The Review of Austrian Economics, 17:4, 323–344, 2004.
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Extending Austrian Economics toward Psychology:
Rules in Loan Decisions
MARTTI VIHANTO martti.vihanto@tukkk.ﬁ
Docent of Austrian Economics, Turku School of Economics and Business Administration, Rehtorinpellonkatu 3,
20500 Turku, Finland
Abstract. The proponents of the Austrian school of economics, like economists in general, often take a negative
view of incorporating psychological assumptions in the main body of economic theory. Still they regularly make
use of such assumptions while applying the theory. The paper argues for a cautious use of the ﬁndings of psychology
from the very start of economic reasoning. The examples employed to illustrate the argument are from the loan
decision process of a banker.
KeyWords: decision-making, cognitive psychology, Austrian economics, bank lending
JEL classiﬁcation: D81, G21, B53.
Much to the annoyance of economists, the phenomena of the social order they have set
out to understand are immensely complex and only painfully apt to scientiﬁc explanation.
As one response to the difﬁculties they face in their work, economists have sought help
from the other sciences of human action, with attempts to extend the traditional modes of
their explanation toward new territories. An example of the expansive or even imperialist
endeavors is the adoption of ideas originally developed within psychology into the body of
Economists have not always been looking with favor the breaking in of psychological
inﬂuences, and many are still completely indifferent to the whole subject. The interest
in the economics of psychology seems to be growing, however, and for example Earl
(1990a:750) speaks in his survey paper of “a burgeoning of research integrating constructs
from psychology and economics.” The Austrian school of economics is an example of
a group of economists among whom the attitude toward psychology varies all the way
from straight hostility to true enthusiasm. It is somewhat ironical that of the two most
prominent Austrian scholars, Ludwig von Mises and F. A. Hayek, the former excludes
psychology strictly from the purview of economics (1962), and the latter sets forth an
elaborate psychological theory in one of his major works (1952a).
Earlier versions of the paper have been presented in the 4th Conference on Alternative Perspectives on Fi-
nance, Turku School of Economics and Business Administration, 7 August 1998, and the Workshop on Austrian
Economics and the Theory of the Firm, 17 August 1999, Copenhagen Business School.