Lessons from Japan: An Interview with Economist Charles Horioka: Charles Horioka Is a Behavioral Economist at the Institute of Social and Economic Research at Osaka University, a Leading Institute on Behavioral Economics, or the Study of Economics as It Relates to Various Aspects of Human Behavior

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What are your general thoughts on the current crisis?

I agree with the standard interpretation that high-risk mortgages and new financial derivatives within the US created the initial impetus for the crisis. And while it is difficult to blame one specific individual, a certain degree of blame falls on the US government for neglecting to regulate those new financial products and ignoring unethical and irresponsible conduct within the private sphere.

Do you believe that the market economy shares some blame as well?

Yes. People--market actors--always attempt to hoard as much as possible. The government needs to regulate this behavior to a certain extent.

Many people believe that the models on which mainstream economics are based have failed or are inadequate, and so they now think that it is necessary to take human behavior into account--but human behavior is far from predictable and rational. Is that where behavioral economics comes in?

I think that more and more phenomena cannot be explained by traditional and therefore simple economic models. There is subsequently an increasing need for behavioral economics.

Behavioral economists work with terms like "mass behavior," which refers collective human action. Are there any the terms from behavioral economics which help explain the cause of the current economic crisis?

Yes. "Mass behavior" is one--you can see it in terms of mass consumption and the growth of the United State's bloated credit society. Another example is "asymmetric information"--which describes a scenario in which one party has more or better information than the other. Buyers who were subject to asymmetric information were not told the whole truth when they invested in certain derivatives.

Behavioral economics also employ the term "moral hazard" to describe the phenomenon that when a certain group feels safe from risk or consequence, it is more likely to engage in risky behavior that it would have otherwise avoided. Until now, "moral hazard" has mainly been used as an academic term, but the current crisis has mainstreamed it.

Do you fear that in the future, excessive risk-taking will not be punished by bankruptcy but "rewarded" by government bailouts?

Yes, as long as people know that the government will save them, they will keep on making high-risk decisions. In my opinion, governments should emphasize that the current bailouts are an exception, and will not be repeated in the future. Of course, governments must also increase regulation in order to deter another crisis from occurring. Greater regulation will prevent companies who trade with bonds and other financial institutions from both engaging in excessively risky behavior and from misleading their clients with asymmetric information.

Do you think that we need more regulation, or rather "only" better regulation? Was the amount of regulation sufficient before the crisis?

No, it was not sufficient. An increasing number of financial products were created which were not covered under current regulation. But while we need new regulation, it should not be excessive. We should not repress the market.

How do the Japanese view the current economic crisis?

Most people here blame the USA. They believe that what happens in the United States has a great effect on Japan and the rest of the world. They also blame the US because it is a key partner in their export market. The public is highly pessimistic: companies have reduced their staff , and the GDP is plummeting. Society's pessimism in turn materializes into demands for our government to deal with the crisis and kick-start the economy again.

Do the Japanese people believe that some blame for the crisis rests in the West's general way of life? Japanese society is less individualistic after all.

Yes, I think yes. The differences between the West and Japan are significant. …