Abstract

Many surveys on behavioral economics start with a reference to Herbert Simon. Certainly Simon has been the single most important innovator in the field of behavioral economics, the approach to economics that takes into account the cognitive limitations (i.e., the bounded rationality) of human decision makers. However, monetary economics has obviously not been one of Simon’s priorities. ¹ This has very likely to do with the fact that monetary economics has always been a rather pragmatic mixture of deductive theorizing, on one hand, and rationalizations of empirical regularities (such as the relation between money growth and inflation), on the other (see Friedman and Hahn 1990). Although rarely explicitly tied to bounds of rationality, economic science traditionally links the raison d’être of money and the effects of money to various frictions in economic life, such as uncertainty and transaction costs. As a theorist who gave economic agents’ judgment errors an important role in his analysis of monetary issues, Irving Fisher must be seen as one of the first behavioral monetary economists (see Fisher 1928; Thaler 1997).