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Project

Behavioral Implications of Uncertainty in Macroeconomics (BUMP)

How people conceive of and respond to uncertainty is a critical behavioral ingredient of dynamic economic models.

Faculty Director

Thomas J. Sargent

Description

In many macroeconomic models today, uncertainty has only modest impacts. This is because these models embrace the assumption of rational expectations that says that people know the probabilities implied by the model. The rational expectations assumption is a valuable tool for evaluating many problems, but is dubious for analyzing many of the important situations we face today when concerns about temperatures, other physical determinants of long-term growth prospects, and demographic drivers of possible “secular stagnation” are on many peoples’ minds. Therefore, we propose to expand the usual rational expectations approach in macroeconomics by attributing uncertainty to the probabilities that people in our models are facing. We see this as having vital implications for formulating sensible economic policies. We push beyond the conventional risk-based, rational expectations analyses by probing more general paradigms coming from decision theory and modern mathematical control theory. Furthermore, we complement and extend other behavioral research that emphasizes psychological mechanisms. We accomplish this by using statistical theory to formalize how environmental complexities of the model framework can influence individual behaviors.

Related Paper: Pricing Uncertainty Induced by Climate Change by Michael Barnett, William Brock and Lars Peter Hansen 

Read more about the BUMP project

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Associated Scholars

Scholars / Distinguished Research Fellow

Thomas J. Sargent

William R. Berkley Professor of Economics and Business, New York University, Stern School of Business

Associated Events

  • Past Events
June
25-26
2020
Past Event • All Day • Virtual Conferencing Information to Come

Expectations in Macroeconomic and Financial Models

There has been a recent surge in research that explores how expectations and uncertainty impact financial markets and the macroeconomy. This virtual conference explored some of the latest research on...
Organizers / Guests
  • Monika Piazzesi
  • Michael Woodford
  • Lars Peter Hansen

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