Nobel-Prize Winner Draws Crowd for Psychology’s Role in Economics Talk

On April 1, 2009, Nobel Prize-winning economist Dr. George Akerlof spoke about the current financial climate to a mix of faculty, staff and students that packed Frank Auditorium at the Smith School. Akerlof, the Koshland Professor of Economics at the University of California, Berkeley, won the 2001 Nobel Prize in economics for his contributions to the analyses of markets with asymmetric information.

Akerlof – who says he’s been thinking about big-picture economics since age 10 when his father lost his job – spoke about his new book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.” He detailed major themes of the book and how they relate to the worldwide economic turmoil experienced since the collapse of the credit markets.

He talked about the role of psychology in macroeconomics – what revolutionary economist John Maynard Keynes dubbed “animal spirits” – and how these “spirits” drive financial events worldwide, from blind faith in ever-rising housing prices to plummeting confidence in capital markets. He says the stories that evolved played key roles in fluctuations in markets.

Take, for example, the “story” of the housing boom. Rapidly appreciating housing prices had more and more people buying into the boom and created an over-confidence in the market, and when left unregulated also spawned what Akerlof called “snake-oil.” In this case, a shadow-banking system cropped up that was built on borrowing short and lending long and ultimately led to the global credit crunch.

Akerlof talked about the implications of the credit crisis and the government alternatives for getting out of it.

“Creative financing may have gotten us into this crisis, but its genius may get us out of it,” Akerlof said.

He entertained questions from faculty and students before concluding the event with a book-signing for the first 75 students to register who received a complimentary copy of his book.