The Fairness Trap

by James Surowiecki

New Yorker
June 4, 2012

With Europe’s economic woes dominating the headlines once more, it’s hard not to think of Yogi Berra’s dictum “It’s déjà vu all over again.” As usual, the turmoil centers on Greece, which is in its fifth year of recession and struggling beneath a colossal debt load. This year, in exchange for drastic austerity measures, Greece’s government agreed to an aid package (its second) with the European Union and the International Monetary Fund, totalling $174 billion. But three weeks ago furious Greek voters tossed the ruling parties out of office; attempts to form a coalition government failed, and new elections are scheduled for next month. Now Greek politicians are talking tough about renegotiating, but the E.U., led by Germany, which is the largest contributor to the bailout, says that there will be no more money for Greece if it doesn’t live up to its promises. So policymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro.

This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy, which seem to be the next countries in line to default. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay.

Rationally, then, this standoff should end with a compromise—relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

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Why We Lie

by Dan Ariely

Wall Street Journal
May 26, 2012

Not too long ago, one of my students, named Peter, told me a story that captures rather nicely our society's misguided efforts to deal with dishonesty. One day, Peter locked himself out of his house. After a spell, the locksmith pulled up in his truck and picked the lock in about a minute.

"I was amazed at how quickly and easily this guy was able to open the door," Peter said. The locksmith told him that locks are on doors only to keep honest people honest. One percent of people will always be honest and never steal. Another 1% will always be dishonest and always try to pick your lock and steal your television; locks won't do much to protect you from the hardened thieves, who can get into your house if they really want to. The purpose of locks, the locksmith said, is to protect you from the 98% of mostly honest people who might be tempted to try your door if it had no lock.

We tend to think that people are either honest or dishonest. In the age of Bernie Madoff and Mark McGwire, James Frey and John Edwards, we like to believe that most people are virtuous, but a few bad apples spoil the bunch. If this were true, society might easily remedy its problems with cheating and dishonesty. Human-resources departments could screen for cheaters when hiring. Dishonest financial advisers or building contractors could be flagged quickly and shunned. Cheaters in sports and other arenas would be easy to spot before they rose to the tops of their professions.

But that is not how dishonesty works. Over the past decade or so, my colleagues and I have taken a close look at why people cheat, using a variety of experiments and looking at a panoply of unique data sets—from insurance claims to employment histories to the treatment records of doctors and dentists. What we have found, in a nutshell: Everybody has the capacity to be dishonest, and almost everybody cheats—just by a little. Except for a few outliers at the top and bottom, the behavior of almost everyone is driven by two opposing motivations. On the one hand, we want to benefit from cheating and get as much money and glory as possible; on the other hand, we want to view ourselves as honest, honorable people. Sadly, it is this kind of small-scale mass cheating, not the high-profile cases, that is most corrosive to society.

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Interview with Daniel Kahneman: Debunking the Myth of Intuition

Spiegel
May 25, 2012

Can doctors and investment advisers be trusted? And do we live more for experiences or memories? In a SPIEGEL interview, Nobel Prize-winning psychologist Daniel Kahneman discusses the innate weakness of human thought, deceptive memories and the misleading power of intuition.

SPIEGEL: Professor Kahneman, you've spent your entire professional life studying the snares in which human thought can become entrapped. For example, in your book, you describe how easy it is to increase a person's willingness to contribute money to the coffee fund.

Kahneman: You just have to make sure that the right picture is hanging above the cash box. If a pair of eyes is looking back at them from the wall, people will contribute twice as much as they do when the picture shows flowers. People who feel observed behave more morally.

SPIEGEL: And this also works if we don't even pay attention to the photo on the wall?

Kahneman: All the more if you don't notice it. The phenomenon is called "priming": We aren't aware that we have perceived a certain stimulus, but it can be proved that we still respond to it.

SPIEGEL: People in advertising will like that.

Kahneman: Of course, that's where priming is in widespread use. An attractive woman in an ad automatically directs your attention to the name of the product. When you encounter it in the shop later on, it will already seem familiar to you.

SPIEGEL: Isn't erotic association much more important?

Kahneman: Of course, there are other mechanisms of advertising that also act on the subconscious. But the main effect is simply that a name we see in a shop looks familiar -- because, when it looks familiar, it looks good. There is a very good evolutionary explanation for that: If I encounter something many times, and it hasn't eaten me yet, then I'm safe. Familiarity is a safety signal. That's why we like what we know.

SPIEGEL: Can these insights also be applied to politics?

Kahneman: Of course. For example, one can show that anything that reminds people of their mortality makes them more obedient.

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Study Finds Germans Incapable of Enjoying Life (Defective Joy Gene)

Spiegel
May 24, 2012

With low unemployment and solid economic growth, things are going better than ever for Germans. But a new study shows they're practically incapable of enjoying it. Not only do they find it difficult to cut loose and experience pleasure, but their "joy gene" is broken, researchers say.

At a certain point, Sven just lost it. Other members of the discussion group had gone into great detail about how they spent their after-work hours with their companions and enjoyed the end of the day. "That's great for you!" Sven fired back to one speaker. "But first one needs the chance! My boss often plops something on my desk right before it's time to clock out, and when I arrive home late, my wife is pissed off because she was forced to take care of our kid and the housekeeping by herself." By that point, he adds, all thoughts of a relaxing evening have vanished.

If anything can comfort Sven, it's the fact that he isn't alone with this problem. The 36-year-old took part in a study released this week by Rheingold, a market-research and consultancy institute based in Cologne, which found that 46 percent of Germans say they are increasingly unable to enjoy anything due to the stress of everyday life and the feeling of being constantly reachable. The difficulty was even more pronounced among the study's younger participants, 55 percent of whom claimed to feel they have lost their ability to feel good.

Whether it's with food, alcohol, vacation or relaxing -- Germans apparently don't have the leisure to enjoy things. In fact, they can't even let go when they're having sex. According to the researchers, the bottom line is: "Our joy gene is increasingly defective -- we've forgotten how to enjoy ourselves."

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The war of the sexes

Paul Seabright interviewed by Viv Davies

Vox
May 18, 2012

Paul Seabright talks to Viv Davies about his recent book titled The War of the Sexes: how conflict and cooperation have shaped men and women from pre-history to the present. Seabright explains how game theory can shed light on the complex dynamics that create both conflict and cooperation between the sexes. They discuss the connection between the rise of modern capitalism and the rise of feminism, monogamy and marriage and whether there will ever be sexual equality.

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What Makes Countries Rich or Poor?

by Jared Diamond

New York Review of Books
June 7, 2012

The fence that divides the city of Nogales is part of a natural experiment in organizing human societies. North of the fence lies the American city of Nogales, Arizona; south of it lies the Mexican city of Nogales, Sonora. On the American side, average income and life expectancy are higher, crime and corruption are lower, health and roads are better, and elections are more democratic. Yet the geographic environment is identical on both sides of the fence, and the ethnic makeup of the human population is similar. The reasons for those differences between the two Nogaleses are the differences between the current political and economic institutions of the US and Mexico.

This example, which introduces Why Nations Fail by Daron Acemoglu and James Robinson, illustrates on a small scale the book’s subject.* Power, prosperity, and poverty vary greatly around the world. Norway, the world’s richest country, is 496 times richer than Burundi, the world’s poorest country (average per capita incomes $84,290 and $170 respectively, according to the World Bank). Why? That’s a central question of economics.

Different economists have different views about the relative importance of the conditions and factors that make countries richer or poorer. The factors they most discuss are so-called “good institutions,” which may be defined as laws and practices that motivate people to work hard, become economically productive, and thereby enrich both themselves and their countries. They are the basis of the Nogales anecdote, and the focus of Why Nations Fail. In the authors’ words:

The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple: it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora.

Among the good economic institutions that motivate people to become productive are the protection of their private property rights, predictable enforcement of their contracts, opportunities to invest and retain control of their money, control of inflation, and open exchange of currency. For instance, people are motivated to work hard if they have opportunities to invest their earnings profitably, but not if they have few such opportunities or if their earnings or profits are likely to be confiscated.

The strongest evidence supporting this view comes from natural experiments involving borders: i.e., division of a uniform environment and initially uniform human population by a political border that eventually comes to separate different economic and political institutions, which create differences in wealth. Besides Nogales, examples include the contrasts between North and South Korea and between the former East and West Germany. Many or most economists, including Acemoglu and Robinson, generalize from these examples of bordering countries and deduce that good institutions also explain the differences in wealth between nations that aren’t neighbors and that differ greatly in their geographic environments and human populations.

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Goldman-Bred Neuroscientist Tracks Testosterone Trading

Joan Coates

by James Pressley

Bloomberg
May 14, 2012

As a Wall Street trader named Scott watched the mortgage market crater in late 2007, a switch buried deep in his brain flipped.

What happened next is anatomized, tick by clinical tick, in John Coates’s unsettling book, The Hour Between Dog and Wolf.

Scott’s heart rate sped up, to pump extra blood to his arms and thighs, Coates writes. His pupils dilated, to absorb more light. He began to sweat, his breathing accelerated and he got a hit of adrenalin. Then, as his losses surged to $24 million, his bowels liquefied.

Though Scott is a fictional representation, his symptoms are all too real, judging from the observations of Coates, who spent 12 years trading derivatives for Goldman Sachs Group Inc. (GS), Merrill Lynch & Co. and Deutsche Bank AG. (DBK)

“As losses mount on the trading floor, one observes anxious traders marching briskly to the toilets, the men’s room starting to exude the fear and stench of a slaughterhouse,” he writes.

If this book isn’t on Jamie Dimon’s reading list, it should be following the $2 billion trading loss at JPMorgan Chase & Co. (JPM)

The biological side of financial markets struck Coates during the dot-com bubble in the 1990s, as he watched normally prudent tech-stock traders become overconfident, reckless and euphoric. At the time, he had become fascinated with breakthroughs in neuroscience, notably research into how hormones affect the brain, influencing how we think and behave.

Could it be that testosterone was impairing the judgment of traders, making them feel infallible and propelling markets to unsustainable heights? Then, as tech stocks crashed, were traders overwhelmed by a stress hormone, cortisol?

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Ψήφος τιμωρίας, επιβράβευσης και προοπτικής

του Γιώργου Tσεμπελή

Καθημερινή
13 Μαΐου 2012

Απ’ ό,τι φαίνεται, οι εκλογές που μερικοί ζητούσαν σαν τη μόνη δυνατή και καθαρή λύση, δεν απέδωσαν ούτε υποψία λύσης στα πιεστικά προβλήματα της χώρας. Κόμματα που δεν θέλουν την εξουσία εμφανίστηκαν στο Κοινοβούλιο, εκείνα που είχαν την εξουσία την έχασαν, και εκείνα που δήλωναν ότι την ζητούσαν και υπόσχονταν να μην επιστρέψουν τη διερευνητική εντολή, το ξανασκέφτηκαν. Φαίνεται λοιπόν ότι θα βάλουμε ξανά πλώρη για καινούργιες εκλογές σύντομα αν όχι αμέσως. Θα υιοθετήσουμε, δηλαδή, σαν χώρα, τη στάση που οι περισσότεροι βρήκαμε απαράδεκτη όταν τη διακήρυσσε ο αρχηγός της Νέας Δημοκρατίας. Πλην όμως, δεν φαίνεται να υπάρχει άλλη λύση. Η λαϊκή εντολή είναι γόρδιος δεσμός, πάμε λοιπόν γι’ άλλα.

Σ’ αυτό το επιτακτικό και ατελείωτο εκλογικό κλίμα, καλό θα ήταν να λάβουμε υπ’ όψιν και τις αναλύσεις της πολιτικής επιστήμης περί ψήφου. Οι εκλογολόγοι, λοιπόν, διακρίνουν την ψήφο είτε ως επιλογή, είτε ως συνέπεια κοινωνικών παραμέτρων (φύλου, κοινωνικής τάξης, εισοδήματος κ. λπ.). Θα συζητήσω μόνο την ψήφο ως επιλογή, γιατί η άλλη προσέγγιση δεν μπορεί να εξηγήσει τις μεταβολές της κοινής γνώμης - οι οποίες είναι το πιο ενδιαφέρον και επίκαιρο θέμα.

Η ψήφος ως επιλογή διαχωρίζεται σε προοπτική (prospective) και αναδρομική (retrospective). Οι μετάφραση είναι δική μου, γιατί οι σπάνιες αναφορές στην ελληνική βιβλιογραφία είναι αδόκιμες. Οι πιο συνήθεις αναλύσεις αναφέρονται στην προοπτική ψήφου όπου ο/η ψηφοφόρος προσπαθεί να ελέγξει ποιο από τα υπάρχοντα κόμματα ή υποψηφίους είναι πιο κοντά στη δική του/της θέση. Για να γίνει αυτό ο/η ψηφοφόρος πρέπει να γνωρίζει τις θέσεις των κομμάτων, και να εξετάζει διάφορες πιθανότητες σε θέματα που μπορεί να ανακύψουν, καθώς και να αποδίδει διαφορετικό βάρος σε κάθε θέμα. Για παράδειγμα, αν ενδιαφέρομαι για τη μετανάστευση, πρέπει να μελετήσω ποια είναι η θέση των κομμάτων επί του θέματος, ενώ για τον πόλεμο στο Αφγανιστάν (για τον οποίο δεν ενδιαφέρομαι, και δεν πιστεύω ότι μπορεί να ανακύψει σαν ελληνικό θέμα) δεν με αφορούν οι θέσεις τους. Αφού, λοιπόν, συνυπολογίσω αυτά τα δεδομένα, θα καταλήξω στο ποιο είναι το πιο συγγενές σε μένα κόμμα και θα το ψηφίσω. Προφανώς αυτός ο τρόπος επιλογής απαιτεί πολλές πληροφορίες, και τη μεθοδική επεξεργασία τους. Από την άλλη, μου δίνει το καλύτερο δυνατό αποτέλεσμα (το πιο κοντινό στις προτιμήσεις μου).

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Our Gift for Good Stories Blinds Us to the Truth

by Reid Hastie

Bloomberg
May 10, 2012

As commentators, politicians and academics struggle to make sense of the recent financial crisis and its ramifications, many of their accounts seek to identify a root cause or the “beginning of the story.”

Theories abound: Former Federal Reserve Board Chairman Alan Greenspan’s “easy money” for banks; the blindness of the credit- rating companies; strategies that encouraged low-income Americans to own homes; the invention of high-risk investment instruments; high-leveraged borrowing; short-sighted executives; greedy investment bankers; lying real-estate dealers, and so on.

We know there was no single cause or event that set in motion the crisis and that the truth is complex and multicausal. So why do we keep seeking the easy answers? It may be that we are hard-wired to do so.

The human brain is designed to support two modes of thought: visual and narrative. These forms of thinking are universal across human societies throughout history, develop reliably early in individuals’ lives, and are associated with specialized regions of the brain. What isn’t universal or natural is the kind of highly structured cognitive processes that underlie logical and mathematical thinking -- the kinds of analysis that produce the most remarkable human cultural products, especially scientific achievements such as interplanetary travel, electronic devices and genetic engineering. They also allow the types of analysis needed to design effective economic policies and business strategies.

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Was Edvard Munch a One-Hit Wonder?

by Brian Palmer

Slate
May 3, 2012

An unidentified buyer purchased Edvard Munch’s The Scream for nearly $120 million at auction on Wednesday. Despite the phenomenal popularity of The Scream, it's likely that few people outside of Norway could name another Munch painting. Are there one-hit wonders in the world of fine art?

Yes. Plenty of painters have managed to capture the public’s attention with a single work of genius, while their other work remains relatively unknown. The best known to Americans is Grant Wood, who painted American Gothic, but Théodore Géricault (The Raft of the Medusa) and Antoine-Jean Gros (Bonaparte Visiting the Plague Victims of Jaffa) are also classic examples. These artists produced plenty of other work before and after creating their masterpieces, but none earned them much public notice or critical acclaim.

University of Chicago economist David Galenson has compiled a list of one-hit-wonder artists in recent history, based on the number of mentions their masterpieces have received in scholarly literature, compared to mentions of their lesser works. According to this approach, the sculptor and landscape artist Maya Lin might be the classic one-hit wonder. When she designed the Vietnam Veterans Memorial in Washington, D.C. while still a college student in 1981, her work was absolutely revolutionary. Before Lin, war memorials almost always featured statues of soldiers. (Think of the Iwo Jima Memorial.) Today, they almost never do. And yet, Maya Lin hasn’t produced anything else that's been deemed worthy of much talk in academic circles.

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