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Endogenous preference formation on macroeconomic issues: the role of individuality and social conformity

Guido Baldi

Mind & Society: Cognitive Studies in Economics and Social Sciences, 2014, vol. 13, issue 1, 49-58

Abstract: Macroeconomic events often require individuals and policy-makers to make decisions that they are not accustomed to making. For example, a sovereign debt crisis makes it necessary to either default on government debt, increase taxes, cut public spending or to impose a mixture of these measures. I argue that decisions on such matters are not derived from deep preferences; they require reflections and judgement under uncertainty. Past experiences and the interaction with other individuals are likely to influence the salience of preferences in the situations of decision making. Using a simple model, I illustrate how the salience of preferences changes with different degrees of individuality and conformity. Individuality is associated with the importance of private habits, while conformity is related to the perceived dissonance between initial intuitions and social opinions. The results obtained from simple simulation exercises stress that a high degree of conformity or a low degree of individuality may lead to overreactions when social opinion makers err for a short period of time. At the same time, a low degree of conformity or a high degree of individuality or leads to delayed adjustments to new circumstances. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Preference formation; Rationality; Habits; B41; B52; E02 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11299-014-0137-9

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