2000), haben gezeigt, dass Herdenverhalten eine wichtige Rolle bei der Erklärung von Preisübertreibungen spielt. Dabei kann es rational sein, sich konform zur Masse der Marktteilnehmer zu verhalten. Neben dem Konzept des Herdenverhaltens kann Konservatismus unter Marktteilnehmern zur Bestätigung vorherrschender Trends beitragen. Heuristiken werden angewandt, um komplexe Sachverhalte zu vereinfachen. Insbesondere die Repräsentativitätsheuristik kann zu einer Verstärkung bestehender Preisübertreibungen führen. Die Autoren sind der Ansicht, dass vor allem eine Verbesserung der Informationsbasis zur Reduzierung von Fehleinschätzungen durch Marktteilnehmer beitragen kann. Sowohl die Verfügbarkeit als auch die Qualität der Informationen spielen dabei eine Rolle. Ein weiterer Lösungsansatz betrifft die Risikoeinstellung und Kreditvergabe der Banken. In Boomphasen sollte das Risiko eines Crashs berücksichtigt werden.The paper deals with the motives of people to invest in overvalued markets. We resort to the concepts of behavioural finance to describe the most important factors. Based on these findings we deduct measures to avoid misjudgement of markets participants. As Bikhchandani and Sharma (2000) show, the concept of herd behaviour plays a decisive role in explaining exuberance in markets. There are incentives for investors, money managers and analysts to imitate other's actions. Furthermore, conservatism as well as heuristics like representativeness may also lead to a confirmation of prevailing trends. Another driver of misjudgement is the usage of heuristics like representativeness. The authors consider that the provision of information may substantially contribute to the reduction of misjudgement and exuberance in markets. Both availability and quality of information are important. Another approach aims at the regulation of bank lending, which should be limited particularly during a booming economy

Group Polarization in the Team Dictator Game reconsidered

While most papers on team decision-making find teams to behave more selfish, less trusting and less altruistic than individuals, Cason and Mui (1997) report that teams are more altruistic than individuals in a dictator game. Using a within-subjects design we re-examine group polarization by letting subjects make individual as well as team decisions in an experimental dictator game. In our experiment teams are more selfish than individuals, and the most selfish team member has the strongest influence on team decisions. Various sources of the different findings in Cason and Mui (1997) and in our paper are discussed

What Drives Home Bias? Evidence from Fund Managers' Views

A survey of fund managers reveals home bias for these sophisticated investors in an unrestricted setting. Proximity, perceived informational advantage and higher expected returns are confirmed as accompanying factors. In addition, the home bias of equity managers is also related to institutional, informational and behavioral characteristics. The perceived informational advantage does not seem to be valid. Multivariate analyses indicate that home bias is mainly related to relative return optimism, non-fundamental information and peculiar behavior towards risk. We interpret these as characteristics of less than fully rational behavior. It is consistently found that this pattern does not apply to bond managers.Eine Befragung von Fondsmanagern offenbart die Heimatverzerrung (sog. Home Bias) dieser erfahrenen Investoren in unbegrenzten Rahmenbedingungen. Nähe, empfundene Informationsvorteile und höhere erwartete Renditen werden als Begleitumstände bestätigt. Zusätzlich ist der Home Bias von Aktienfondsmanagern mit institutionellen und informatorischen Gegebenheiten sowie mit bestimmten Verhaltensmustern verbunden. Der empfundene Informationsvorteil scheint sich jedoch nicht zu bewahrheiten. Multivariate Analysen zeigen, dass der Home Bias hauptsächlich mit relativem Renditeoptimismus, der Nutzung nicht-fundamentaler Informationen und besonderem Risikoverhalten verbunden ist. Wir interpretieren diese Eigenschaften als unvollkommen rationales Verhalten. Konsistent zeigt sich, dass dieses Muster nicht für Rentenfondsmanager gilt

Naturalizing Institutions: Evolutionary Principles and Application on the Case of Money

In recent extensions of the Darwinian paradigm into economics, the replicator-interactor duality looms large. I propose a strictly naturalistic approach to this duality in the context of the theory of institutions, which means that its use is seen as being always and necessarily dependent on identifying a physical realization. I introduce a general framework for the analysis of institutions, which synthesizes Searle's and Aoki's theories, especially with regard to the role of public representations (signs) in the coordination of actions, and the function of cognitive processes that underly rule-following as a behavioral disposition. This allows to conceive institutions as causal circuits that connect the population-level dynamics of interactions with cognitive phenomena on the individual level. Those cognitive phenomena ultimately root in neuronal structures. So, I draw on a critical restatement of the concept of the meme by Aunger to propose a new conceptualization of the replicator in the context of institutions, namely, the replicator is a causal conjunction between signs and neuronal structures which undergirds the dispositions that generate rule-following actions. Signs, in turn, are outcomes of population-level interactions. I apply this framework on the case of money, analyzing the emotions that go along with the use of money, and presenting a stylized account of the emergence of money in terms of the naturalized Searle-Aoki model. In this view, money is a neuronally anchored metaphor for emotions relating with social exchange and reciprocity. Money as a meme is physically realized in a replicator which is a causal conjunction of money artefacts and money emotions

Women between Part-Time and Full-Time Work: The Influence of Changing Hours of Work on Happiness and Life-Satisfaction

This paper asks whether part-time work makes women happy. Previous research on labour supply has assumed that as workers freely choose their optimal working hours on the basis of their innate preferences and the hourly wage rate, outcome reflects preference. This paper tests this assumption by measuring the impact of changes in working-hours on life satisfaction in two countries (the UK and Germany using the German Socio-Economic Panel and the British Household Panel Survey). We find decreases in working-hours bring about positive and significant improvement on well-being for women

Meaning and Function in the Theory of Consumer Choice: Dual Selves in Evolving Networks

Building on the philosophy of Charles Sanders Peirce, recent advances in biosemiotics have resulted into a concise framework for the analysis of signs in living systems. This paper explores the potential for economics and shows how biosemiotics can integrate two different research agendas, each of which are also connected with biological theories, namely neuroeconomics and the theory of networks. I introduce the triadic conceptual framework established by Peirce which distinguishes between object, sign and interpretant and the corresponding causal forces in evolving hierarchical systems. This framework is used to systematize recent results of neuroeconomics in the form of the dual selves approach, following early contributions of James Coleman, partitioning the individual into the acting self and the object self. This distinction implies that there is a fundamental information asymmetry between the two selves. Against this background, the semeiotic process is an information generating and processing dynamics, which is driven by the internal selection of classificatory schemes of actions chosen and the population level dynamics of sign selection, with mimetic behavior as a driver. This can be further analyzed by means of the theory of signal selection. A central insight is that the internal information gap between acting self and object self implies a systematic role of sign processing in social networks for any kind of consumer choice. I exemplify my approach with empirical references to food consumption as a most universal and simple form of consumer choice