Embedded Culture as a Source of Comparative Advantage
The Cultural Economics Revolution In the second half of the 20th century, economics operated under two fundamental assumptions: that humans were perfectly rational (the rationality assumption) and that their behavior was universally consistent across cultures and contexts (the universality assumption). These hypotheses were challenged by two streams of literature: behavioral economics and cultural economics. The […]
Luigi Guiso is the AXA Professor of Household Finance at the Einaudi Institute for Economics and Finance, Paola Sapienza is the Donald C. Clark/HSBC Chair in Consumer Finance Professor at the Kellogg School of Management at Northwestern University, and Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at The University of Chicago Booth School of Business. This post is based on their recent paper.
The Cultural Economics Revolution
In the second half of the 20th century, economics operated under two fundamental assumptions: that humans were perfectly rational (the rationality assumption) and that their behavior was universally consistent across cultures and contexts (the universality assumption). These hypotheses were challenged by two streams of literature: behavioral economics and cultural economics.
The behavioral revolution made economics more human but not less universal. It maintained the premise that deviations from rationality due to cognitive biases and behavioral patterns were consistent across cultures and contexts. In contrast, cultural economics argues that individuals’ beliefs (priors) and preferences (values) are fundamentally shaped by their personal and communal history, leading to persistent differences in economic behavior across societies.
