Behavioral economics and statistical process control

The financial crisis of 2008 has highlighted the flaws of the rational assumptions made by macroeconomic models. Behavioral economics shows that human economic behavior consistently violates the economic rational assumptions. If the crisis was brought about through a Tragedy of the Commons of economically irrational behavior, then it is imperative to develop a method for monitoring this situation. Systems theory shows that behavior over time is representative of the underlying systems structure. Therefore, the system’s archetype of the Tragedy of the Commons generates a trend that could be monitored. This dissertation develops and validates the Self-Starting CUSUM control chart for Trends and a post-signal diagnosis Change Point Maximum Likelihood Estimator to determine the point in time when trend behavior shifts. The study conducts a human experiment to test the effectiveness of transparency and public communication as a solution to the Tragedy of the Commons. The statistical process tools developed show that the solution is very effective and immediately shifts the trend of consumer behavior. The study is successful in developing and demonstrating a method to control the Tragedy of the Commons, test possible alternative solutions, and uniting behavioral economics with macroeconomic trend monitoring.