MENTAL MODELS AND ECONOMIC POLICY
It is curious that while economists engage in many disputes not only about policy but also about the correct models economies such as new classical versus Keynesian macro models, when it comes to formal modeling it is common to assume that all actors know the correct model. In their classic piece that coined the term "mental models" as used in economics Art Denzau and Douglas North snowed the important role that shared beliefs played in promoting economic development and well-functioning economies. In economic policy disputes, however, different positive views about the correct models to describe economies often play as important a role as differences in value judgments. Sadly we often find that economists' (and politicians') positive views about how the world works are heavily colored by their normative views about how they would like the world to work. The term mental models are used to denote informal beliefs as well as formal theories.
We view these issues surrounding actors' mental models, both those that are shared and those that conflict, as extremely important. Our work has shown how these differences in perception have played crucial roles in debates about international policy coordination, the processes of regional economic integration, views of the International Monetary Fund and operation of the international financial system and about neoliberalism, the Washington Consensus, and globalization. We have also explored how defective mental models interacted with perverse incentive structures to play a major role in generating the global financial crisis, and how the shattering of mental models by crises can be a major cause of contagion.
Willett, T.D. (2000), “International Financial Markets as Sources of Crisis or Discipline: The Too Much, Too Late Hypothesis,” Princeton Essays in International Finance, 2000.
Willett, T.D., Denzau, A. and Roy, R. (2006), Neoliberalism: National and Regional Experiments with Global ideas, Routledge, 2006.
Willett, T.D. (2009), "The Role of Deficient Mental Models in Generating the Current Financial Crisis", Journal of Financial Economic Policy, (forthcoming)
Willett, T.D. (2010), “Some Lessons for Economists from the Financial Crisis.” Indian Growth and Development Review Vol. 3, No. 2, 2010: pp. 186-208.