When misperception of wealth lead to financial crises
Complexity Lab in Economics
Financial literacy : are people equipped to make effective decisions with their money?
The first part of his research will consist in a series of laboratory experiments designed to empirically test whether misperceptions of wealth actually lead individuals to spend more and to accumulate debt. « The first of these experiments is going to be about financial literacy, trying to figure out if cognitive biases come from people not being able to read their balance sheet properly », Dr. Alberto Cardaci specifies. The result of these experiments will also help identify a set of nudge policies to help offset the impact of such biases. « A nudge is any easy intervention “that alters people’s behavior in a predictable way without forbidding any options”, Dr Alberto Cardaci explains. « My set of nudges should include polices that, in principle, can be implemented by private companies, like banks, and public institutions since both can act as “choice architects” ». « The idea is to provide people information about the average level of borrowing in their reference group, which can be the neighbourhood, work colleagues, people who have a bank account at the same bank, and so on ». The second part of the research consists in the development of a computational model, that studies the macroeconomic consequences of individual decision-making with wealth misperceptions, and allows to simulate the set of experimentally tested nudge policies. « The inclusion of nudges and choice architecture techniques in a computational model represents an innovative approach for the study of the collective consequences of individual behavior ».
Combining findings from behavioural economics and social cognitive psychology with the modern techniques of computational macroeconomics, Dr. Alberto Cardaci is adopting a different perspective on financial crises with respect to the existing literature. His findings will shed light on how financial stability can be jeopardized by the presence of cognitive biases that affect individual perceptions of wealth, and thus even if there are no notable changes in the fundamentals. In particular, by contributing to a better understanding of the causes of the recent financial crisis in the United States, the researcher and this team aim to avoid repeating the past.
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