1 - On Some Antecedents of Behavioural Economics

Original Article
History of the Human Sciences

1–26
On some antecedents ª The Author(s) 2021
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DOI: 10.1177/09526951211000950
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Kristian Bondo Hansen

Copenhagen Business School, Denmark
Thomas Presskorn-Thygesen
Copenhagen Business School, Denmark
Abstract
Since its inception in the late 1970s, behavioural economics has gone from being an
outlier to a widely recognized yet still contested subset of the economic sciences. One of
the basic arguments in behavioural economics is that a more realistic psychology ought
to inform economic theories. While the history of behavioural economics is often
portrayed and articulated as spanning no more than a few decades, the practice of
utilizing ideas from psychology to rethink theories of economics is over a century old. In
the first three decades of the 20th century, several mostly American economists made
efforts to refine fundamental economic assumptions by introducing ideas from
psychology into economic thinking. In an echo of contemporary discussions in beha-
vioural economics, the ambition of these psychology-keen economists was to strengthen
the empirical accuracy of the fundamental assumptions of economic theory. In this
article, we trace, examine, and discuss arguments for and against complementing eco-
nomic theorizing with insights from psychology, as found in economic literature pub-
lished between 1900 and 1930. The historical analysis sheds light on issues and challenges
associated with the endeavour to improve one discipline’s theories by introducing ideas
from another, and we argue that these are issues and challenges that behavioural
economists continue to face today.
Keywords
behavioural economics, economic man, economics, financial markets, psychology
Corresponding author:
Kristian Bondo Hansen, Copenhagen Business School, Dalgas Have 15-V.2.45, 2000 Frederiksberg, Denmark.
Email: kbh.msc@cbs.dk
2 History of the Human Sciences XX(X)
Introduction
On 9 October 2017, it was announced that the American economist Richard H. Thaler
would receive the Nobel Prize in Economic Sciences ‘for his contribution to behavioral
economics’. In the press release from the Royal Swedish Academy of Sciences (2017),
Thaler was lauded for having ‘built a bridge between the economic and psychological
analysis of individual decision-making’. One of the several areas in which Thaler’s work
bridges economic and psychological analysis of decision-making is the field of finance.
Together with his colleague, compatriot, and fellow Nobel laureate, Robert S. Shiller,
Thaler was one of the fathers of behavioural finance. Both scholars have staunchly
argued against a narrow rational choice paradigm in financial economics and have in
their respective ways sought to show that decision-making in financial markets is influ-
enced by a combination of economic and psychological factors (see De Bondt and
Thaler, 1985, 1987, 1989, 1990, 1995; Russell and Thaler, 1985; Shiller, 1984, 2005,
2012). The main objective of behavioural economics, as Thaler has recently argued, is
and always has been to ‘crediting people with just the right amount of rationality and
human foibles’ (Thaler, 2017a: 1800). The challenge lies in figuring out what the right
amount is.
One of the main reasons why Thaler and his co-author on multiple publications,
Werner De Bondt, believe that behavioural research on financial market phenomena
ought to be taken seriously is that it ‘wants to start the analysis with assumptions that are
approximately true’ (De Bondt and Thaler, 1995: 388). They consider empirical accu-
racy of the underlying assumptions a prerequisite of an accurate economic theory. In
contrast, the Chicago School and ‘neoclassical’ economists have claimed that economic
theories are not supposed to be judged on the realism of their assumptions, but rather on
their ability to generate useful predictions (Becker, 1976; Friedman, 1953; Lazear, 2000;
cf. Mäki, 2009). Strongly opposing the neoclassical or Chicago School’s understanding
of economic theorizing, De Bondt and Thaler (1995: 388) insist that more realistic
theories of economic decision-making must rely on ‘support from our sister social
sciences’. A central objective of Thaler and like-minded behavioural economists enga-
ging in current discussions has thus been to demonstrate exactly how extant disciplines
like psychology and sociology can help provide economic theory with more realistic
assumptions.
Some scholars have discussed behavioural economics as a rather sudden Kuhnian
‘paradigm shift’ (Etzioni, 2011; Etzioni, Poire, and Streeck, 2010; Medin and Bazerman,
1999), while other accounts have simply retold the stories of the key conferences from
the beginning of the 1980s, where the current generations of behavioural economists first
began to challenge mainstream neoclassical economics (Kahneman, 2011: 4–10; Thaler,
2015: 157–202). However, attempts to improve theories of economics by adopting ideas
from psychology were made long before the emergence of modern behavioural econom-
ics and finance (Heukelom, 2014; Rehman, 2016). Recently, Thaler acknowledged such
past efforts to bridge psychology and economics by quoting the early 20th-century
economist John Maurice Clark:
Hansen and Presskorn-Thygesen 3
The economist may attempt to ignore psychology, but it is sheer impossibility for him to
ignore human nature. . . . If the economist borrows his conception of man from the psychol-
ogist, his constructive work may have some chance of remaining purely economic in
character. But if he does not he will not avoid psychology. Rather he will force himself
to make his own, and it will be bad psychology. (Clark, quoted in Thaler, 2017a: 1799)
Clark’s insistence on the impossibility of ignoring and escaping human nature in eco-
nomic theorizing is echoed in the work that earned Thaler the Nobel Prize a century later.
By drawing attention to Clark’s work, Thaler gave voice to one out of a number of
mainly US-based economists who engaged in heated exchanges of opinions on the
relevance of psychology in economics over the first three decades of the 20th century.
In this article, we delve into this historical debate for and against introducing psy-
chology into economics and examine the bridges built between both disciplines and
attempts to dismantle them. Drawing on an extensive archive of mainly academic but
also prescriptive economic literature, such as financial advice handbooks published
during the first three decades of the 20th century, we examine the influence of ideas
imported from psychology on economic thought in the early 20th century and show how
some of these ideas came under critical scrutiny and fell out of favour during the late
1910s and 1920s. We argue that (a) the early 20th-century psychologization of economic
thinking shared a number of significant features and preoccupations with the present
debate, (b) the eventual failure to replace underlying assumptions of orthodox economics
with those imported from social psychology was due to brewing doubts—even among
those in favour of engaging with psychology—about whether the imported ideas really
were ‘good psychology’, and (c) the gradual fading out of psychology-informed eco-
nomics in the second and third decades of the 20th century can help us understand the
success of contemporary behavioural economics.
By revisiting these scantily studied debates on the role of psychology in economic
science (see Coats, 1976; Lewin, 1996) and in non-academic financial writing (see
Hansen, 2015, 2017), and discussing their relevance in connection to contemporary
behavioural economics and finance, the article contributes to scholarship on the history
of behavioural economics (Kaish, 1986; Sent, 2004) and the history of the psychological
underpinnings of economic thought (Coats, 1976; Hands, 2010), and to discussions of
the relationship and possible collaboration between the disciplines of economics and
psychology (Earl, 2005; Lewin, 1996). Furthermore, we contend that the antecedents of
behavioural economics revisited in this article holds a cautionary tale for present-day
behavioural economists. The psychological insights with which behavioural economists
seek to inject more realism into economics risk being surpassed and thus rendered
outdated by the next rendition of ‘good psychology’.
The psychological moment in financial markets

At the beginning of the 20th century, several economists and non-academic financial
writers began to show increasing interest in the psychological factors supposedly influ-
encing financial markets. One market phenomenon assigned significant importance in
psychologized accounts of financial markets to the so-called ‘psychological moment’,
which marked the crucial tipping point where traders either made a profit or incurred a
loss. The expression had been part of Wall Street vernacular since the early 20th century,
but in the 1910s, the psychological moment began to attract academic interest among
economists and other social scientists with a penchant for psychological explanations
(Hansen, 2017).
George Charles Selden, a former fellow at Columbia University and prolific financial
writer, tried to conceptualize the psychological moment in the stock market. Selden’s
Psychology of the Stock Market (1912) was one of the first books devoted entirely to the
task of unfolding a psychology of the market. In an article in the Sociological Review
published a few years prior to Selden’s book, historian Herbert Fisher (1908: 63) wrote
that ‘the psychology of the Stock Exchange still awaits its Walter Bagehot’. Although
Selden’s attempt to write a psychology of the stock market pales in comparison with
Walter Bagehot’s rigorous analysis of the English money market in Lombard Street
(1896[1873]), it nevertheless did address a question of pertinence to many social scien-
tists at the time: what were the underlying psychological factors of market action and
price formation? In the preface to Psychology of the Stock Market, Selden hypothesized
that ‘the movements of prices on the exchanges are dependent to a very large degree on
the mental attitude of the investing and trading public’ (Selden, 1912: Preface). By
‘mental attitude’ of the public, Selden meant ‘the mental attitudes of those persons who
are interested in the market at the time’ (ibid.: 9). He refrained, however, from explicat-
ing what he meant by ‘interest’, or how it would be possible to identify the people who
were interested in the market at a particular time. How ‘mental attitudes’ should be
assessed was another question that Selden left unanswered. A review in the Journal of
Political Economy stated that Selden had made ‘no attempt at working out a causal
organic theory’, and that the scientific contribution of Psychology of the Stock Market
was a mere ‘suggestion of what might be accomplished in this direction’ ([Review of
Psychology of the Stock Market], 1913). The review concluded that instead of being a
scientific contribution, the book’s actual objective was ‘to offer practical guidance
toward successful speculation’ (ibid.). Though Selden resorted to psychology for expla-
natory purposes, it came to serve him primarily as a means to describe market move-
ments and to prescribe successful ways of acting in the stock market.
Selden’s orientation toward the practical side of stock market trading reflected his
conviction that the market fundamentally was a ‘purely practical proposition’ (Selden,
1912: 34). Though various scientific methods might be applied to markets, Selden felt
that it was impossible to ‘reduce the fluctuations of the stock market to a basis of
mathematical certainty’ (ibid.). This scepticism toward the clear-cut unambiguousness
of numbers paved the way for ideas from psychology to enter Selden’s work on the stock
market. He distinguished between two levels of psychological influence on markets: the
aggregate and the individual. On the aggregate market level, Selden was interested in
providing answers to questions concerning what effect ‘varying mental attitudes of the
public have upon the course of prices’ and how the market was ‘influenced by psycho-
logical conditions’ (ibid.: 12). On the individual level, Selden asked how ‘the mental
attitude of the individual trader affect his chances of success’ and ‘to what extent, and
how, can he overcome the obstacles placed in his pathway by his own hopes and fears,
his timidities and his obstinacies[?]’ (ibid.). The two levels were necessarily inextricable,
for while individual sentiment affected the aggregate level, the mental attitude of the
individual was susceptible to the public mind.
The ‘public mind’, according to Selden, was not necessarily an ‘inferior mind’ or
synonymous with an inferior class of market actors. The ‘wrongheadedness’ of the
public, he claimed, ‘no longer exists to the same extent as formerly’ (Selden, 1912: 85).
Though ‘the public is always wrong’ had long been a popular adage in Wall Street
(Thomas, 1900), Selden saw signs of improvement in the public’s speculative competen-
cies. In an article published in the Quarterly Journal of Economics, Selden (1902: 309)
argued that as the public grew smarter, their interest in speculation increased concomi-
tantly. Consequently, people’s natural inclination to speculate was beginning to have a
stronger influence on the stock and commodities markets because of increasing public
participation (ibid.: 296–7).
Along similar lines, the prolific how-to book and market letter author Thomas Gibson
argued that the public had become better at speculating than they had previously been. In
an issue of his market letter, Thomas Gibson’s Weekly Market Letter, published on 7
November 1908, Gibson (1909: 216) stated that although he did not mean to ‘offer the
opinion that the public element has suddenly grown extremely wise’, he did detect a
‘great improvement in methods’. Although a great number of small traders had proven
that they were able to trade intelligently, Gibson and Selden both stressed that there were
pivotal moments when the public tended to be on the wrong side of the market. These
were ‘psychological moments’ when prices seemed to have reached top or bottom and
were about to take a turn. At these crucial turning points, Selden claimed, it was nec-
essary to oppose the public (Selden, 1912: 85–6). The psychological moment marked the
point when irrational psychology affected the sentiment of the public and hence made its
mark on the fluctuation of prices.
Selden believed that one mode of discounting these turning points in the price of a
stock was to detect market sentiment in the news (Selden, 1912: 58). The press, he
assumed, reflected ‘the thoughts of the multitude’, and thus constituted a means to
identify when a break in a stock price was imminent (ibid.: 28–9). However, other
observers considered the detection of public sentiment through the news to be rather
risky. Gibson did not share Selden’s appreciation for sentiment analysis based on news-
paper reading. He argued that speculators and investors tended to exaggerate the impor-
tance of news and that it generally was difficult to distinguish proper news from plain
gossip (Gibson, 1913: 116–17). Many providers of market news, Gibson thought, were
dishonest and manipulative, preying on the public’s docility through ‘the power of
suggestion by means of exaggeration’ (ibid.: 587). Gibson suggested that ‘gossip mas-
querading as news’ should be disregarded, while speculators and investors should attend
only to ‘genuinely informative’ and authoritative sources of market information (ibid.:
116–17). These opposing views reflected an infrequently discussed yet thinly veiled
paradox penetrating the work of autodidactic market psychologists such as Selden and
Gibson, namely that the disease also appeared to be the remedy: studying the psychology
of the public could offer valuable indications of where markets were moving, but it could
equally distort the individual trader’s ability to make unbiased and independent
decisions.
Another pertinent question that Selden did not pose directly in Psychology of the
Stock Market, but which he nevertheless seemed to grapple with throughout the book,
was this: what happened to the individual while trading in the stock market? One thing
that Selden was certain about was that the atmosphere of the stock market affected the
discernment of market actors. While commencing on a market venture, he believed, the
individual trader ‘unconsciously’ permitted ‘his judgment to be swayed by his hopes’
(Selden, 1912: 71). This idea that the mind of the individual was unconsciously influ-
enced in the market was strikingly similar to the idea that people lost their sense of
individuality in crowds. This latter idea was a cornerstone of crowd psychology. The
French polymath and popularizer of crowd theory Gustave Le Bon argued that people
gathering in a crowd unwittingly lost their ability to decide for themselves and became
subject to ‘the law of the mental unity of crowds’ (Le Bon, 1896: 2; emphasis in original).
This law also seemed to apply to the stock market, at least according to Selden and
Gibson, but also to established academic economists such as Irving Fisher, Frank A.
Fetter, and others.1 The trick was not to become subject to the collective mind of the
market crowd.
Though it seems counterintuitive that market actors should be able to actively or
consciously prevent an unconscious loss of autonomy, Selden believed that they could
do so. In order not to experience a loss of discernment, Selden advised that the trader had
to ‘hold himself in a detached, unprejudiced frame of mind’ and needed to ‘study the
psychology of the crowd, especially as it manifests itself in the movement of prices’
(Selden, 1912: 86). The trader, Selden stressed, should try to remain unaffected by any
emotion, as emotions tended to ‘cloud the intellect’ (ibid.: 113). Selden thus assumed
that there was a privileged position from which the trader could observe the actions of the
market crowd and act on them but without being affected in return. In other words, he
reserved a space for rational action in a social setting that was deeply influenced by
collective irrationality. The same level of confidence in the self-control of rational
individuals can be found in contemporary behavioural economics. The rationale was
more or less the same, namely that if people were aware of the biases and temptations
shaping their behaviour, they would be able to avoid being affected by them and thus,
retain their self-control (see, for instance, Thaler and Sunstein, 2008). For Selden,
however, it was a matter not only of not succumbing to waves of irrationality, but of
remaining level-headed in order to take advantage of the susceptibility of others.
Acting in the stock market thus required constant awareness of collective sentiment.
The trader needed to know when to ride a wave of public sentiment and when to break
with it, while at the same time always maintaining a safe distance from any mind-
distorting influences. Selden’s suggestions for proper market conduct were aimed at
those who dared to embark on this intricate balancing act. Parallel to the increasing
popularity of market psychology in the handbook literature, economists began to take an
interest in psychological theories as potential modes of explaining and correcting the
fundamental assumptions of theories of economics. Whereas Selden described market
movements and prescribed ways to profit from them through his application of psycho-
logical ideas to market phenomena, economists saw in theories of social psychology an
opportunity to rethink and more aptly explain the factors guiding economic action.
The psychologization of economics
It would be a libel, not altogether devoid of truth, to say that the classical political economy
was a tissue of false conclusions drawn from false psychological assumptions. (McDougall,
1916[1908]: 11)
One of the American economists who advocated strongly for the use of psychology as a
means of explaining, complementing, and ultimately improving theories of economics
was Wesley Clair Mitchell. Having been a student of Thorstein Veblen at the University
of Chicago, Mitchell was no stranger to psychology-informed economics. Armed with
insights from crowd and instinct psychology, Mitchell proposed some radical changes to
the conceptualization of economic theory (Mitchell, 1914). Inspired by the then-
fashionable social psychology of William McDougall, Mitchell wanted to prove that
psychology was the unrecognized foundation of economics and, furthermore, that the
psychological assumptions already inscribed in economic theory were essentially flawed
(Mitchell, 1910a, 1910b).
In his seminal book, titled An Introduction to Social Psychology (1916[1908]),
McDougall argued that psychology was the foundation of all social sciences. He
believed that psychology was not taken seriously enough in the social sciences, including
in classical theories of economics, and noted that social scientists’ attempts to say
something about the ‘mind’ within the social sciences often came out as flawed and
as downright bad psychology (ibid.: 1–2). Paraphrasing McDougall’s criticism of the
simplistic psychology underpinning the classical theories of economics, Mitchell pointed
out that many notable economists had committed the intellectualist fallacy of assuming
that individuals were always guided by their ‘enlightened self-interest’, as well as a
hedonistic psychology equating ‘the good’ with ‘the pleasurable’ (ibid.: 11; Mitchell,
1910a: 197).
In the two-part article in the Journal of Political Economy titled ‘The Rationality of
Economic Activity’, in which he laid out his assessment of the assumptions underpin-
ning the classical theories of economics, Mitchell presented a lengthy critique of the
hedonistic psychology found in most classical theories of economics. From loosely
elaborating on the premises of Smith, Malthus, and Ricardo’s economic theories, Mitch-
ell thoroughly examined the entanglement of utilitarian ethics and hedonistic calculus
found in the work of, among others, James Mill and Bentham, yet fully and explicitly
integrated in Jevons’ economic theory (Mitchell, 1910a, 1910b). The combined assump-
tions of enlightened self-interest and hedonism turned the human into a reflective
pleasure-calculating animal, which, according to Mitchell, was inconsistent with the
way in which humans acted in real life and the way in which their minds really func-
tioned. Mitchell’s argument was simple: economists ought to rely on the work of psy-
chologists like McDougall while reviewing their assumptions on human nature
(Mitchell, 1910a). ‘It is clearly unsafe for them to take man’s rationality for gran-
ted. . . . It is clearly unwise for them to continue trusting and using the traditional hedo-
nistic psychology’ (Mitchell, 1910b: 216).
Driven by a desire to reformulate the underlying premises of economic theory,

Mitchell encouraged economists to open up to broader conceptions of what constituted
human activity, which required an acknowledgment of the importance of people’s habits,
their ‘amenability to suggestion’, their ‘tendency toward imitation’, and their ‘instinct of
construction’ (Mitchell, 1910b: 200). Unless they were willing to do so, Mitchell
believed, economists would ‘fall unconsciously into an artificial way of representing
the mental processes of economic life’ (ibid.: 205). In what was arguably his most
influential work, Business Cycles (1913), Mitchell criticized math-centric economists,
who, he felt, often failed to understand that the real world was not as ordered as the world
of algebra was. ‘A mathematician’s mood exercises no influence upon his solution of an
algebraic equation; but it does affect his opinion about the advisability of buying the
bonds which are offered him’ (Mitchell, 1913: 455). The emotional states allegedly
affecting the opinions of people about to, in this case, buy bonds, Mitchell argued, were
‘the product of strictly individual conditions’ and ‘of suggestions received from the
demeanor, the talk, and the actions of associates’ (ibid.). He believed that individual
inclinations or instincts, combined with external affectations of various kinds, could
easily make individuals diverge from their independent judgement. This was particularly
true in financial markets, where people were closely gathered and constantly interacting.
When emotions spread in the market, Mitchell thought, the actions they prompted
were both intensified and affirmed by the market actors (Mitchell, 1913: 455). In the
same vein as McDougall’s and others’ arguments, Mitchell pointed out that no person
was ‘wholly immune from the contagion of emotional aberration’ (ibid.: 35). Thus,
social psychology was fundamentally important and economists had to account for it,
especially while dealing with questions concerning financial markets. The objective was
to replace the bad psychology lingering in existing theories of economics with allegedly
more nuanced views on the peculiarities of human nature. To borrow a figurative phrase
from the British financial journalist Ellis Thomas Powell, what Mitchell was trying to do
was to ‘clothe the dry bones of economic theory with the flesh of living reality, so that
theory and practice come together’ (Powell, 1910: 3).
With his attempt to rethink economic action by adopting ideas from psychology,
Mitchell delivered a strong critique of the very foundation of economic theory, one he
had himself helped build. Prior to his writings on psychology in economics, Mitchell had
been making a name for himself in the economic sciences by publishing prolifically on
the use of quantitative methods in economics. Years later, economist Allyn Abbott
Young remarked that it seemed as if Mitchell had ‘done his best to destroy confidence
in the soundness of the general structure of which the best of his own work seems to be an
integral part’ (Young, 1925: 174). Another way to interpret Mitchell’s shift toward a
more heterodox view on economics would be to see it as part of a broader movement
taking place at the beginning of the 20th century away from ‘economic monism’ toward
‘economic pluralism’ (Patten, 1912). With his eclectic authorship, Mitchell arguably
helped broaden the understanding of what economic phenomena could be and show-
cased different ways in which such phenomena should, in his opinion, be examined.
Although Mitchell was one of the first believers in improving economic thought by
using insights from research on psychology, he was not the only one. Frank William
Taussig, professor of economics at Harvard and proponent of the neoclassical economic
theory, also recognized psychology as foundational in markets and economic life. Mar-
ket oscillations, Taussig argued in Principles of Economics (1911), had ‘partly eco-
nomic, partly psychological’ causes (Taussig, 1911: 403). One of the reasons why
collective psychology influenced markets and economic life was that economic opera-
tions made people dependent on one another. Economic relationships tied debtors and
creditors, sellers and buyers, and producers and consumers. According to Taussig,
everyone partaking in production, trading, and consumption was dependent on other
people’s willingness to buy and sell certain products and services. Thus, economic life
linked people together in a ‘long chain of apparently separate, yet essentially interde-
pendent, operations’ (ibid.: 405).
Taussig was not alone in pointing to the interdependence of economic actors as a main
reason why social psychology played a crucial role in economic life. In The Nature of
Capital and Income, Fisher argued that ‘interdependence’ was an underemphasized and
underappreciated principle in the study of economic behaviour, highlighting speculation
in particular (Fisher, 1906). In a heated speculative market, according to Fisher, the lack
of independence could quickly result in imitative behaviour: a prediction error, if com-
mitted by an influential speculator, would likely spread throughout the market. ‘It is’,
Fisher wrote, ‘like an infection; it is caught by hundreds of others and transmitted to
thousands’ (ibid.: 296–7). While Fisher did see imitation and mental contagion as play-
ing central roles in spreading irrationality in financial markets, Coats points out that he
was not a proponent of mixing psychological and economic theorizing, thereby blurring
established disciplinary boundaries. In his doctoral dissertation from 1892, he in fact
stressed that it was not the economist’s ‘province to build a theory of psychology’
(Fisher, in Coats, 1976: 51).
On the other side of the Atlantic, Cambridge economist Arthur Cecil Pigou contended
that economic actors were bound together in ‘a quasi-hypnotic system of mutual sug-
gestion’, in which they were exerting mental influence on one another through the inter-
mental process of sympathy (Pigou, 1912: 460). Drawing on the thoughts of American
economist Edward David Jones (1900) on collective psychology in the stock and com-
modities markets, which were heavily influenced by the French sociologist Gabriel
Tarde’s theory of imitation, Pigou stressed that the problem of mutual suggestion was
amplified when people were ‘congregated in close physical proximity to one another in
the business sections of large cities’; and noted that it created ‘an atmosphere of sym-
pathy’ (Pigou, 1912: 461). Pigou argued that ‘psychological interdependence’ was inti-
mately connected to real relationships such as that between a debtor and creditor. ‘Most
firms are both borrowers and lenders. . . . They borrow from one set of people by buying
materials from them on credit, and they lend to another set by selling the fruits of their
workmanship on credit’ (ibid.). This foundational type of interdependence in business,
according to Pigou, was allied with ‘the psychology of crowds’ and tended to ‘promote
action in droves’ (ibid.: 462).2
Like Pigou, Taussig stressed that the interdependence of economic actors increased
the risk of ‘psychological contagion’ (Taussig, 1911: 405; cf. Hansen, 2021). In other
words, inter-mental affectation was considered by Taussig and Pigou to be an unavoid-
able factor in business life and in financial markets. Contagion and erratic, irrational
behaviour were thus considered negative side effects of the ways in which economic
relations were established and transactions were carried out. Taussig described the
influence of collective psychology on business in the following words:
A pervading spirit of optimism fills most businessmen in times of activity, as a spirit of

pessimism does in times of depression. A few very sagacious and sober persons may indeed
remain unaffected. These hold off when others press on, and venture freely when others
hesitate. But they are as rare as the persons who remain rational in a mob or quiet in a
cheering crowd. Most businessmen respond to the influences that surround them. They enter
on new enterprises or enlarge old ones when all the world about them is doing likewise.
(ibid.: 403–4)
Mitchell, Fisher, Pigou, and Taussig all believed that psychology played an important
role in economic life. However, not all economists were convinced that, for example, the
social psychology of McDougall provided insights that could help them refine or refor-
mulate theories of economics.
Pushback against the psychology fad

Despite several attempts to introduce psychology into economic thinking and to think of
markets in psychological terms, there were also economists who resisted the temptation
to jump on the economic psychology bandwagon. Critics of the ongoing psychologiza-
tion of economics did not see the sense in tampering with the fundamental assumptions
of the economic sciences simply because a few new theories had emerged within the
field of psychology. Psychology was a fad sweeping the economic sciences, but critics
did not expect it to leave a lasting impression. They refused to be seduced into thinking
that psychology could provide a valid basis for a radical rethinking of the theoretical
underpinnings of economics. In contrast, economists trying to bring psychology and
economics closer together argued that it was necessary to acknowledge the empirical
facts: economic actors were not rational to the extent suggested in classical and neo-
classical economic theory, and economic life was changing in a way that required
psychological factors to be taken seriously.
The question dividing those in favour of the introduction of psychology into econom-
ics and those who were sceptical or completely against it was whether the psychologiza-
tion of economic thinking would in fact improve theories of economics. Specifically
addressing the concept of value, professor of political economy at Columbia University
Edwin R. A. Seligman pointed out that ‘it may be doubted whether the psychological
treatment of economic relations can carry us much further than to the comprehension of
the elementary principles of valuation’ (Seligman, 1910[1905]: 29). Though Seligman
acknowledged that the connection between psychology and economics was ‘real and
intimate’, he nevertheless doubted that psychology could help inform the existing the-
ories of economics (ibid.). In general, Seligman believed that the points of contact
between different sciences were becoming more numerous and that this tendency was
pronounced when it came to economics and psychology. However, the use of terminol-
ogy from psychology in economics was, in Seligman’s opinion, nothing more than a
rhetorical exercise; psychology was simply the latest fad in economics. Before
psychology, as Marshall (1890: 64–5) had previously pointed out, it was biology that had
been the primary extra-disciplinary influence in economic thinking:3
It was at one time the fashion to apply biological concepts to economic life, and to speak of
the economic organism, the economic structure and the economic functions. It is, however,
coming more and more to be recognized that these are vague analogies rather than iden-
tities; that the laws of life in the economic world are not the same as those in the physical
world; and that the only real aid which biology can give to economics is to enforce the
conviction that in social as in animal life there is continual growth and perpetual change.
(Seligman, 1910[1905]: 29)
The major problem, as Seligman pointed out, was that natural and economic laws were
not the same. To assume ideas from psychology or biology to be applicable to economic
science, according to Seligman, was simply a mistake. ‘Economic law must explain
economic facts’, Seligman argued, emphasizing that theories of economics needed to
attend to actual economic conditions, and that they therefore ought to concern them-
selves with economic facts and not take other facts into account (ibid.: 34–5). Overall,
Seligman did not believe that applying ideas from either psychology or biology to
economics would increase the understanding of the latter.
Another argument against tinkering with the fundamental assumptions of economics
was that the theories generally appeared to be working. This at least was one of the things
Max Weber tried to argue in a critique of the psychology fad in economic thinking.
Although Weber is somewhat of an outlier figure when compared to the group of
economists and social theorists discussed in this article, his thoughts on the use of
psychology in economics speaks directly to the debate on whether or not it was worth-
while, necessary, or even possible to improve theories of economics by introducing
concepts from psychology. In a critical assessment of German economist Lujo Brenta-
no’s attempt to tighten the relationship between the marginal theory of value and certain
general assumptions of experimental psychology, Weber argued that psychology really
did not have any legitimate role to play in economic theorizing (Weber, 2012[1908]:
242). In keeping with Seligman’s criticism of the psychology fad, Weber did not think
psychology could bring anything but confusion to theories of economics. Introducing
ideas from psychology into economic theory, according to Weber, would only obfuscate
the objective of the latter, which was to understand certain aspects of ‘man’s external
conduct to conditions of existence’ (ibid.: 247, original emphasis). As Weber noted, the
inner conditions of man (stimulus, sensations, reactions, emotions, etc.) preoccupying
psychologists were not of importance in the theory of marginal utility, as such inner
states should simply not be accounted for in theory. On the one hand, Weber was clear in
stating that the emerging neoclassical theories based on marginal utility were built on
unrealistic presuppositions (ibid.: see also Weber, 2012[1917]: 332). On the other hand,
he still thought that economic theories should be valued for their ability to say something
about the consequences of individual action under some rather restrictive assumptions:
The general theorems formulated by economic theory are simply constructs stating what the
consequences of the action of an individual person, intertwined with [the actions] of all
other persons, must be if we assumed that each individual person were to shape his conduct
toward his environment exclusively according to the principles of commercial bookkeep-
ing – in other words: ‘rationally’, in that sense [of the word]. (Weber, 2012[1908]: 248;
emphasis in original)
The quality of economic theories was that they isolated an ideal type of rational action,
which should be compared with ‘the real situation’, where they could potentially be
usefully in describing aspects of economic phenomena (Weber 2012[1904]: 125). While
ideal types of marginalist economics were one-sided, they were nonetheless useful
constructs:
The foundation of the theory of marginal utility – indeed: of every subjective theory of
value – is not psychological but (if we wish to find a methodological term for it) ‘prag-
matic’; that is to say: it employs categories of ‘ends’ and ‘means’. (Weber, 2012[1908]:
249)
The considerable attention that some economists gave psychology in the first and second
decades of the 20th century called into question the very basis of economic thinking. As
pointed out by Harvard philosopher Ralph Barton Perry, economic theory had ‘steadily
grown more psychological’ due to an effort to ‘go behind the existing forms and instru-
ments of the economic process, to the human motives which underlie the process’ (Perry,
1916: 447). However, some economists thought that the preoccupation with psychology
went too far and that the fantasy of unveiling underlying psychological factors influen-
cing economic action had economists reducing everything to psychology. In his book
The Stock Market Barometer, Wall Street Journal editor William Peter Hamilton
expressed dismay at the overuse of the word psychology. The overemphasis on psycho-
logical conditions in markets, according to Hamilton, had led to too much distortion of
the fundamental economic principles of supply and demand. ‘We have meddled so
disastrously with the law of supply and demand that we cannot bring ourselves to the
radical step of letting it alone’ (Hamilton, 1922: 247). Hamilton feared that reducing
economic action and market behaviour to collective psychology would pave the way for
regulation, which was a form of market interference that he strongly opposed.
Whereas critics such as Hamilton dismissed the preoccupation with psychology in
economics as tendentious and superfluous, proponents saw a potential in psychological
research for a fundamental reorientation of economic thinking. Though the Harvard
economist Zenas Clark Dickinson did not see the use of psychology in economic think-
ing as a fad, he thought applications of the ‘teachings of James, McDougall, Freud, Binet
and so on’ in newspapers, magazines, and scientific journals often left a lot to be desired
(Dickinson, 1919: 391). He found many of these applications ‘improper’ and even
thought that some of the imported psychological ideas were themselves ‘false’. Never-
theless, he contended that it was perfectly justifiable to make use of theoretical aid from
psychology (ibid.). In fact, he argued that ‘an accurate knowledge of the psychology
involved in economic behavior is needed in economic theory’ (ibid.: 420–1). To Dick-
inson, psychology was relevant not only as a vehicle for better theorization but just as
much as a means to strengthen the usefulness of economics in practice. What needed

careful but pragmatic consideration was what psychology to use and for which purpose:
The issue is not, do we need any psychology, but do we need more psychology, or any
improvement on the psychology we are using? ‘Some unsettled questions’ are the follow-
ing: Are the psychological assumptions which the prevailing economic theory makes suffi-
ciently valid? Are they exemplified in the workings of real men’s minds and in their
choices; or, if not universally true, do they hold of a sufficiently large number of men to
make them adequate for the economist’s purpose? Or, if the assumptions now made are true
as far as they go, can they be added to with profit to the science? More specifically, is there
anything new in the science of psychology which necessitates, if true, any change in
economic theory? If so, what is it and what changes does it imply? (ibid.: 392)
A more enthusiastic stance on the role of psychology in economics was presented by

John Maurice Clark, whose work we referred to in the introduction. Clark advanced the
argument that people’s wants and desires, and consequentially their decisions, were
informed by stimuli from the ‘system’ that the individual ‘happens to be born into’
(Clark, 1918a: 11; see also Clark, 1918b). In the same vein as his predecessor Mitchell,
Clark believed that the assumptions of human agency inscribed in the then-prevailing
theories of economics were far too detached from the realities of economic life. Rather
than manufacture their own abstract assumptions, he proposed, economists should bor-
row them from competent colleagues in other fields such as psychology and sociology
(Clark, 1919: 290). Clark argued, almost as an echo of Mitchell, that ‘if the economist
borrows his conception of man from the psychologist, his constructive work may have
some chance of remaining purely economic in character’, and she or he would not end up
resorting to self-made ‘bad psychology’ (Clark, 1918a: 4). The import of ideas from
psychology was thus seen as a means to assure empirical accuracy and less abstraction in
economic thought. To avoid falling into the trap of producing bad psychology, Clark
resorted, as Mitchell had done before him, to authorities within the fields of social
psychology, such as William James, McDougall, and Charles Horton Cooley (ibid.).
The problem with the ambition of wanting to refrain from bad psychology was that it
rested on the assumption that the economists would be able to determine what consti-
tuted good and bad psychology. Alternatively, economists would have to do as Clark
seemed to suggest and put their faith in whatever conception of man happened to be
dominant within psychology. Although Dickinson (1922: 86–7) saw the value in draw-
ing on the social psychology tradition in economic thinking, he did question whether the
theories of the likes of Tarde and McDougall, which were supposed to replace the bad
psychology of old, were not themselves bad psychology. In a review of James M.
Williams’ The Foundations of Social Science (1922), Dickinson dismissively argued
that ‘much water had passed under the bridge since that was the best motive psychology
available’ and criticized Williams for not accounting for ‘laboratory psychology on the
mechanics of learning, pleasure-pain, intelligence, and so on’ (Dickinson, 1923: 370).
What seemed to have happened was that the increasing popularity of seemingly more
scientific branches of psychology, such as the behaviouristic school of psychology (e.g.
Copeland, 1925), had made crowd and social psychological theories stand out as
speculative and outdated. In short, the theories that Mitchell, Clark, and others had
considered authoritative in terms of explaining human desires, motives, and action were
increasingly deemed unscientific, and thus bad psychology.
Years later, the American sociologist Talcott Parsons (1935a) heavily criticized early
20th-century psychologization of economic thought. According to Parsons, the ‘whole
thing’ (that is, attempts to introduce social psychology into economics) was marked by
the ‘transitoriness of the psychological theories’ on which Mitchell and others relied, as
well as an alleged inability of the economists to distinguish these psychological theories
from one another (ibid.: 441). Like Seligman, Parsons insisted that there had been far too
much psychology and biology (and sociology) in economics (Parsons, 1935b: 666). In
light of this pushback, it is easier to understand why the psychological ideas of the early
part of the 20th century dried out in the period after 1930, and why the early proponents
of an increased cooperation with psychology failed to have a lasting impact on the
economic orthodoxy.4 In the next section, we discuss a set of suggestive similarities
between the examined historical debates and the concern of contemporary behavioural
economics, but we will also briefly elaborate on why contemporary behavioural eco-
nomics has prevailed where the early critique largely failed.
Discussion: A revival of past concerns?

There are several reminiscences of the early 20th-century arguments for infusing
economics with a healthy dose of psychology in contemporary behavioural economics.
In this discussion, we focus on three areas where past and present perspectives on
behavioural economics meet: (a) the insistence on importing psychological ideas, (b)
the psychological inflection of the critique of homo economicus, and (c) the special
interest in financial markets that both the historical and the contemporary discussions
display. In light of these similarities, we also briefly address (d) the question of why the
early psychological critique ultimately failed to leave a lasting mark on the economic
orthodoxy, whereas contemporary behavioural economics seems to have prevailed.
Injecting the economics profession with healthy portions of psychology

Contemporary discussions on behavioural economics echo the historical call for the
economics profession to incorporate results and ideas from research in psychology. As
detailed above, several prominent economists in the early part of the 20th century
decried the lack of interdisciplinary cooperation and, particularly, the lack of import
of psychological ideas into economics. Mitchell (1910a: 97) regretted that ‘few econo-
mists have regarded the study of psychology as a necessary part of the equipment for
their work’. Similarly, Taussig (1911: 403) deemed it necessary to stress that while
economics was an independent science, explanations of market behaviour had to draw
on a vocabulary that was ‘partly economic, partly psychological’. This psychology-keen
branch of economic thinking—of which Mitchell was perhaps the main proponent and
Taussig was not entirely dismissive—was met with increasing criticism in the 1920s and
then gradually started to fade in popularity. Dialogue with other social sciences did not
cease after the 1950s, and mainstream economics continued to offer several decisive
analyses of non-economic phenomena such as racial discrimination, crime, and family

relations (Becker, 1957, 1993a, 1993b). Yet, and crucially, the direction of influence was
an export rather than an import of ideas. Several authors thus chose to speak of ‘eco-
nomic imperialism’ to denote the process by which standard rational choice models
spread to other social sciences (Lazear, 2000; Mäki, 2009; Stigler, 1984; cf.
Presskorn-Thygesen, 2017: 37–45).
The current behavioural trend shares the willingness to extend its analyses beyond
strictly economic domains and to all matters of public policy (e.g. Thaler and Sunstein,
2008), but reverts to the stance of earlier historical discussions by insisting on importing
ideas from psychology. As Thaler (2015: 9) emphasizes, behavioural economics ‘is not a
different discipline: it is still economics, but it is economics done with strong injections
of good psychology’. This goal of increasing the realism of economics by calling for the
use of psychological concepts has an important and often overlooked historical ante-
cedent in earlier discussions from 1900 to 1930. Yet one should be careful not to over-
estimate the similarity, since there are considerable differences between the crowd
psychology of Le Bon (1896) and the social psychology of McDougall (1916[1908]),
which were among the preferred reference points in economic discussions at the begin-
ning of the 20th century, and the experimental psychology (e.g. Kahneman and Tversky,
1979; Loewenstein et al., 2001; Tversky and Kahneman, 1986) that is preferred by
modern behavioural economists. Arguably, an important clue to the success of
present-day behavioural economics lies precisely in its empirical and experimental basis,
since this invalidates the critique that was often made in the early ‘pushback’ against the
import of psychological ideas, namely that they remained speculative and of dubious
empirical grounding (see Coats, 1976).
The experimental outlook of the psychology referred to in contemporary discussions
cements its scientific authority, especially among economists, and largely determines the
kind of psychology that is deemed ‘good psychology’ and worthy of inclusion in con-
temporary economic research. As Abbott (2016: 179) notes, behavioural economics is
trying to ‘reinvent’ experimental psychology at a time when the front of psychological
research itself has ‘gone biological’. In light of the historical debates charted in this
article, this also indicates a potential vulnerability for behavioural economics. Just as the
crowd psychology in particular eventually lost scientific credibility, there is no guarantee
that psychology will not move further away from the ideas that behavioural economics is
presently importing from the discipline of psychology.
A psychological inflection of the critique of economic man

Behavioural economics repeats and reinforces the critique of homo economicus that first
emerged in early 20th-century discussions on psychology in economics. The assump-
tions of utility maximization, immense calculative powers, and self-interested motives
that come together in the figure of economic man has often been subject to critique.
Philosophers of science, in particular, have decried the reductive nature of this key
assumption in many economic models (e.g. Albert, 2012[1963]; Nussbaum, 1997; Sen,
1977), but in the early literature surveyed here, as well as in the contemporary arguments
of behavioural economics, that critique contains a distinct psychological inflection.
As detailed above, economic man was a favourite among earlier economists, who tried
drawing lessons from the psychology of their day. For example, Clark (1919: 285) saw
‘economic man’ as a paradoxical character expressing a truth ‘not found in real life’. As
Fred M. Taylor wrote while trying to summarize the consensus among his peers, ‘Every-
one knows that . . . men are influenced by motives other than the economic, their knowl-
edge and judgment are imperfect and their actions inconsistent’ (Taylor, 1921[1911]:
251). While such facts about humans were at odds with the standard notion of economic
rationality, Taylor added that they were nonetheless pertinent to economics, since ‘the
excitement, the rumor, the tendency . . . often cause buyers and sellers to act without
rationality’ (ibid.). In order to make the same argument today, behavioural economists
point to experimental psychological studies that suggest the same point: in laboratory
conditions, at least, people make choices that show a significant concern for others; their
perceptions of information, probabilities, and risks are subject to cognitive limitations
(Kahneman and Tversky, 1979); and they let their emotions affect decision-making
(Loewenstein and Lerner, 2003; also, see DellaVigna, 2009: 315–16). In echoing the
early discussions of psychology in economics, behavioural economics thus urges econ-
omists to search for a more realistic conception of human nature within psychology and
other social sciences. Understanding human nature better—and on an interdisciplinary
basis—will improve the explanatory power of economics just as it will be able to suggest
novel and better solutions to pressing policy problems (Shiller, 2012; Thaler, 2017b;
Thaler and Sunstein, 2008).
Yet, and despite such striking similarities in the problematization of economic man,
Weber’s (2012[1908]) early critique of the psychological trend also illustrates a crucial
difference between the past and present discussions. In the earlier context, the psycho-
logical critique tended to confront marginalist economists, who held that the utilitarian
and hedonistic figure of homo economicus was indeed a sufficiently realistic conception
of human psychology. In the present context, however, orthodox economists echo Weber
in fully appreciating that economic man is a methodological abstraction that is worth
preserving not as a realistic model, but as an ideal type that is productive in generating
parsimonious and predictively potent models (Friedman, 1953). That difference makes
the critical task of contemporary behavioural economics significantly more complex
when viewed in comparison with the earlier context, since what is at issue for current
neoclassical economists is not the realism of homo economicus, but rather the pragmatic
question of what should replace this productive assumption if it is abandoned (e.g.
Herfeld and Becker, 2012; Lazear, 2000).
Financial markets as the testing ground for psychology?

To an external observer, it may seem surprising that financial markets should be a testing
ground for psychological ideas in economics. After all, economics has long considered
financial markets the most efficient among all markets, and since market behaviour in,
say, stock markets is always overtly strategic and calculative, they might seem like the
least likely place to look for imperfections of rationality and other quirks of human
psychology. Nonetheless, both past and present discussions of psychology in economics
share a special interest in financial markets that is worth highlighting. As noted by
Mirowski (2013: 256–63), the rising popularity of behavioural economics is no excep-

tion to this rule, and key contributions to contemporary behavioural economics and
finance are often offered as explanations of the apparent market ‘irrationality’ that
accompanied the 2008 financial crisis (Akerlof and Shiller, 2009; Thaler, 2015). The
beginning of the 20th century also had its fair share of financial panics and crises (the
panics of 1901, 1903, and 1907; Noyes, 1909), which did not go unnoticed in either
academic or non-academic discourses on finance (Hansen, 2017). Thus, financial mar-
kets have always delivered ample empirical evidence contradicting the assumption that
economic agents were rational in the sense required by the emerging form of neoclassical
economics.
Behavioural economics and its attempt at revising the psychological foundation of
economics carry implications for all areas of economic research, but the study of finan-
cial markets stands out as the key area in which it seems to have proven most successful
(DellaVigna, 2009). By drawing upon psychological research on decisions (Kahneman
and Tversky, 1979; Tversky and Kahneman, 1986) and emotion (Loewenstein and
Lerner, 2003), behavioural economists have thus highlighted a number of key economic
phenomena within finance. As a consequence, concepts such as ‘myopic loss aversion’
(Benartzi and Thaler, 1995) or ‘the endowment effect’ (Kahneman, Knetsch, and Thaler,
1991) are now part and parcel of the vocabulary used by financial economists. Not all
financial economists have accepted the psychological insights of behavioural economics,
but Thaler has argued that the term behavioural finance is becoming increasingly redun-
dant, because ‘what other kind of finance is there?’ (Thaler, 1999: 16). One can arguably
discern at least two overall reasons for this special interest in financial markets. First,
behavioural economics is to a large degree a critical perspective, whose success is con-
tingent partly on its ability to criticize alternative theories. Consequently, as Thaler (2015:
348) notes, it thrives within an area such as finance, where mainstream economics has
issued very precise and tightly specified hypotheses such as the ‘law of one price’ (Lamont
and Thaler, 2003), which can be easily tested and potentially refuted. Second, there is the
abundance of readily available data from stock markets, whose day-to-day developments
can be easily surveyed back to the 1920s. Financial markets thus offer a fertile ground to
critically test new and competing hypotheses.
Past failure and present success

The similarities between the historical and contemporary debates charted above prompt
the question of why the early critique failed, while modern behavioural economics seems
to have prevailed. First, in the early context, the proponents of the orthodoxy were
successful in arguing that the psychological perspective was not sufficiently unified to
constitute an alternative theoretical foundation for economics. Indeed, and as the above
historical analysis shows, the psychology-informed economists drew their theoretical
inspiration from quite a mixed bag of ideas from instinct psychology, social psychology,
and crowd psychology (see Tugwell, 1925). From the perspective of the economic
orthodoxy, these inspirations were simply too theoretically diverse to constitute a viable
alternative research programme. Second, the likes of Mitchell and Clark seldom com-
bined their calls for increased realism of the core economic assumptions with systematic
empirical studies (Coats, 1976). Such a lack of theoretical unity and sustained empirical
work made it easier for the economic orthodoxy to dismiss the critique and to instead
follow the likes of Weber and Parsons in safeguarding the disciplinary boundary between
economics and psychology.
When viewed in light of these two critiques of the earlier strain of psychological
thinking in economics, the contrast with contemporary behavioural economics is signif-
icant. Modern behavioural economics is theoretically unified in its adherence to experi-
mental psychology. Certainly, experimental psychology does not provide an expansive
theoretical framework, but it offers empirical credibility, since it does not derive its core
concepts—such as ‘myopic loss aversion’ and ‘the endowment effect’—from broad
theoretical considerations, but rather from empirical experiments. This gives behavioural
economics a stronger empirical footing in its critique of the orthodox models and
assumptions of neoclassical economics.5 In addition, behavioural economists have—
utilizing in particular the fertile reservoir of empirical data provided by financial mar-
kets—proven themselves more than willing to engage in systematic empirical inquiry,
whereas the early debates stayed largely at the level of theoretical critique.
Conclusion
The first couple of decades of the 20th century saw ideas from psychology and the
burgeoning field of social psychology being mobilized against what some progressive
economists considered unrealistic and outdated assumptions of both the classical and the
budding neoclassical economics. With theories about the plasticity of the human and
collective psychology becoming prevalent in society and academia in the late 19th and
early 20th centuries, an increasing number of economists began to question the validity
of the hedonistic and utilitarian conception of human behaviour underpinning the pre-
vailing theories of economics. Armed with insights from the psychology of the likes of
Tarde, James, and McDougall, the imperviousness and always strictly rational actions of
economic man suddenly appeared an overly abstract, reductionist, and ultimately inad-
equate conception of human action. More than anything else, these psychological the-
ories demonstrated that humans were profoundly social and highly susceptible creatures,
who were constantly affected by the numerous sources of stimuli in modern life and
whose sociability and affectivity gave shape to the contexts in which they roamed. In this
article, we have examined how such psychological ideas found their way into the work of
several early 20th-century economists and how this shift in perspective on the constituent
factors of economic action—from individual rational calculation to unconscious mental
affectation, emphasis on instincts, collective mind, and so on—influenced these econo-
mists’ views on economic life in general and stock markets more specifically. The
rampant behaviour occasionally occurring on the floor of the stock exchange suggested
to some economists, and to other observers occupied with economic matters, a void
between economic behaviour as carved out in the underlying assumptions of the pre-
vailing economic theories and the way people acted in real markets.
Our study of the work of little-known financial writers Selden and Gibson and
sparsely discussed considerations around the role of psychology in economics laid out
by the likes of Mitchell, Clark, and Dickinson shows that the import of ideas and tropes
from psychology happened in different genres of economic and financial writing, but,
more importantly, that the uptake of such ideas did not happen exclusively on the
margins of the economic mainstream. That neoclassical economists Fisher, Taussig, and
Fetter (Tobin, 1985) were not dismissive, but rather compelled to discuss collective
psychology in relation to economic action, is indicative of how popular and influential
these psychological theories were at the beginning of the 20th century. However, our
analysis also demonstrates that these seductive yet empirically under-substantiated ideas
increasingly came under scrutiny in the late 1910s and 1920s, as new and seemingly
more scientific psychological theories such as behaviourism gained traction. This led to
doubts, also among proponents of the psychologization of economics, about whether the
imported ideas from psychology were reliable and thus the best available alternatives to
the hedonistic psychology underpinning economic theory.
On the one hand, the early 20th-century efforts to infuse realism into economics
reveal important antecedents of current attempts to refine the psychological foundations
of economics, and thereby increase our understanding of the historical context of beha-
vioural economics. By historical example, they reinforce the conviction that economics
need not follow a path of increased mathematical specialization, but may instead draw
inspiration from other social sciences. On the other hand, the psychology-keen econo-
mists’ inability to articulate a sufficiently unitary research programme (Coats, 1976) and
the increasing historical doubt about what constituted ‘good’ psychology show how
difficult it is to challenge, let alone radically change, orthodox economics. Equally, the
extra-disciplinary import of ideas today requires ongoing critical engagement with
developments in the discipline from which ideas are imported. Otherwise, behavioural
economists run the risk of criticizing prevailing theories of economics from an extra-
disciplinary position on human behaviour that may not be the best that the extant
discipline of psychology has to offer.
Arguably, therefore, the failure of early 20th-century attempts to replace the alleged
‘bad psychology’ in economics with seemingly ‘better psychology’ is also a cautionary
tale of how not to get overly committed to or uncritical about your conviction about what
constitutes ‘good psychology’. We believe that this cautionary tale applies to beha-
vioural economics insofar as the ambition is to keep challenging the assumptions of
neoclassical economics and not, as Chetty (2015) pragmatically proposes, to be a set of
‘tools’ that help improve the empirical predictions of and policy decisions based on
neoclassical models.
Declaration of conflicting interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/
or publication of this article.
Funding
The authors received no financial support for the research, authorship, and/or publication of this
article.
ORCID iD
Kristian Bondo Hansen https://orcid.org/0000-0002-9536-6050
Notes
We are very grateful to the anonymous referees for their constructive criticism and insightful
comments on our article, and to the editor and editorial assistant of this journal for facilitating a
professional and smooth review process.
1. Gibson was convinced that crowd psychology played a significant yet unrecognized role in
financial markets. Established economists Fetter and Fisher also assigned importance to imita-
tion and crowd-following (Fisher, 1907: 333) and ‘the hypnotism of the crowd’ (Fetter, 1904:
353) in economic life. Drawing primarily on Keynes’ General Theory (1936), but also on
Fisher’s discussion of debt deflation in his Econometrica article ‘The Debt-Deflation Theory
of Great Depressions’ (1933), Minsky (2008[1986]: 192) has bought into the idea that markets
are often moved by collective psychology with his financial instability hypothesis. Though
these two sources of inspiration were published in the 1930s, their preoccupation with collec-
tive psychology in markets is reminiscent of early 20th-century psychology-informed ideas
about irrational causes of market movements. On Minsky’s account, ‘euphoria’ is one of the
psychology factors that moves markets, and the post-1950s normalization of ‘short-term financ-
ing of long-term positions’ is a central cause of the ‘euphoric economy’ (ibid.: 237). Minsky’s
work in the 1970s and 1980s on financial instability and euphoric economy can thus be consid-
ered a precursor to behavioural finance (e.g. Akerlof and Shiller, 2009), yet it is also in continua-
tion of some of the ideas that emerged during the early 20th-century psychologization of
economic thinking.
2. In his work on behavioural economics and business cycles, Kaish (1986) draws on some of the
same works from the history of economic thought as we do (specifically, Mitchell, Clark, and
Pigou). When discussing Pigou, Kaish makes a noteworthy comparison between the concept of
‘psychological interdependence’ and Tversky and Kahneman’s work on ‘cognitive simplifica-
tion’ (ibid.: 43–4). He also draws on Pigou’s compatriot Frederick Lavington’s The Trade Cycle
(1922) when discussing ‘cognitive dissonance’ (Kaish, 1986: 35–6). Lavington—whose work
on trade cycles was influenced by Marshall, Mitchell, and Pigou—made a similar argument
about the relationship between mental relationships (i.e. psychological interdependence) and
real economic relationships between actors in the business world. When discussing business
confidence, Lavington (1922: 30) pointed to the ‘interdependence among business firms’ as a
reason why confidence rose and fell via ‘simple contagion’. According to Lavington, the
consequence of this contagion, enabled by mental and economic interdependencies between
actors, was that rational judgement became ‘coloured’ by emotion (ibid.: 32).
3. Marshall (1890: 65) argued that the inflow of ideas from biology in 19th-century economics had
oriented the attention of economists toward ‘the pliability of human nature, and the way in
which the character of man affects and is affected by the prevalent methods of the production,
distribution and consumption of wealth’. Unlike Seligman, therefore, Marshall suggested that
the influence from extant disciplines was real and significant, and not just an opportunity to
make vague analogies without much substance. Almost concurrently with the re-emergence of
psychology in economic thinking in the 1970s and 1980s, biological metaphors found their way
back into the fringes of the economic mainstream (see Nelson and Winter, 1982). Marshall’s
argument about biology directing attention to the pliable human indicates the affinity between
the biologization and the succeeding psychologization of economic thinking. The resurgent
biological or evolutionary economics was heavily influenced by ‘old behavioral economics’,
more specifically Herbert Simon (Sent, 2004), and was interested mainly in behavioural issues
on the level of the ‘business firm operating in the market environment’ (Nelson and Winter,
1982: 4).
4. The perceived weaknesses of the psychological critique were exacerbated by the technical
successes of the burgeoning neoclassical camp: Hands (2010), for instance, has stressed the
role of the shift from a cardinal to an ordinal conception of utility in the 1930s and the resulting
Slutsky-Hicks-Allen indifference curve analysis as vital in this regard. As Robbins remarked of
this technical innovation, ‘It is difficult to overstress its importance. With one slash of Occam’s
razor it extrudes from economic analysis forever the last vestiges of psychological hedonism’
(Robbins, quoted in ibid.: 636). Equally, Shiller (1984: 458) has highlighted the role of the
advent of expected utility theory in 1950s as the final blow to the early strain of work on market
psychology.
5. The experimental and empirically driven approach of contemporary behavioural economics
seems to have provided a much firmer scientific basis for the critique of mainstream economics,
especially when compared to the heavily theorized crowd psychology that informed many early
20th-century economists and financial writers. Yet this obviously does not mean that the results
of the novel experimental approach are incontestable. The recent replication crisis in psychol-
ogy (e.g. Shrout and Rodgers, 2018) has cast some doubt on the credibility of experimental
approaches in psychology. More recently, the replication crisis also seems to have engulfed
economics (Ortmann, 2015), raising some of the same questions—about the credibility of
research and methodological rigour, but also about the validity of reproducibility as the over-
riding measure of quality in experimental research—that have been debated in psychology over
the last decade. These questions and debates are worth considering for experimental
psychology-reliant behavioural economists.
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Author biographies
Kristian Bondo Hansen is a postdoctoral researcher in the Department of Management, Society
and Communication at Copenhagen Business School. His research has been published in journals
including Science, Technology, & Human Values, Economy and Society, Journal of Cultural
Economy, Environment and Planning D: Society and Space, and Big Data & Society.
Thomas Presskorn-Thygesen is an assistant professor of philosophy in the Department of

Management, Politics and Philosophy at Copenhagen Business School. His research, published
in outlets such as Theory, Culture & Society, concentrates on the philosophy of science and the
history of the social sciences.

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Original Article

History of the Human Sciences

Kristian Bondo Hansen

The psychological moment in financial markets

The psychologization of economics

Driven by a desire to reformulate the underlying premises of economic theory,

A pervading spirit of optimism fills most businessmen in times of activity, as a spirit of

Pushback against the psychology fad

much as a means to strengthen the usefulness of economics in practice. What needed

A more enthusiastic stance on the role of psychology in economics was presented by

Discussion: A revival of past concerns?

Injecting the economics profession with healthy portions of psychology

analyses of non-economic phenomena such as racial discrimination, crime, and family

A psychological inflection of the critique of economic man

Financial markets as the testing ground for psychology?

Mirowski (2013: 256–63), the rising popularity of behavioural economics is no excep-

Past failure and present success

Declaration of conflicting interests

McDougall, W. (1916[1908]) An Introduction to Social Psychology. Boston, MA: John W. Luce.

Thomas Presskorn-Thygesen is an assistant professor of philosophy in the Department of

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