Thesis advisor: Donald Cox / This dissertation consists of two essays which address the origins of the business cycle. In particular, it asks: to what extent do behavioral or psychological effects, famously termed "animal spirits" by John Maynard Keynes, contribute to the amplification of business cycle fluctuations. The first essay, titled "The Labor Market Effects of Bad Economic News", examines the effects of economically pessimistic newspaper articles on hiring and employment patterns. Combining information on newspaper subscriptions with automated content analysis of newspaper articles, the paper reconstructs the flow of pessimistic news across the United States during the past recession on a county-by-county, quarter-by-quarter basis. This high resolution map of pessimistic news delivery is then used to estimate the causal impact of media pessimism on labor market outcomes. Exposure to negative news is found to suppress hiring and total employment during the early stages of the recession by up to 40% compared to pre-recession levels; overall, media pessimism can account for some 7% of jobs lost between 2007 and 2010. Further analysis of Google search data suggests that this contractionary effect is mediated by changes in public attitude caused by exposure to pessimistic stories in the media. Importantly, this study considers only articles which report negative news about the state of the national economy, rather than stories which focus on local events. It argues that the prevalence of such news stories affects local labor market conditions, but is unlikely to be affected by such conditions. This approach helps to address the simultaneity issues which have dogged previous research on the topic. The second essay, titled "Uncertainty and Risk Averse Firms in DSGE" a develops theoretical framework to rationalize the previous paper's empirical results. This paper solves a simple general equilibrium model in which firms are risk averse over future profits in a manner analogous to household risk aversion. It shows that response to increased economic uncertainty - particularly uncertainty with regards to future consumer demand, economies with risk averse firms are likely to undergo a business cycle contraction. This result also addresses a long standing problem in the RBC literature; namely, how to generate a contraction with a Keynesian demand side shock. In most models with risk averse utility-maximizing households, a reduction in aggregate demand due to consumer-side changes is expansionary. The paper argues that by introducing firm-side risk aversion into the model, this counter-intuitive behavior can be corrected in a realistic and parsimonious manner. / Thesis (PhD) — Boston College, 2014. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

La sympathie comme principe par lequel une idée se convertit en impression n’est pas la seule espèce de sympathie employée par David Hume dans ses ouvrages. Le terme «sympathie» possédait des sens variés dans le langage courant au XVIIIème siècle, et il arrive que le philosophe écossais se serve du terme «sympathie» dans l’un ou l’autre de ces sens. C’est ainsi que, outre son concept philosophique, Hume se sert du terme «sympathie» suivant cinq autres sens. L’identification des différentes sortes de sympathie présentes dans les ouvrages de Hume a permis de mieux comprendre ce qu’il en était de la nature de son concept philosophique de sympathie. Ainsi, on a pu comprendre quels rapports la sympathie entretenait avec un autre principe de production d’affections mentionné à l’occasion par Hume : la contagion. Ainsi, on a également pu comprendre quels rapports la sympathie entretenait avec d’autres éléments de la philosophie humienne, tels que les esprits animaux, leurs mouvements et les émotions. Les analyses ont démontré, par ailleurs, que les esprits animaux et leurs mouvements jouaient un rôle de premier plan dans la théorie humienne des passions et que le principe de la sympathie, au final, désignait l’augmentation de l’agitation des esprits animaux. C’est ainsi que la sympathie entendue comme principe par lequel une idée était convertie en impression désignait un mécanisme physiologique chez Hume. Les analyses ont également démontré que les impressions que Hume nommait «émotions» désignaient plus particulièrement le mouvement des esprits animaux. Qu’ainsi, l’on devait considérer qu’il y avait dans la taxonomie du philosophe écossais non seulement des perceptions de l’entendement humain (idées, passions, sentiments, etc.) mais également des perceptions du corps humain (émotions) et que celles-ci étaient en correspondance étroite avec celles-là. On peut ainsi faire l’hypothèse qu’il y a dans la philosophie humienne des éléments susceptibles de fonder une théorie de l’union entre l’âme et le corps. La considération de la sympathie comme un principe physiologique d’agitation des esprits animaux permet que l’on jette un regard nouveau sur la façon dont David Hume concevait la nature humaine. / Sympathy, as a principle by which an idea is converted into an impression, is not the only kind of sympathy that David Hume employs in his works. Hume refers to several of the multiple distinct meanings that the term afforded in 18th century vernacular. The thesis argue that in the end the Scottish philosopher uses the word “sympathy” with five different meanings, besides his own philosophical concept. Identifying these meanings as they appear throughout Hume’s body of work provided a greater understanding of the nature of his own philosophical concept of sympathy. This brought to light the relationship between sympathy and another affection-producing principle that Hume occasionally mentions: contagion. Similarly, this granted insight into the interplay between sympathy and other elements in Hume’s philosophy, especially the animal spirits, their movements, and emotions. Indeed, this analysis has uncovered the key role that animal spirits and their movements play in Hume’s theory of passions, observing that his principle of sympathy merely describes an increase in the agitation of animal spirits. Consequently, sympathy as a principle of conversion of an idea into an impression describes what is in fact in Hume’s thinking a physiological mechanism. Further, this investigation has shown that those impressions which Hume calls “emotions” specifically refer to the movement of animal spirits. Therefore, we must recognize that Hume’s taxonomy not only includes perceptions in human understanding (ideas, passions, sentiments, etc.), but also integrates perceptions in the human body (emotions), and that they are closely correlated. This leads to the hypothesis that there are in Hume’s philosophical works enough elements to delineate a theory of the relationship between body and mind (or soul). Understanding sympathy as a physiological mechanism involving the agitation of animal spirits offers a new outlook on David Hume's conception of human nature.

The diploma thesis analyses the influence of money on the economic instability by the view of Post Keynesian economic theory. The paper answers the question, what creates the economic instability and if it's possible to eliminate or least reduce the instability. The money is here always seen as credit, which is made by institutions on the financial market. We need trust to create money. However the confidence is based on long-term expectations, which are not rational. The result of the analysis is that the trust growth in economy leads to growth of creation of money, whereby more money based on irrational, by psychology influenced expectations, is made. The economy becomes less stable, because there is more money in it, than people will have in the future to pay for its extinction. As the irrational expectation is an exogenous variable, which basically cannot be influenced, the economic instability is ineliminable and therefore allied to economy. We can only reduce instability by focusing on limiting factors in the creation of money, or on areas, where the irrational action can vent itself. Into consideration comes regulation of the financial institutions size, or regulation of international capital flow.

La crise qui a démarré en 2007 a remis en cause les fondations de la théorie et du système financier. Cette théorie s’articule autour des postulats de la finance classique dont la « main invisible » et l’hypothèse de rationalité des investisseurs dont découle celle d’efficience des marchés.Cette crise a mis en lumière l’aspect psychologique des marchés financiers, aspect abordé par J.M Keynes lorsqu’il développait la notion d’ « esprits animaux » pour rendre compte de l’incertitude de l’économie. Jusqu’au début des années 1980, la compréhension de la psychologie a été le fruit d’une approche informelle.Depuis lors, la psychologie des marchés financiers est formalisée par la finance comportementale. Tout au long de son développement, ses tenants ont remis en cause l’hypothèse de rationalité des investisseurs sur des bases empiriques. Néanmoins, aucun évènement de l’ampleur de cette crise n’a autant invalidé les postulats du mainstream dominant.La théorie financière est à la croisée des chemins. L’hypothèse de rationalité des investisseurs est-elle valide ? Si oui, quelles sont les conditions de sa validité ? Si non, doit-on sortir du cadre de la finance classique et adopter celui de la finance comportementale? Ce sont autant de questions qui appellent à une refondation de la théorie financière.Le jury du Prix d’économie en la mémoire d’Alfred Nobel ne s’est d’ailleurs pas trompé en décernant le prix 2013 aux deux écoles. Cependant, les académiciens ne semblent pas trancher entre elles, reconnaissant ainsi leurs apports respectifs pour la théorie et la pratique financière. Cette récompense suggère néanmoins la question centrale suivante : les deux écoles sont-elles parallèles, complémentaires ou antinomiques?Le premier chapitre traite de la remise en cause des hypothèses centrales de la finance, à la base des modèles de gestion les plus courus. Le cadre de la finance classique n’a pas permis de donner une explication à la formation de la bulle immobilière pas plus qu’il n’a permis de fournir une solution unifiée à la crise. L’inadéquation des hypothèses du cadre classique avec la réalité apparaît notamment dans un contexte de forte volatilité et d’incertitude exacerbée. Cette remise en cause ouvre la voie à l’introduction de paramètres psychologiques dans la compréhension des phénomènes du marché.La finance comportementale développe la psychologie des marchés financiers. Le second chapitre aborde les concepts centraux de ce courant. L’analyse de ces concepts et du développement historique, épistémologique et paradigmatique du courant montre qu’il s’inscrit à l’opposé et, parfois, en complément du classique. Il n’en demeure pas moins que le cadre théorique de ce courant n’est pas encore achevé pas plus que la formation d’un paradigme dominant.Parmi les principaux résultats de la finance comportementale, les outils psychologiques apportent des clefs de lecture pertinentes des marchés financiers. Le troisième chapitre aborde les biais et heuristiques à la lumière de la crise. L’analyse de la crise montre que les heuristiques et les biais émotionnels ont pu conduire les investisseurs à des erreurs de jugements. L’attention et l’analyse se sont focalisées sur des croyances dans un contexte d’opacité de l’information et de l’environnement.La finance comportementale cherche à établir un cadre conceptuel plus élaboré. La théorie des « esprits animaux » a repris de la vigueur notamment chez les comportementalistes à orientation néo-keynésienne. Le retour à cette notion s’explique par l’importance prise de concepts liés comme la confiance, la corruption ou le rôle des histoires. D’ailleurs, les collusions corruptives et le fonctionnement du système ont failli saper durablement la confiance dans l’économie financière. Ce quatrième chapitre montre que la confiance et la corruption procèdent de la psychologie humaine et montrent le poids de celle-ci en situation d’incertitude et le rapport des hommes aux gains. / The crisis that started in 2007 have challenged the foundations of the financial system and the financial theory. This theory is based on assumptions of conventional finance including the "invisible hand" and the rationality assumption of investors which builds that of market efficiency.This crisis has highlighted the psychology of financial markets, aspects already addressed by J.M Keynes when he developed the concept of "animal spirits" to reflect the uncertainty of the economy. Until the early 1980s, the understanding of psychology has always been the result of an informal approach.Since, the psychology of financial markets has been formalized by behavioral finance. Throughout its development, its theoricians have questioned the rationality assumption of investors on empirical bases. However, no paramount event such this crisis has struck much the postulates of the dominant mainstream.Consequently, the financial theory is at the crossroads. Is the assumption of rationality of investors valid? If so, what are the conditions of its validity? If not, are we departing from the scope of conventional finance and adopt that of behavioral finance? These are all issues that are calling for an overhaul of the financial theory.The Jury of the prize in economics in memory of Alfred Nobel did not err in fact by awarding the 2013 prize to these two schools. However, academics do not seem to decide between them, recognizing their contributions to financial theory and practice. This award suggests the following central question: are the two schools parallel, complementary or contradictory?The first chapter deals with the questioning of the central assumptions of finance, at the base of the most popular business models. The framework of conventional finance has failed to give an explanation to the formation of the housing bubble nor has it helped to provide a unified solution to the crisis. The inadequacy of the assumptions of the classical framework with reality appears especially in a context of high volatility and heightened uncertainty. This challenge opens the way for the introduction of psychological parameters in understanding the phenomena of the market.Behavioral finance develops the psychology of financial markets. The second chapter covers the central concepts of this trend, in order to answer the central question of this thesis. The analysis of this trend and its historical epistemological and paradigmatic development shows it is opposite and sometimes in addition to the classic one. The fact remains that the theoretical framework of this trend is not yet completed nor the formation of a new dominant paradigm achieved.Among the key findings of behavioral finance, psychological tools provide relevant insights to developments in financial markets. The third chapter addresses the biases and heuristics in light of the crisis. The analysis of the crisis shows that heuristics and emotional biases may have led investors to judgment errors. The attention and analysis has focused on beliefs in an abstruse information and environmental context, allowing the development of heuristics. Consequently, the tools of behavioral finance can develop a mental map to this crisis.Behavioral finance seeks to establish a more sophisticated conceptual framework. The theory of "animal spirits" has regained momentum especially among behaviorists of neo-Keynesian orientation. The return to this concept is explained by the growing importance of certain concepts such as confidence, corruption and the role of stories in the context of this crisis. Moreover, collusion and corrupt system operation almost permanently undermine confidence in the financial economy. This fourth chapter shows that trust and corruption stem from human psychology and show the weight of the latter in situations of uncertainty and the relationship between men and earnings.

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The principle of effective demand states that given endogenous expenditure patterns, the level of exogenous expenditure determines the level of employment. If investment represents the sole form of exogenous expenditure, employment adjusts to the level of investment. If exogenous expenditure changes, equilibrium is restored via the equilibrating variable, employment. If employment is linked in a unique way to income, we have what is referred to as the income adjustment process. The income adjustment process is investigated in a closed and a small open economy (SOE) which imports consumption and capital goods. If a SOE imports its capital goods, the causal link between investment and employment is weakened. When capital goods are imported, investment adjusts to the balance of payments and animal spirits are constrained. Certain South African data are analysed within the framework of the income adjustment process. / M.A.(Economics)

The principle of effective demand states that given endogenous expenditure patterns, the level of exogenous expenditure determines the level of employment. If investment represents the sole form of exogenous expenditure, employment adjusts to the level of investment. If exogenous expenditure changes, equilibrium is restored via the equilibrating variable, employment. If employment is linked in a unique way to income, we have what is referred to as the income adjustment process. The income adjustment process is investigated in a closed and a small open economy (SOE) which imports consumption and capital goods. If a SOE imports its capital goods, the causal link between investment and employment is weakened. When capital goods are imported, investment adjusts to the balance of payments and animal spirits are constrained. Certain South African data are analysed within the framework of the income adjustment process. / M.A.(Economics)

Sur fond d’incertitude radicale, les entrepreneurs ne peuvent s’en remettre à un calcul précis de rentabilité. Pour les anticipations d’investissement, ils ont recours à leurs esprits animaux, c’est-à-dire un jugement analogique instinctif sur le futur associé à une décision émotionnelle automatique par rapport à lui en fonction de motivations. La notion remonte à l’Antiquité. Elle était synonyme d’influx nerveux. Si l’on interroge les neurosciences d’aujourd’hui, ce sont les marqueurs somatiques qui l’éclairent. Nos émotions servent à arrêter la réflexion, restreindre l’espace des possibles et valoriser certaines options. Elles contribuent à l’intelligence de nos décisions. C’est l’excès, de cognition ou d’émotion, qui est à éviter. Les émotions servent également à réviser ou renforcer nos croyances. Par leur mouvement propre, elles peuvent créer des cycles, ce que nous proposons d’appeler « le paradoxe de la confiance ». Une confiance élevée prépare le terrain de la chute future. À l’inverse, une confiance basse met peu à peu en place les conditions du retournement de conjoncture. Notre travail propose une analyse du raisonnement inductif en économie, à l’origine de l’élaboration de scénarios anticipatifs. Le capital culturel et symbolique semble également orienter les esprits animaux. Notre enquête empirique établit l’existence d’un lien entre capital culturel et prise de risque. Elle dessine aussi une typologie des esprits animaux à même de saisir l’hétérogénéité des entrepreneurs. 11 familles sont dégagées, en fonction de leurs motivations, émotions, capitaux culturels, comportements d’investissement et scénarios anticipatifs privilégiés. / In a background of fundamental uncertainty, entrepreneurs cannot rely on a precise calculus of profitability. For their investment expectations, they have to lean on their animal spirits, that is an analogical, instinctive judgment about the future associated with an automatic emotional decision under the guidance of motivations. The notion traces back to the Ancient times. She was then synonymous with “nerve impulse”. Nowadays, if one probes neuroscience, it appears that somatic markers could shed some light on them. Emotions are useful to stop thoughts, restrict the states of nature and value certain options. They contribute to the intelligence of decisions. It is the excess, be it of cognition or emotion, that is detrimental. Emotions also serve to update or strengthen our beliefs. By their own momentum, they can create cycles, which I propose to dub “the confidence paradox”. When confidence is high, the terrain for the future fall is being prepared. Conversely, when it is low, little by little the conditions for a reversal are being staged. Our work proposes an analysis of inductive reasoning responsible for the elaboration of anticipative scripts. Cultural and symbolic capital also appears to come into play. Our empirical inquiry establishes a link between cultural capital and risk-taking. It outlines as well a clustering of animal spirits so as to grasp the heterogeneity of entrepreneurs. 11 different sorts are outlined and sorted by their motivations, emotions, cultural capital, investment behaviors and preferred anticipative scripts.