Matthew Yglesias has an interesting post on the economic concept of the permanent income hypothesis. The idea is that people are forward looking and know that some kinds of government spending or tax cuts lead to future taxes, and so they don't spend the extra money they get, in anticipation of the future taxes.
I have always had a problem with this idea. With all of the talking about the irrational nature of the current crisis, why do we still believe people maximize their consumption over their life time, given expectations of future income?
So, here's my new idea of blending psychology and economics: tipping point expectations to explain economic crises.
Economic models assume that changes to beliefs happen exogenously. I want to develop a model of economic crises using endogenous belief based on psychological evidence. In the model, individuals hold beliefs about the world and update those beliefs based on random information that they receive. When the aggregate beliefs of other people reaches a certain threshold, or tipping point, all individuals immediately switch from their own current beliefs to the more common belief, no matter where their current beliefs are at.
Normally, any new idea I have was already done by someone 3 months ago (or, on the odd chance, 150 years ago). I can't find this anywhere. Anyone recognize the idea from someone else?
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