Are You With the Dumb Money or the Smart Money?

by James Heaton and Nicholas Polson

Bloomberg
June 14, 2012

Market observers often divide investors into “smart money” and “dumb money.” Our research shows there may be a way to figure out which group you are in.

The first place to look is prices, which reflect the interaction of smart money and dumb money and may contain valuable information about the proportion of either in the market. In other words, the price knows which category we belong to. The trick is to extract that information.

Consider a simple example of a simple market: betting on a horse race. Say there are two horses, A and B. And there are two types of bettors, smart money and dumb money. We place our bet on horse A because we think it is more likely to win. It turns out that 75 percent of the money is on horse B, and 25 percent is on A. These “prices” can help us learn whether we are more likely to be the dumb money or the smart money.

We want to compare the probability that we are the dumb money given the market price to the probability that we are the smart money given the market price. We can write this as P(dumb|market)/P(smart|market). If this ratio is greater than one, then it is more likely that we are the dumb money. Less than one, we are more likely to be the smart money.

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What Traders’ Testosterone Tells Us About Markets

by Mark Buchanan

Bloomberg
June 11, 2012

An unusual study of traders’ spit may offer a taste of the future in how we understand what drives markets -- and why they aren’t as stable and efficient as we might hope.

Several years ago, two neuroscientists undertook an experiment on the trading floor of a major investment bank in London. Over eight consecutive business days, at both 11 a.m. and 4 p.m., John Coates and Joe Herbert took samples of saliva from the mouths of 17 traders. With these samples, taken before and after the bulk of the day’s trading activity, they measured the rising and falling levels of a number of steroid hormones, including testosterone, adrenaline and cortisol.

The data revealed physiological changes not evident to the eye. To begin with, Coates and Herbert found that when traders did well and made money, they didn’t do it solely through cleverness and cerebral dexterity. Guts also played a role, although “testicles” would actually be more accurate. Traders performed better on days in which they registered higher morning levels of the hormone testosterone, which is mostly produced in the testes.

This isn’t actually surprising. After all, testosterone increases the level of hemoglobin in the blood, enabling it to carry more oxygen. Experiments in both animals and humans show that it boosts searching persistence, fearlessness and appetite for risk, qualities that obviously help any trader exploit real opportunities in the market. Athletes preparing for a competition produce more testosterone, which helps bring them to an optimal state of readiness for intense action.

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Happyism: The creepy new economics of pleasure

by Deirdre N. McCloskey

The New Republic
June 8, 2012

In the first panel of a Peanuts strip—the preceding ones had been about Lucy scolding her little brother, Linus, for not being a good brother—Lucy asks what Linus is offering her: “What’s this?” “A dish of ice cream.” Then Linus explains: “I brought it to you in order that your stay here on Earth might be more pleasant.” She smiles genially, and uncharacteristically: “Well, thank you ... You’re a good brother.” In the final panel, Linus walks away smiling: “Happiness is a compliment from your sister!”

That about sums it up. Pleasure is to be achieved by things like dishes of ice cream. Psychologists have shown rigorously that people are most pleasured exactly as you might have thought if you are a human being: when eating, say, a heaped pastrami on rye at Manny’s Deli off Roosevelt Road in what was once the garment district of Chicago. Happiness, by contrast, is more complicated, though it can also be pursued at Manny’s. It is the pleasure of kosher comfort food, down to the diminishing marginal utility of that last bite—but it is also expressing one’s urban identity and Chicago-ism, even at the costs of the considerable inconvenience in getting to Manny’s and braving the insults of the countermen. It is introducing your friend, a naïve gentile, to the Jewish side of the City of the Big Shoulders, affirming thereby your philo-Semitism. It is participating in the American democracy of a 1950s cafeteria. It is facing, too, the cost of a little addition to the love handles. And it is a compliment from your sister. Pleasure is a brain wave right now. Happiness is a good story of your life. The Greek word for happiness is “eudaimonia,” which means literally “having a good guiding angel,” like Clarence the angel in It’s a Wonderful Life. The schoolbook summary of the Greek idea in Aristotle says that such happiness is “the exercise of vital powers along lines of excellence in a life affording them scope.”

But nowadays there is a new science of happiness, and some of the psychologists and almost all the economists involved want you to think that happiness is just pleasure. Further, they propose to calculate your happiness, by asking you where you fall on a three-point scale, 1-2-3: “not too happy,” “pretty happy,” “very happy.” They then want to move to technical manipulations of the numbers, showing that you, too, can be “happy,” if you will but let the psychologists and the economists show you (and the government) how.

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The Moral Diet

by David Brooks

New York Times
June 7, 2012

In the 1970s, the gift shop at the Kennedy Center for the Performing Arts was an informal affair. It was staffed by about 300 mostly elderly volunteers, and there were cash drawers instead of registers. The problem was that of the shop’s $400,000 in annual revenue, somebody was stealing $150,000.

Dan Weiss, the gift shop manager at the time who is now the president of Lafayette College, investigated. He discovered that there wasn’t one big embezzler. Bunches of people were stealing. Dozens of elderly art lovers were each pilfering a little.

That’s one of the themes of Dan Ariely’s new book The (Honest) Truth About Dishonesty. Nearly everybody cheats, but usually only a little. Ariely and his colleagues gave thousands of people 20 number problems. When they tackled the problems and handed in the answer sheet, people got an average of four correct responses. When they tackled the problems, shredded their answers sheets and self-reported the scores, they told the researches they got six correct responses. They cheated a little, but not a lot.

That’s because most of us think we are pretty wonderful. We can cheat a little and still keep that “good person” identity. Most people won’t cheat so much that it makes it harder to feel good about themselves.

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Capitalism

by Richard A. Posner

The Becker-Posner Blog
June 3, 2012

I agree wholeheartedly with Becker that capitalism is a superior economic system to any other that has been tried, the others being mainly socialism and communism. The best evidence for this is that out of the 194 countries in the world, I can think of only two that are not capitalist—Cuba, which however is moving slowly in the capitalist direction, and North Korea, the greatest economic failure on the planet.

But this statistic indicates that capitalism is a necessary condition of economic success rather than a sufficient condition. Many of the world’s countries, though capitalist, are basket cases—not as badly off as North Korea, but plenty badly off. Per capita incomes in rich capitalist countries such as the United States, Canada, Germany, Britain, and Japan greatly exceed per capita incomes in poor capitalist countries, which are the majority of countries.

So the big question is, given capitalism, what else does a country need in order to prosper? We know that it doesn’t need abundant natural resources or a large population. But it needs a legal and political system that protects property rights, allows a large degree of economic freedom, minimizes corruption, controls harmful externalities (like pollution) and subsidizes beneficial ones (like education), distinguishes between equality of opportunity (which it promotes) and equality of incomes (which it promotes only to the extent of combating poverty), welcomes and assimilates skilled and wealthy immigrants, and (related to protecting economic freedom) avoids public ownership or control of economic enterprises. To create and maintain such a legal and political system a country also requires a culture of respect for business success, of competition and risk-taking, and of consumerism—since, as Keynes argued, consumption drives production.

Such a combination is difficult to achieve; no nation has achieved it. The variance across nations in culture and in institutional structure is very great, and determines the relative economic success of the different nations.

Since there is so much variance across capitalist countries—so much that can go wrong with a capitalist system because of the complex institutional structure and social culture that capitalism requires if it is to be maximally successful in contributing to social welfare—we need to avoid complacency. Complacency was a major factor in the surprising economic collapse that began in September 2008, a collapse the consequences of which are still very much with us.

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Profits, Competition, and Social Welfare

by Gary S. Becker

The Becker-Posner Blog
June 3, 2012

The financial crisis and the resulting recession have led to a strong reaction in many countries against the profit motive and private enterprise. Left of center political parties are gaining office and power in France, Mexico, Greece, and elsewhere with the promise of much greater regulation of banks and other businesses, renationalizing some companies, and constraining profits through higher taxes and other ways.

It is easy to sympathize with the hostility to the many banks that behaved (in retrospect) so foolishly in ways that damaged everyone else as they took on excessive risk in their quests for greater profits. One can understand also the general reaction against capitalism and “market failures” since commercial and investment banks were in the past a leading example of capitalism at work. Yet anyone concerned about the welfare of the poor and middle classes should resist the temptation to attack competitive private enterprise and capitalism- monopoly or crony capitalism should be deplored. This is only partly because “government failure” also contributed in an important way to the financial crisis as regulators did not rein in the asset explosion of banks and households. Indeed, regulators often encouraged lending to lower income families to buy houses with low down payments, large mortgages and ballooning interest payments.

The main reason to be concerned about the attacks on competitive capitalism is that it has delivered during the past 150 years so much to all strata’s of society, including the poor. I will try to demonstrate this not with a general analysis, but with several rather impressive examples.

China in 1980 was among the poorest countries in the world. It had just gone through the Cultural Revolution and the Great Leap Forward that contributed to the deaths of tens of millions of rural and other Chinese. In desperation, a few farsighted Chinese leaders decided to allow private enterprise and capitalism to gain a toehold in its agricultural sector. To the great surprise of many Chinese political leaders, the result was an explosion in farm output, even though farmers had only tiny plots of land to work with. Seeing the success of the liberalization of farm output, China extended the incentive system to industry by encouraging the growth of private enterprises in some sectors. Again, the results far exceeded expectations as these private companies, many owned by Taiwanese and Hong Kong residents, were not only far more efficient than state owned enterprises, but they also became the leaders in the rapid expansion of exports from China to the US and other countries.

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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.

Listen to the Interview

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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Michael Shermer: Baloney Detection Kit

Presented by The Richard Dawkins Foundation for Reason and Science
June 2009

With a sea of information coming at us from all directions, how do we sift out the misinformation and bogus claims, and get to the truth? Michael Shermer of Skeptic Magazine lays out a "Baloney Detection Kit," ten questions we should ask when encountering a claim.

The 10 Questions:
1. How reliable is the source of the claim?
2.Does the source make similar claims?
3. Have the claims been verified by somebody else?
4. Does this fit with the way the world works?
5. Has anyone tried to disprove the claim?
6. Where does the preponderance of evidence point?
7. Is the claimant playing by the rules of science?
8. Is the claimant providing positive evidence?
9. Does the new theory account for as many phenomena as the old theory?
10. Are personal beliefs driving the claim?

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Produced by The Richard Dawkins Foundation and Michael Shermer
Directed by Josh Timonen
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How To Be Creative

by Jonah Lehrer

Wall Street Journal
March 12, 2012

Creativity can seem like magic. We look at people like Steve Jobs and Bob Dylan, and we conclude that they must possess supernatural powers denied to mere mortals like us, gifts that allow them to imagine what has never existed before. They're "creative types." We're not.

But creativity is not magic, and there's no such thing as a creative type. Creativity is not a trait that we inherit in our genes or a blessing bestowed by the angels. It's a skill. Anyone can learn to be creative and to get better at it. New research is shedding light on what allows people to develop world-changing products and to solve the toughest problems. A surprisingly concrete set of lessons has emerged about what creativity is and how to spark it in ourselves and our work.

The science of creativity is relatively new. Until the Enlightenment, acts of imagination were always equated with higher powers. Being creative meant channeling the muses, giving voice to the gods. ("Inspiration" literally means "breathed upon.") Even in modern times, scientists have paid little attention to the sources of creativity.

But over the past decade, that has begun to change. Imagination was once thought to be a single thing, separate from other kinds of cognition. The latest research suggests that this assumption is false. It turns out that we use "creativity" as a catchall term for a variety of cognitive tools, each of which applies to particular sorts of problems and is coaxed to action in a particular way.

Does the challenge that we're facing require a moment of insight, a sudden leap in consciousness? Or can it be solved gradually, one piece at a time? The answer often determines whether we should drink a beer to relax or hop ourselves up on Red Bull, whether we take a long shower or stay late at the office.

The new research also suggests how best to approach the thorniest problems. We tend to assume that experts are the creative geniuses in their own fields. But big breakthroughs often depend on the naive daring of outsiders. For prompting creativity, few things are as important as time devoted to cross-pollination with fields outside our areas of expertise.

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When Truisms Are True

by Suntae Kim, Evan Polman and Jeffrey Sanchez-Burks

New York Times
February 25, 2012

What ignites the engine of creativity? A popular metaphor in American business urges you to think “outside the box.” Folk wisdom advises that problem-solving is helped by thinking about something “on the one hand” and then “on the other hand.”

Is there any psychological truth to such metaphors for better thinking? Our research suggests that the answer is yes. When people literally — that is, physically — embody these metaphors, they generate more creative ideas for solving problems.

Recent advances in understanding what psychologists call “embodied cognition” indicate a surprisingly direct link between mind and body. It turns out that people draw on their bodily experiences in constructing their social reality. Studies show, for example, that someone holding a warm cup of coffee tends to perceive a stranger as having a “warmer” personality. Likewise when holding something heavy, people see things as more serious and important — more “weighty.”

However, until recently it was not known whether bodily experiences could help in generating new ideas and solutions to problems. Our research, which will be published soon in the journal Psychological Science, discovered that it can.

For example, we asked 102 undergraduates at New York University to complete a task designed to measure innovative thinking. The task required them to generate a word (“tape,” for example) that related to each of three presented clue words (“measure,” “worm” and “video”). Some students were randomly assigned to do this while sitting inside a 125-cubic-foot box that we made of plastic pipe and cardboard. The rest got to sit and think outside (and next to) the box.

During the task we tracked the number of correct responses suggested by the students. We found that those thinking outside the box were significantly more creative: compared with those thinking inside the box, they came up with over 20 percent more creative solutions.

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Shaping risk preferences across time

by Alison Booth, Lina Cardona Sosa and Patrick Nolen

Vox
February 20, 2012

Some blame women’s under-representation in high-level jobs on differences between the sexes in risk aversion and competition. But are these differences in behaviour hardwired or learned? This column describes a study that tackles this thorny question with a controlled experiment in single-sex and mixed classrooms in a British university. Women are found to become far less nervous about uncertainty over time with the men out of the room.

The majority of experimental studies investigating gender differences in risky choices find that women are less willing to take risks than men. This research is summarised in Eckel and Grossman (2008) and Croson and Gneezy (2009). However, these experimental studies investigating gender differences in risky choices typically do so only at a single point in time.

Why might there be gender differences?

Only recently have economists begun to explore why women and men might have different risk preferences. Broadly speaking, those differences may be due to either nurture, nature, or some combination of the two. For instance, boys are pushed to take risks when participating in risky or competitive sports while girls are often encouraged to remain cautious. Thus, the riskier choices made by males could be due to the nurturing received from parents or peers. Likewise, the disinclination of women to take risks could be the result of parental or peer pressure not to do so.

In recent research (Booth and Nolen 2012), we present a recent experimental study exploring why girls and boys might have different risk preferences. Using adolescent subjects from two distinct environments or ‘cultures’, we examine the effect on risk preferences of two types of environmental influences – randomly assigned experimental peer-groups and educational environment (single-sex or coeducational). The experimental subjects were UK students in years 10 and 11 who were attending either single-sex or coeducational state-funded high schools. We find that the gender composition of the experimental group, as well as the gender mix of the school the student attended, affected decisions on whether or not to enter a real-stakes lottery. But our experiment was conducted at one point in time, and did not track changes over time.

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