Why we sometimes choose wrongly

When a child chooses chocolate ice-cream over vanilla, she is revealing her preferences and there is nothing to do but accept it. But what about when she spends time watching television rather than studying? What about those who choose the default option (on pension, savings account, insurance) regardless of what the default is? And those 70% of smokers who would like to quit smoking but don’t or can’t? In a recent NBER working paper, Beshers, Choi, Laibson and Madrian summarise the five main factors that can create a disparity between the choices that people make and the ones that are actually in their interest: passive choice, complexity of options, limited personal experience, third-party marketing, and intertemporal choice.

Keynes and the Credit Crisis

What would John Maynard Keynes have made of the current crisis affecting the United States? How different from the Great Depression would the crisis have appeared to him? Would he have advocated Keynesian policies? Would he have approved of the approach of the Fed Chairman, Ben Bernanke. In a recent CEPR paper, Alex Leijonhufvud, the great scholar of Keynes’s work, has this to say:

Ten Lessons about the Budget

In 1994, the OECD projected that, by the year 2000, the Swedish public debt would explode to 130% of GDP. The Swedish economy was experiencing three years of negative growth, record levels of real interest rates and unemployment. The Swedish Krona was forced out of the Exchange Rate Mechanism and declined by 20% in 1992. But by the year 2000, public debt actually fell to 53% of GDP, the budget deficit, from 11% of GDP, turned into a surplus. Growth was robust and unemployment fell. Good monetary and fiscal policies, sound labour market reforms, as well as the beneficial effects of a devalued currency account for the upturn. Here are the ten lessons about budget consolidation that Jens Henriksson, adviser to the Swedish Minister of Finance between 1994 and 2006, retains from this episode: