Annual Report 2025 - Report - Page 93
Panel Discussion with Shohini Kundu, Bengt R. Holmström, …
Daniel McFadden on economic effects of human decision making
… Philip H. Dybvig, Douglas W. Diamond, and moderator
Antoinette Schoar
connection even more powerful was learning that Doug
and Phil’s work had directly informed federal reserve policy during the crisis.”
Risks, however, do not just happen at large scales, as
discussed in Lindau by Daniel McFadden. The economics
Laureate from 2000 studied how people make decisions
and how this affects the economy. Our brain, he explained,
is far from being perfect, and so are our senses; these very
senses and brain wiring create inconsistencies, and these
inconsistencies, in turn, create vulnerabilities.
The Laureate drew a parallel between how a corporation works and how the brain works. The prefrontal cortex operates much like a CEO, taking responsibility for big
decisions and long-term strategies. It gets information
from other parts of the brain, which in turn rely on what
our senses can make of the surrounding world.
However, even if this information is perfect (and it is
not), human attention is scarce. Our brains evolved to
spot predators in the grass, not to sift through thousands
of insurance plans or endless online product listings.
Ultimately, McFadden echoed a key point made by the
panel. We should accept that fragility is not a side effect
of the system. Rather, it is the system itself. Whether we
are talking about banks or human brains, the things that
make them so efficient are also the things that make
them vulnerable.
We can use this to build more robust systems. For
banks, that means deposit insurance, lender-of-last-resort central banks, smarter stress tests, and accounting
rules that reflect reality instead of paper fiction. For consumers, it means protection against predatory nudges,
clearer disclosures, and markets that do not exploit attention gaps. We are wired to altruistically punish deception
as an instrument to sustain trust, McFadden says, and we
can use that as well.
None of this will eliminate crises, of course. But we
can reduce their number and prevent small shocks from
turning into catastrophes.
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