Wednesday, July 21, 2010

Aggregation Mechanics

From micro level decision making to macro level analysis there is a huge gap, which seems to go completely ignored by policy makers.

For instance, The Economist is considering the problems with too low interest rates, pretty common these days, as a compensation for tighter fiscal conditions. The issue of risk taking is raised something around these lines: "Cutting interest rates is supposed [...] to persuade businesses and savers to stop clinging to the safety of cash and instead make riskier investments that help economic growth. It is tricky to judge when this necessary check on undue caution turns into an incitement to recklessness."

Well I for one believe it is an issue of aggregation structure we face right here: the whole of business decision makers is not homogeneous and there is a spectrum of risk perception and tolerance, not to mention information availability and distribution of investment opportunities (they are quite different from a chemical industry to a car rental business, to keep it simple).

I think some work is due on the mechanics of aggregation of autonomous actors if policy making is to make more sense.

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