Good article at the Harvard Magazine, surveying the impact psychology is finally having on modern economics.. In some ways it makes the dismal science seem even more dismal since it shows that free and efficient markets never will be as they are full of venal, vengful, short-termist, short-sighted and stupid humans.. Economists always assumed that with enough agents and enough money at stake these deviations would be arbitraged out but psychologists are showing them that they had mispriced other human wants like pirde and need to feel fairly treated which lead to the willingness to get pay even higher personal price to get revenge.
Lots of lovely/depressing little examples.. i like this one about procrastination which i had never thought of in quite these terms before..
Laibson can sketch a formal model that describes this dynamic. Consider a project like starting an exercise program, which entails, say, an immediate cost of six units of value, but will produce a delayed benefit of eight units. That%u2019s a net gain of two units, %u201Cbut it ignores the human tendency to devalue the future,%u201D Laibson says. If future events have perhaps half the value of present ones, then the eight units become only four, and starting an exercise program today means a net loss of two units (six minus four). So we don%u2019t want to start exercising today. On the other hand, starting tomorrow devalues both the cost and the benefit by half (to three and four units, respectively), resulting in a net gain of one unit from exercising. Hence, everyone is enthusiastic about going to the gym tomorrow.
Of course, the good news is that a more realistic economic theory has to be progress. But sure enough, the idea that the human realm is irrational and we are our own worst enemy will take a long time to pervade the world of economics, filled as it is with failed mathematicians (closet Platonists the lot of them!)