Economists as Worldly Philosophers

While leading figures in the early history of economics conceived of it as inseparable from philosophy and other humanities, there has been movement, especially in recent decades, towards its becoming an essentially technical field with narrowly specialized areas of inquiry. Certainly, specialization has allowed for great progress in economic science. However, recent events surrounding the financial crisis support the arguments of some that economics needs to develop forums for interdisciplinary interaction and to aspire to broader vision.Economic methodology, Specialization, Behavioral economics, Psychology, Rational expectations, Economics as a moral science, Pareto criterion, Interdisciplinary, Journal of Economic Perspectives

From Efficient Market Theory to Behavioral Finance

The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.Speculative markets, Rational expectations, Psychology, Anomalies, Excess volatility, Feedback, Smart money, Limits to arbitrage, Short sales

Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models

macroeconomics, Low Interest Rates, High Asset Prices, Popular Economic Models

The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation

The life-cycle accounts proposal for Social Security reform has been justified by its proponents using a number of different arguments, but these arguments generally involve the assumption of a high likelihood of good returns on the accounts. A simulation is undertaken to estimate the probability distribution of returns in the accounts based on long-term historical experience. U.S. stock market, bond market and money market data 1871-2004 are used for the analysis. Assuming that future returns behave like historical data, it is found that a baseline personal account portfolio after offset will be negative 32% of the time on the retirement date. The median internal rate of return in this case is 3.4 percent, just above the amount necessary for holders of the accounts to break even. However, the U.S. stock market has been unusually successful historically by world standards. It would be better if we adjust the historical data to reduce the assumed average stock market return for the simulation. When this is done so that the return matches the median stock market return of 15 countries 1900-2000 as reported by Dimson et al. [2002], the baseline personal account is found to be negative 71% of the time on the date of retirement and the median internal rate of return is 2.6 percent.Private accounts, Lifetime portfolio selection, portfolio choice, pensions, old age insurance, social insurance, stock market, returns, historical simulation, thrift savings plan

Understanding Recent Trends in House Prices and Home Ownership

This paper looks at a broad array of evidence concerning the recent boom in home prices, and considers what this means for future home prices and the economy. It does not appear possible to explain the boom in terms of fundamentals such as rents or construction costs. A psychological theory, that represents the boom as taking place because of a feedback mechanism or social epidemic that encourages a view of housing as an important investment opportunity, fits the evidence better. Three case studies of past booms are considered for comparison: the US housing boom of 1950, the US farmland boom of the 1970s, and the temporary interruption 2004-5 of the UK housing boom. The paper concludes that while it is possible that prices will continue to go up as is commonly expected, there is a high probability of steady and substantial real home price declines extending over years to come.Home prices, Residential investment, Mortgage, Subprime crisis, Business cycle, Recession, Boom, Bubble, Monetary policy

The Life-Cycle Personal Accounts Proposal for Social Security: A Review

The life-cycle accounts proposal for Social Security reform has been justified by its proponents using a number of different arguments, but these arguments generally involve the assumption of a high likelihood of good returns on the accounts. A simulation is undertaken to estimate the probability distribution of returns in the accounts based on long-term historical experience. U.S. stock market, bond market and money market data 1871-2004 are used for the analysis. Assuming that future returns behave like historical data, it is found that a baseline personal account portfolio after offset will be negative 32% of the time on the retirement date. The median internal rate of return in this case is 3.4 percent, just above the amount necessary for holders of the accounts to break even. However, the U.S. stock market has been unusually successful historically by world standards. It would be better if we adjust the historical data to reduce the assumed average stock market return for the simulation. When this is done so that the return matches the median stock market return of 15 countries 1900-2000 as reported by Dimson et al. [2002], the baseline personal account is found to be negative 71% of the time on the date of retirement and the median internal rate of return is 2.6 percent.

Public Resistance to Indexation: A Puzzle

macroeconomics, indexation, payments, inflation, currency units

Understanding recent trends in house prices and homeownership

Housing ; Housing - Prices

Household Reaction to Changes in Housing Wealth

It is widely claimed that housing wealth, as well as stock prices, have an impact on consumption and hence on aggregate economic activity. This paper presents a broad overview of the issues that arise in evaluating this claim in the context of recent research in behavioral economics. Particular attention is paid to a model of the response of consumption to wealth components produced by Christopher Carroll [2004].Wealth effect, Home prices, Stock prices, Consumption, Saving, Life cycle theory, Interest rates, Inflation, bubble