DOMINIC W. MASSARO, editor
University of California, Santa Cruz

Cognitive Psychology and Economics Courting Disaster

When Genius Failed: The Rise and Fall of Long-Term Capital Management
By Roger Lowenstein. New York: Random House, 2000. xxi + 264 pp. Cloth, $26.95.

The Economics of the Mind
By Salvatore Rizzello. Cheltenham, UK: Edward Elgar, 2000. xxi + 198 pp. Cloth, $80.

What do these two apparently different books have in common? And why should psychologists have any interest in them?

They have in common a serious interest in the practical application of cognitive psychology, specifically judgment and decision making, to matters related to economics. Lowenstein (a journalist who formerly wrote the "Heard on the Street" column for the Wall Street Journal) focuses on the spectacular rise and fall of the fortunes of a huge mutual fund. This boom and bust was brought about by the judgments and decisions about the behavior of the capital markets made by two Nobel prize winners in economics. Rizzello (a professor of economics at the University of Torino) has a much larger interest; he attempts to bring the recent research in cognitive psychology to bear on "The assumptions that are at the basis of economic theory" because, he says, "these must be consistent with the mechanisms that guide the workings of the human mind" (p. xv). In short, despite widely different backgrounds, both authors focus on the cognitive activity that is brought to bear on the field of economics; the first examines cognition in relation to predicting the behavior of the capital markets, the second conducts a broad overview of the relationship between the theories of cognitive psychology and economics.