Our Economy

Abstract

I discuss the strengths and weaknesses of the current predominant approach to macroeconomic modelling of asset prices and suggest an alternative perspective. This alternative rests on the insight that the economy is the result of individual decisions. The industry standard has it, however, that individual action is ruled by objective, general laws instead. Changing the point of view allows to reconcile numerous puzzles and paves the way for a promising new research agenda.

Share and Cite:

C. Müller, "Our Economy," Modern Economy, Vol. 2 No. 4, 2011, pp. 569-574. doi: 10.4236/me.2011.24063.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] V. L. Smith, G. L. Suchanek and A. W. Williams, “Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets,” Econometrica, Vol. 56, No. 5, September 1988, pp. 1119-1151.
[2] D. Kahneman and A. Tversky, “Prospect Theory: An Analysis of Decision under Risk,” Econometrica, Vol. 47, No. 2, 1979, pp. 263-291.
[3] P. De Grauwe and P. R. Kaltwasser, “Modeling Optimism and Pessimism in the Foreign Exchange Market,” CESifo Working Paper Series 1962, CESifo GmbH, April 2007.
[4] P. Bacchetta and E. van Wincoop, “Rational Inattention: Solution to the Forward Discount Puzzle,” Research Paper 156, International Center for Financial Asset and Engineering, September 2005.
[5] C. Sims, “Rational Inattention: A Research Agenda,” Discussion Paper, Series 1: Economic Studies 34, Deutsche Bundesbank, 2005.
[6] J. W. Milnor, “Games against Nature,” In: C. H. Coombs, R. L. Davis and Robert McDowell Thrall, Eds., Decision Processes, Wiley, New York, 1954, pp. 49-60.
[7] E. Hanany and P. Klibanoff, “Updating Ambiguity Averse Preferences,” The B.E. Journal of Theoretical Economics, Vol. 9, No. 1, 2009, p. 37.
[8] J. Conlisk, “Why Bounded Rationality?” Journal of Economic Literature, Vol. 34, No. 2, June 1996, pp. 669-700.
[9] J. Tirole, “Rational Irrationality: Some Economics of Self-Management,” European Economic Review, Vol. 46, No. 4-5, May 2002, pp. 633-655.
[10] H. M. Pesaran, “The Limits to Rational Expectations,” Basil Blackwell, Oxford, 1987.
[11] M. Cipriani and A. Guarino, “Herd Behavior in a Laboratory Financial Market,” American Economic Review, Vol. 95, No. 5, December 2005, pp. 1427-1443. doi:10.1257/000282805775014443
[12] M. Dufwenberg, T. Lindqvist and E. Moore, “Bubbles and Experience: An Experiment,” American Economic Review, Vol. 95, No. 5, December 2005, pp. 1731-1737. doi:10.1257/000282805775014362
[13] M. Drehmann, J. Oechsler and A. Roider, “Herding and Contrarian Behavior in Financial Markets: An Internet Experiment,” American Economic Review, Vol. 95, No. 5, December 2005, pp. 1403-1426. doi:10.1257/000282805775014317
[14] R. N. Hussam, D. Porter and V. L. Smith, “Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?” American Economic Review, Vol. 98, No. 3, June 2008, pp. 924-937. doi:10.1257/aer.98.3.924
[15] P. Wang and T. Jones, “The Impossibility of Meaningful Efficient Market Parameters in Testing for the Spot- Foreward Relationship in Foreign Exchange Markets,” Economics Letters, Vol. 81, 2003, pp. 81-87. doi:10.1016/S0165-1765(03)00148-4
[16] J. A. Carlson and M. Lo, “One Minute in the Life of the DM/US$: Public News in an Electronic Market,” Journal of International Money and Finance, Vol. 25, 2006, pp. 109-1102.doi:10.1016/j.jimonfin.2006.08.005
[17] M. D. D. Evans and R. K. Lyons, “Order Flow and Exchange Rate Dynamics,” Journal of Political Economy, Vol. 110, No. 1, February 2002, pp. 170-180. doi:10.1086/324391
[18] C. Mueller-Kademann, “Puzzle Solver,” MPRA Paper 19852, University Library of Munich, Germany, October 2009.
[19] T. Ito, R. K. Lyons and M. T. Melvin, “Is There Private Information in the FX Market? The Tokyo Experiment,” Journal of Finance, Vol. 53, No. 3, 1998, pp. 1111-1130.
[20] P. Hartmann, M. Manna and A. Manzanares, “The Microstructure of the Euro Money Market,” Journal of International Money and Finance, Vol. 20, No. 6, November 2001, pp. 895-948. doi:10.1016/S0261-5606(01)00029-8
[21] M. Friedman, “The Case of Flexible Exchange Rated,” In: M. Friedman, Ed., Essays in Positive Economics, University of Chicago Press, Chicago, 1953, pp. 157-203.

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.