Cognitive Economics

In the last four decades, many studies have documented that rational choice is not a good description of human behavior in financial, consumer, labor, political and other markets. Observed departures from rational choice have been organized in a taxonomy, but have not been traced to deeper processes such as limited attention, selective memory, language and emotions. Our research will carry out a systematic integration of cognitive science and economics to develop a unified psychologically founded approach to human choice. Progress on this front is critical to enhance the predictability of individual and market outcomes as well as to devise optimal policies. Below is a sample of issues that our research will help address.

1. How do persuasion and information policies work?
Many of our choices are influenced by advertising, financial advisors, teachers, etc. Some of these influences are useful, others are not. When does truth or deception work, for instance for climate risks? Our cognitive approach can throw light on this question, helping devise effective information policies.

2. What are the causes of group conflict?
Gender or racial discrimination, political polarization and other forms of group conflict can be swiftly mobilized or remain latent. Which social cues mobilize prejudice and animosity? Our cognitive approach will help understand how these phenomena can erupt and persist, despite being based
on incorrect facts.

3. What is the psychology of financial instability?
Financial markets play a key role in economic growth, but they can also become a source of instability and crises. Our work will help understand “switching points” for exuberant or pessimistic investor attitudes, the key sources of financial instability. This will help devise a map of “risk factors” upon which policymakers can intervene before it’s too late. 

4. How does aging affect the economy?
Aging is associated with significant psychological changes, such as cognitive decline (e.g. memory loss) but also better emotional regulation. How do these changes affect saving and investment decisions, the evaluation of medical options, and legal contracting? Our research will help address
these questions, shedding light on the complex ways in ageing affects societies.

Team (work in progress):
• Nicola Gennaioli (Department of Finance)
• Katrin Goedker (Department of Finance)
• Josefina Cenzon (Department of Finance)
• Salvo Nunnari (Department of Economics)