Recommended articles: Economics and Finance

Economics

1. This new economic model takes into account the fact you're irrational: One of the leading criticisms of economics is the field’s reliance on perfectly rational agents in many of its models. Read the assumptions behind a macroeconomic model and the rules under which households and businesses are presumed to make decisions. Chances are high that they will seem fanciful if not outright ridiculous. Of course, simplifying assumptions are always going to be needed to make models workable, but “perfect rationality” seems like a jump too far—not least because behavioral economics research shows how individuals very often fail to act in rational ways.

2. More replication in economics? About a year ago, I blogged on a paper that had tried to replicate results on 61 papers in economics and found that in 51% of the cases, they couldn’t get the same result.   In the meantime, someone brought to my attention a paper that takes a wider sample and also makes us think about what “replication” is, so I thought it would be worth looking at those results.

Finance

3. Improving the investment patterns of cyclical companies: Companies that invest smartly when times are bad typically outperform peers.

4. Strategic portfolio management: Divesting with a purpose. Tying portfolio decisions to a company’s distinctive capabilities can help identify which businesses to divest.