Bernanke becomes a money shrink
In a nation where many individuals suffered through bouts of financial agitation in recent years, Federal Reserve Chairman Ben Bernanke is becoming a shrink of sorts by spearheading a new type of economic discussion that focuses on the psychology of money and personal economics.
The Fed chairman said Monday that by focusing on macroeconomic data — employment, consumer spending, disposable income, net worth and debt service payments — the Fed is doing its job, but missing microeconomic trends that impact a person's financial well-being.
He made this assertion in prepared statements before the International Association for Research in Income and Wealth out of Cambridge, Mass.
Bernanke said aggregate numbers show the basic economic indicators are improving, but not enough for policymakers and monetary officials to make comprehensive assessments about the nation's economic well-being. The Fed chief believes some of the data points should be evaluated in the context of behavioral psychology.
More granular details that relate to overall economic health include changes in a person's income, wealth or consumption, the chairman said. In addition, a person's degree of upward mobility in terms of well-being, job security and confidence about their future job prospects are other key measures that don't necessarily make it into traditional forecasting tools.
Another factor is whether individuals have the liquidity levels they need to deal with other financial shocks.
"Continued work on the measurement of economic well-being will likely lead to greater recognition by economists of the contributions of psychology — an area that has been explored by pioneers like 2002 Nobel laureate Daniel Kahneman," said Bernanke.
"One topic on the frontier of economics and psychology is the neurological basis of human decisions, including decision-making under risk and uncertainty, inter-temporal choice, and social decision-making. Researchers are investigating behavioral tendencies in a variety of circumstances — for instance, by examining human responses to perceived inequality, losses, risk and uncertainty; the need for autonomy; and the importance for well-being of social ties and community."
The Fed chief says measuring a person's overall financial well-being is an important step in ensuring economic policymakers make broad-based macro-economic decisions with the right preliminary data.