Pioneers of Behavioural Economics

George A. Akerlof (born June 17, 1940, in New Haven, Connecticut, USA) and Robert J. Shiller (born March 29, 1946, in Detroit, Michigan, USA) are two influential economists who have significantly contributed to the development of behavioral economics and the understanding of market behavior through their exploration of information asymmetries, irrationality, and financial markets.

Akerlof is best known for his pioneering work in asymmetric information, particularly the concept of the “market for lemons”. This work, which won him the Nobel Prize in Economic Sciences in 2001, demonstrated how the presence of information asymmetry – where one party has more or better information than another – can lead to market inefficiencies and “bad” goods driving out “good” goods. His work on information asymmetry laid the foundation for much of the modern understanding of markets, especially in areas such as insurance, credit, and labor markets. Akerlof’s key ideas also extend to behavioral economics, where he examined how psychological factors, including identity and social norms, affect economic decisions.

Some of Akerlof’s major works include “An Economic Theory of ‘Truth’ and ‘Lying’” (1970), where he explores how deception and dishonesty impact markets, and “Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being” (2010), which applies insights from psychology to economic theory, emphasizing how people’s personal identities influence their economic decisions. He also co-authored the famous book “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” (2009) with Robert Shiller, where they discuss the role of psychological factors in economic cycles, with a focus on the global financial crisis.

Shiller, a prominent figure in finance and economics, is most famous for his work on asset bubbles and the “irrational exuberance” that leads to market instability. His seminal book “Irrational Exuberance” (2000), which warned of an impending stock market crash, became a cornerstone for understanding speculative bubbles in financial markets. Shiller’s work also extends to understanding the role of psychology in finance, and he developed the Case-Shiller Home Price Index, a widely used measure of the housing market.

Shiller’s ideas center on behavioral finance, which examines how psychological factors influence investor behavior and market outcomes, often leading to volatility, bubbles, and crashes. His work with Akerlof in “Animal Spirits” directly critiques the idea that markets are driven solely by rational expectations and efficient market hypotheses. Together, their work highlights the importance of social and psychological factors in economic decision-making.

In addition to his academic work, Shiller also has made significant contributions to the popularization of economic ideas, making him a household name, especially after his predictions of the housing bubble’s collapse in 2007-2008.

Shiller completed his undergraduate studies at Michigan State University, and earned his Ph.D. in economics from University of Pennsylvania in 1972. Akerlof received his undergraduate degree from Yale University and his Ph.D. in economics from MIT in 1966.

Both Akerlof and Shiller have had significant roles in shaping modern economic thought, particularly in regard to the limitations of the efficient market hypothesis and the role of psychology in economic behavior. Akerlof is currently a professor at the University of California, Berkeley, and Shiller is a professor of economics at Yale University.