Andrei Shleifer is a professor of economics at Harvard University.  Nicola Gennaioli is a professor in the Department of Finance at Bocconi University, Milan.

A Crisis of Beliefs is well worth reading as either a treatise on psychology or as an application of a model of psychology to people’s mistaken thinking and acting in certain economic circumstances.

But Gennaioli and Shleifer must ask, How would the human participants act if, instead of being a bundle of desires, fears, cognitive biases, and ignorance regarding the abstract primary relativities of the economic process, they understood the laws of the process and the precepts for adaptation yielded by the laws? That is to ask, Is there a set of laws independent of human psychology and above intellectual ignorance to which human participants would enlightenedly adapt if they understood them? And, if so, is not the primary responsibility of professors of macroeconomics to educate and enlighten participants as to the laws they are violating so as, thus, to curb automatically their irrational psychological tendencies? Continue reading →