Cambridge Business Association
New Lessons from Behavioral Economics
Article

New Lessons from Behavioral Economics

The long reach of life experience affects real-world economic outcomes, for policymakers and consumers alike

Ulrike Malmendier and Clint Hamilton
IMF, 2024
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The Great Depression of the 1930s left an entire generation of Americans scarred by financial ruin, scarcity, and lost opportunity. This dramatic impact on the “Depression babies” of that era altered their spending habits, investment choices, and risk tolerances for the rest of their lives. Behavioral economists Ulrike Malmendier and Clint Hamilton explore the generational repercussions of financial downturns that can last long after a crisis is over.

Summary

Behavioral economics arose as a discipline out of the actions and experiences of the Great Depression generation.

Individuals living during the Great Depression, and particularly the “Depression babies” who grew up during the crisis, faced financial chaos, economic scarcity, and social malaise. The Depression transformed an entire generation’s financial, investment, and spending choices. For economists, the Great Depression disrupted the conventions of macroeconomics and of fiscal and monetary policy, ushering in the discipline of behavioral economics in the 1960s.

Psychologists Daniel Kahneman and Amos Tversky published the first paper on behavioral economics that discussed the “prospect theory.” This states that individuals make decisions that tend to inflate small risks while...

About the Authors

Ulrike Malmendier is a professor of economics and finance at the University of California, Berkeley, where Clint Hamilton is a PhD student in finance.

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