Mental Models of Causal Structure in Economics and Psychology

Abstract

A burgeoning literature in economics studies how people form beliefs about the causal structures linking economic variables, and what happens when those beliefs are mistaken. We survey this research and connect it to a rich literature in cognitive science. After providing an accessible introduction to causal Directed Acyclic Graphs, the dominant modeling approach, we review theory and evidence addressing three nested questions: how individuals reason within a fully parameterized causal structure, how they estimate its parameters, and how they learn such structures to begin with. We then discuss methodological challenges and review applications in microeconomics, macroeconomics, political economy, and business.