Behavioural methods for macroeconomics: Modelling investment

Macroeconomics has been relatively slow to embed insights from behavioural economics, partly because of the challenges associated with building an aggregate macroeconomic model from microeconomic foundations. Aggregation is especially problematic for behavioural macroeconomics because of the complexities which characterise behavioural economics more generally, including numerous and complex barriers to rational decision-making in the context of risk and uncertainty. Commonly, analytically rigorous macroeconomic models are forced to rely on simplified behavioural assumptions which are inconsistent with key insights from behavioural economics. In the context of these challenges, this chapter analyses some of the pitfalls associated with aggregation in macroeconomic models generally and in behavioural macroeconomic investment models in particular, and explores implications for building behavioural macroeconomic models founded on more realistic assumptions about how people think, decide and interact.