What Cookies and Meth Have in Common

by Richard A. Friedman

New York Times
June 30, 2017

As a psychiatrist, I have yet to meet a patient who enjoys being addicted to drugs or compulsively overeating.

Why would anyone continue to use recreational drugs despite the medical consequences and social condemnation? What makes someone eat more and more in the face of poor health?

One answer is that modern humans have designed the perfect environment to create both of these addictions.

No one will be shocked to learn that stress makes people more likely to search for solace in drugs or food (it’s called “comfort food” for a reason). Yet the myth has persisted that addiction is either a moral failure or a hard-wired behavior — that addicts are either completely in command or literally out of their minds. Now we have a body of research that makes the connection between stress and addiction definitive. More surprising, it shows that we can change the path to addiction by changing our environment.

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The 25 best books I read in 2016 (by Prof. Aristides N. Hatzis)

Brexit – Britain is paying the price for a badly designed choice

by Richard Thaler

Financial Times
August 17, 2016

The Brexit vote has created an environment of great uncertainty for Britain, the EU and the global economy. No one can predict with any confidence what will happen for at least the next three years, but economists are in unusual agreement that if Brexit occurs it will be bad for the UK and bad for the EU.

How did we get here? One answer lies in “choice architecture”, the decision-making framework in which choices are made.

Consider the original charter of the EU. An important principle of good choice architecture is to anticipate how things might go wrong and take steps in advance to mitigate the damage. In the formation of the EU, this step did not seem to attract the attention it deserved. What will happen if a country breaks the rules but is financially unable to repay its debts? The ambiguity in this answer has been evident in the drama surrounding Greece and a possible Grexit.

Another question that appears to have been left unanswered originally is what would happen if a country wanted to leave, as the UK might wish to do. The EU resembled the Hotel California described in the Eagles song, where, “You can check out any time you like / But you can never leave”. Eventually this omission was addressed by the creation of the now famous Article 50 of the Lisbon treaty, adopted in 2009, which provides the rules for a country that wishes to secure a divorce from the EU. (It has to be said that few states have provisions for leaving a union to which they belong; the US fought its deadliest war over such an issue.)

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N. Christodoulakis, "An Economic Analysis of Conflicts With an Application to the Greek Civil War 1946-1949"

Springer, 2016

This book provides a quantitative framework for the analysis of conflict dynamics and for estimating the economic costs associated with civil wars. The author develops modified Lotka-Volterra equations to model conflict dynamics, to yield realistic representations of battle processes, and to allow us to assess prolonged conflict traps. The economic costs of civil wars are evaluated with the help of two alternative methods: Firstly, the author employs a production function to determine how the destruction of human and physical capital stocks undermines economic growth in the medium term. Secondly, he develops a synthetic control approach, where the cost is obtained as the divergence of actual economic activity from a hypothetical path in the absence of civil war. The difference between the two approaches gives an indication of the adverse externalities impinging upon the economy in the form of institutional destruction. By using detailed time-series regarding battle casualties, local socio-economic indicators, and capital stock destruction during the Greek Civil War (1946-1949), a full-scale application of the above framework is presented and discussed.

Is Eating a Cinnamon Roll Irrational?

by Tyler Kubik

Mises Review
January 14, 2015

The literature on market imperfection and market failure is voluminous, ever-growing, and filled with Nobel laureates. Identify a new source or instance of market “failure,” and you’re likely to win a Nobel Prize, or so it seems.

Phishing for Phools: The Economics of Manipulation and Deception, by Nobel Laureates George A. Akerlof and Robert J. Shiller, presents the thesis that we are overly confident in unregulated markets and that entrepreneurs accrue profit by preying on hapless consumers, exploiting “our weakness in knowing what we really want” through the market’s tendency “to spawn manipulation and deception.” Mavens of manipulation themselves, Akerlof and Shiller claim many, if not most people — especially the poor — are irrationally exuberant and are induced into buying things they really do not want. How do they know what the consumer really wants, one might ask? The answer is that anything the authors would not do themselves is ipso facto not in the best interest of the consumer. In fact, it is something that “no one could possibly want.”

We’ll Decide What’s Best For You

Their opening chapter is an exercise in convoluted methodology. In it, Akerlof and Shiller obliterate any distinction between adroit entrepreneurship/marketing and deception/fraud. The most fundamental problem, however, is that Akerlof and Shiller think that what people really want is what is (objectively) good for them. They refuse to recognize that even if consumers were aware of the costs of eating Cinnabon — their bête noire in the opening chapter — and consuming a high calorie meal devoid of nutrients, they still might choose to eat Cinnabon. In their paternalist fervor, they cannot fathom that some people, in some places, at some times, might be willing to make such a trade off.

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How Facebook Makes Us Dumber

by Cass Sunstein

Bloomberg
January 8, 2015

Why does misinformation spread so quickly on the social media? Why doesn’t it get corrected? When the truth is so easy to find, why do people accept falsehoods?

A new study focusing on Facebook users provides strong evidence that the explanation is confirmation bias: people’s tendency to seek out information that confirms their beliefs, and to ignore contrary information.

Confirmation bias turns out to play a pivotal role in the creation of online echo chambers. This finding bears on a wide range of issues, including the current presidential campaign, the acceptance of conspiracy theories and competing positions in international disputes.

The new study, led by Michela Del Vicario of Italy’s Laboratory of Computational Social Science, explores the behavior of Facebook users from 2010 to 2014. One of the study’s goals was to test a question that continues to be sharply disputed: When people are online, do they encounter opposing views, or do they create the virtual equivalent of gated communities?

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Read the study (PDF)

Does Cinnabon Prove We're Phools?

by Donald J. Boudreaux

Foundation for Economic Education
December 14, 2015

The phlaws in George Akerlof’s and Robert Shiller’s Phishing for Phools are many — phar too many for me to have addressed in the review of the book that I wrote that is forthcoming in Barron’s. One phlaw is Akerlof’s and Shiller’s inadequate appreciation for the role of entrepreneurship.

Akerlof and Shiller would likely dispute the above contention. They would insist that they treat entrepreneurship more fully than does standard microeconomic theory. This insistence would be correct, but that standard (please pardon the double entendre) is too low to be relevant. Genuine entrepreneurship seldom, if ever, appears in formal mainstream economic theory.

Akerlof and Shiller argue that people — as consumers and investors — are plagued by such a plethora of psychological quirks and informational deficiencies that their decision-making very often makes them prone to buy things that they don’t really want to buy and otherwise to act in ways that they don’t really want to act.

Arguing correctly that profit opportunities are not long left unexploited by profit-hungry entrepreneurs, Akerlof and Shiller insist that entrepreneurs predictably exploit people’s psychological quirks and informational deficiencies. Entrepreneurs do so by offering goods and services that appeal to those desires that spring chiefly from people’s psychological quirks and informational deficiencies. The result is a “phishing equilibrium” in which all opportunities for entrepreneurial profit are fully exploited.

But Akerlof’s and Shiller’s “phishing equilibrium” is no such thing. The authors fail to apply the logic of entrepreneurship as fully as it should be applied; they apply it only half-way.

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Law and Economics: Philosophical Issues and Fundamental Questions

Edited by Aristides N. Hatzis & Nicholas Mercuro

London/New York: Routledge, 2015

The Law and Economics approach to law dominates the intellectual discussion of nearly every doctrinal area of law in the United States and its influence is growing steadily throughout Europe, Asia, and South America. Numerous academics and practitioners are working in the field with a flow of uninterrupted scholarship that is unprecedented, as is its influence on the law.

Academically every major law school in the United States has a Law and Economics program and the emergence of similar programs on other continents continues to accelerate. Despite its phenomenal growth, the area is also the target of an ongoing critique by lawyers, philosophers, psychologists, social scientists, even economists since the late 1970s. While the critique did not seem to impede the development of the field, it certainly has helped it to become more sophisticated, inclusive, and mature. In this volume some of the leading scholars working in the field, as well as a number of those critical of Law and Economics, discuss the foundational issues from various perspectives: philosophical, moral, epistemological, methodological, psychological, political, legal, and social.

The philosophical and methodological assumptions of the economic analysis of law are criticized and defended, alternatives are proposed, old and new applications are discussed.

The book is ideal for a main or supplementary textbook in courses and seminars on legal theory, philosophy of law, jurisprudence, and (of course) Law and Economics.

Aristides N. Hatzis is an Associate Professor of Legal Theory at the University of Athens, Greece.

Nicholas Mercuro is Professor of Law in Residence ath the Michigan State University College of Law and Member of the faculty of James Madison College, Michigan State University, USA.

Here you can find the Preface, the Table of Contents and Two Chapters (by Judge Richard Posner and Prof. Martha Nussbaum)

How free markets make us fatter, poorer and less happy

by George A. Akerlof & Robert J. Shiller

Washington Post
October 22, 2015

It is now not uncommon for 11-year-olds to be diabetic. I see one reason for it every time I check out at my local Safeway in Washington. The candy is right there at the cash register, waiting to be eaten.

But this does not mean that the manager of the store is mean or even irresponsible. If she has qualms about this practice, she would face a real dilemma: She needs to show a profit. The margins at supermarkets are tiny. No matter what her morals, she has almost no choice but to place those sweet impulse buys where customers can see them. In other words, there is an economic equilibrium in which businesses take advantage of every opportunity to increase profits. In such an equilibrium, the candy will be at the checkout counter.

Curiously, while economists understand each and every such instance where people are tempted to buy things that are not good for them, they fail to appreciate that this occurs because of a general principle of economics. They fail to understand that free markets, as bountiful as they may be, will not only provide us with what we want, as long as we can pay for it; they will also tempt us into buying things that are bad for us, whatever the costs.

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See also

‘Date-Onomics,’ ‘The Sex Myth’ and ‘Modern Romance’

by Kristin Dombek

New York Times
September 9, 2016

Back when adultery and gay sex were widely criminalized in the United States, when masturbation was thought to make you crazy and fellatio was taboo, the Kinsey Institute famously revealed that Americans were secretly less faithful, more gay, more various in their sexual practices and more perverse than most wanted to think. Sixty years later, many of us have come to regard sex — preferably passionate, hot, transformative sex — as central to our lives. In the time of Tinder, our sexuality feels anything but secret. But romance is still mysterious — what does it feel like for everyone else? — and three new books try to explain modern mating.

Rachel Hills, an Australian journalist who lives in New York, argues in “The Sex Myth” that there is a new gap between what we believe and what we do: Americans are secretly having less and worse sex than everyone thinks, and feeling bad about it. She cites a recent study, which shows that on any given weekend, 80 percent of male college students think their schoolmates are having sex (it’s actually 5 percent to 10 percent). Hills argues persuasively that when our value is tied to sexual desirability and performance, we live with a new kind of shame: If we’re not having good sex, all the time, there’s something wrong with us. In this way, the liberation of sex actually regulates us.

Motivated by her own sense of falling short of some sexual ideal, and by conversations with friends who felt the same way, Hills attempts to show how we moved from “a culture that told us we were dirty if we did have sex to one that tells us we are defective if we do not do it enough.” She examines social science literature and media, and interviews hundreds of people to contrast the “myth of a hypersexual society” with our lived reality. “The Sex Myth” provides a clarifying framework for understanding new versions of old contradictions — that women must choose between being “wholly ‘pure’ or ‘empowered,’ innocent Madonna or self-assured Gaga.” Hills makes a smart argument against that strain of neo- or anti-feminism that would have women rebel against objectification by objectifying ourselves: We might be better off, she argues, to stop identifying ourselves primarily with our sex lives.

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How Homo Economicus Went Extinct

by Carol Tavris

Wall Street Journal
May 15, 2015

As a social psychologist, I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs. In recent years, a new field has emerged—“behavioral economics”—to propose an alternative to the rational man of traditional economics. A spate of popular books and empirical studies have been published exploring human irrationality—in decision making, beliefs and actions. Researchers in this field are making up for lost time, or perhaps realizing that they are social psychologists after all.

As the offspring of traditional economics and experimental social psychology, behavioral economics shows remarkable hybrid vigor, and Richard Thaler, one of the new field’s founders, acknowledges its debt to psychological science throughout his highly enjoyable intellectual autobiography, “Misbehaving.” Indeed, his opening aphorism is Vilfredo Pareto’s 1906 claim that “the foundation of political economy and, in general, of every social science, is evidently psychology. A day may come when we shall be able to deduce the laws of social science from the principles of psychology.” That day is here, as Mr. Thaler explains.

For all of his creative career spanning 40 years, Mr. Thaler, who is a professor of behavioral science and economics at the University of Chicago Graduate School of Business, has been studying “the myriad ways in which people depart from the fictional creatures that populate economic models.” As human beings who arrogantly and often wrongly consider ourselves “sapiens,” we simply don’t match the model of human behavior favored by economists, one that “replaces homo sapiens” (whom Mr. Thaler calls Humans) with “a fictional creature called homo economicus” (whom he calls Econ). “Econs do not have passions; they are cold-blooded optimizers,” he says. “Compared to this fictional world of Econs, Humans do a lot of misbehaving”—thus the book’s title.

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Voting is irrational. Emotions always win

by Eyal Winter

Guardian
May 7, 2015

One of my father’s vivid memories of growing up as a Jewish child in Nazi Germany concerned the horrifying visit of his uncle Walter one evening in 1933. Pale as a ghost and shivering with fear, Walter entered the house crying: “I’ve been bewitched!” On his way home from the train station he had come across a Nazi rally. At first he feared the mob, but when he gained some confidence that his Aryan appearance would disguise his Jewish identity a strange feeling slowly took hold of him.

When the rally sang the Nazi party anthem, Walter joined in, mumbling the words to the song. Not long after that he suddenly noticed that he was actually getting swept up in the emotions. Along with everyone around him, he was shouting “Sieg Heil”. He completely forgot that the ideology he so much wanted to be part of regarded him as one of its most hated enemies.

When we talk about politics, we tend to pretend that voting is ultimately a rational choice. The works of the great rationalists Thomas Hobbes and Immanuel Kant are set texts in political science departments. On the doorstep, most campaigners still win over voters by logical argument, or at least try to, weighing up candidates’ pros and cons on different policies. James Carville’s famous phrase from Bill Clinton’s early 90s campaign, “It’s the economy, stupid!”, reflects a conventional wisdom that voting is primarily about spending money wisely.

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Η Γιούλη Φωκά για τον εγκέφαλο και την ορθολογική συμπεριφορά

20 Μαρτίου 2015
CR Radio

Aristides Hatzis: The Economic Crisis and the Economic Science

ELIAMEP
Crisis Observatory
November 19, 2014

Aristides N. Hatzis, Associate Professor at the University of Athens (Department of Methodology, History & Theory of Science), answers the following questions of the Crisis Observatory, concerning Economics and the way it is being taught since the beginning of the crisis.

Question 1: In the wake of both the financial crisis and the economic crisis that ensued (and continues to cause problems, especially to the European economy), Economics came under harsh criticism. This criticism involved its failure to foretell the crisis, but also the validity of its established models and approaches in general, as well as their capacity to correctly diagnose economic problems and to offer appropriate policies therefore. In your opinion, is this criticism justified and, if so, what do you think are the lessons that Economics should draw from the recent crisis?

Question 2: Based on your previous response, what do you think that ought to change in the way Economics is being taught in universities, considering that the economic policy makers of tomorrow are today's the students of Economics?

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Why Do Investors Make Bad Choices?

by Cass Sunstein

Bloomberg
April 9, 2014

For many years, I have studied human behavior, including the mistakes occasionally made by fallible people, including investors.

But a few years ago, I made a really dumb investment decision. In a single day, I hit the trifecta, committing at least three classic behavioral mistakes.

The year was 2011. The stock market was recovering well from its terrible collapse during the Great Recession, but over a short period it had a series of stumbles. I got nervous. What if it collapsed again?

At the time, I was working in the federal government, with a daughter in college, a 2-year-old boy and a new child on the way. Could I afford to lose a lot of money? Wouldn’t it make sense to sell equities and to put the money into a safe, reliable certificate of deposit?

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Is Economics a Science?

by Robert J. Shiller

Project Syndicate
November 6, 2013

I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences, which makes me acutely aware of criticism of the prize by those who claim that economics – unlike chemistry, physics, or medicine, for which Nobel Prizes are also awarded – is not a science. Are they right?

One problem with economics is that it is necessarily focused on policy, rather than discovery of fundamentals. Nobody really cares much about economic data except as a guide to policy: economic phenomena do not have the same intrinsic fascination for us as the internal resonances of the atom or the functioning of the vesicles and other organelles of a living cell. We judge economics by what it can produce. As such, economics is rather more like engineering than physics, more practical than spiritual.

There is no Nobel Prize for engineering, though there should be. True, the chemistry prize this year looks a bit like an engineering prize, because it was given to three researchers – Martin Karplus, Michael Levitt, and Arieh Warshel – “for the development of multiscale models of complex chemical systems” that underlie the computer programs that make nuclear magnetic resonance hardware work. But the Nobel Foundation is forced to look at much more such practical, applied material when it considers the economics prize.

The problem is that once we focus on economic policy, much that is not science comes into play. Politics becomes involved, and political posturing is amply rewarded by public attention. The Nobel Prize is designed to reward those who do not play tricks for attention, and who, in their sincere pursuit of the truth, might otherwise be slighted.

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The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013

It Captures Your Mind

by Cass R. Sunstein

New York Review of Books
September 26, 2013

There is a great deal of unlovely jargon within the federal government. The product of an activity is called “the deliverable.” A task that follows a meeting is called a “do-out.” A request for action is described as “the ask.” If someone needs to continue a discussion with a colleague, he will promise to “circle back.” If a project must be abandoned or put on hold because of competing demands on people’s time and attention, the problem is one of “bandwidth.” Of course such terms can be found in many other places, including in businesses, but they are used with particular regularity in Washington, D.C.

Of the various unlovely terms, “bandwidth” is the most useful and the most interesting. The central idea is that public officials have the capacity to focus on, and to promote and implement, only a subset of the universe of good ideas. Bandwidth is limited partly for political reasons. In any particular period, members of Congress, executive branch officials, and the public itself may be unwilling to support more than a small set of proposals. But much of the problem involves the limits of time and attention. A proposed reform might seem excellent, and it might even be able to attract considerable political support, but the minds of the people who might pursue it are occupied, and they do not have the time to learn about it and to explore its merits. Within government, some good ideas fail to go anywhere, not because anyone opposes them, but because the system lacks the bandwidth to investigate them.

Economists focus on the problem of scarcity—on how people allocate their resources (including both time and money) in the face of many competing demands. In their extraordinarily illuminating book, the behavioral economist Sendhil Mullainathan and the cognitive psychologist Eldar Shafir explore something quite different, which is the feeling of scarcity, and the psychological and behavioral consequences of that feeling. They know that the feeling of scarcity differs across various kinds of experiences and that people can feel “poor” with respect to money, time, or relationships with others.

But their striking claim, based on careful empirical research, is that across all of those categories, the feeling of scarcity has quite similar effects. It puts people in a kind of cognitive tunnel, limiting what they are able to see. It depletes their self-control. It makes them more impulsive and sometimes a bit dumb. What we often consider a part of people’s basic character—an inability to learn, a propensity to anger or impatience—may well be a product of their feeling of scarcity. If any of us were similarly situated, we might end up with a character a lot like theirs. An insidious problem is that scarcity produces more scarcity. It creates its own trap.

Because they lack money, poor people must focus intensely on the economic consequences of expenditures that wealthy people consider trivial and not worth worrying over. Those without a lot of time have to hoard their minutes, and they may have trouble planning for the long term. The cash-poor and the time-poor have much in common with lonely people, for whom relationships with others are scarce. When people struggle with scarcity, their minds are intensely occupied, even taken over, by what they lack.

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‘Nudge’ Back in Fashion at White House

Time
August 9, 2013

When a White House adviser sent out an e-mail last month announcing that she was looking to hire social scientists to study human behavior and design public policy based on social experiments, right-wing critics were aghast: Barack Obama was going too far again.

The inspiration for Yale social scientist Maya Shankar’s team, she said in her note, is Britain. It’s in the Old World that the White House has gone looking for something new, calling a gang of consultants in the United Kingdom an inspiration. There, the so-called Behavioral Insights Team has taken a controversial philosophy and found solutions from lowering energy consumption to increasing tax collection.

The squad was established a mere three years ago, following Prime Minister David Cameron’s ascension to power. Referred to in Whitehall patois as the nudge unit, the team was inspired by the 2009 bestselling book, Nudge: Improving Decisions About Health, Wealth and Happiness by University of Chicago professor Richard Thaler and Harvard Law professor Cass Sunstein. Cameron’s political mandate was simple: influence British policies by constructing cheap, shrewd and local solutions to social problems across governmental agencies.

The nudge unit appears to have succeeded where one of its inspirations could not. During the first three years of the Obama administration, Sunstein led the Office of Information and Regulatory Affairs where he was charged with approving every new regulation the government issued based on cost-benefit analysis. Sunstein has written that his efforts were hamstrung by a political climate suspicious of his ideas. Last year several important regulations were halted before the presidential election and Sunstein’s subsequent book, Simpler: The Future of Government describes the difficulty of new thinking into government. With an entire team to focus on streamlining costs and regulation across the government, the new team is aiming to improve on Sunstein’s record.

Working at the intersection of psychology and economics, the nudge unit in Britain has tackled a number of problems ranging from reducing car theft by offering containers to de-clutter garages to increasing repayment of court fines through a text message system.

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Science Is Not Your Enemy: An impassioned plea to neglected novelists, embattled professors, and tenure-less historians

by Steven Pinker

New Republic
August 6, 2013

The great thinkers of the Age of Reason and the Enlightenment were scientists. Not only did many of them contribute to mathematics, physics, and physiology, but all of them were avid theorists in the sciences of human nature. They were cognitive neuroscientists, who tried to explain thought and emotion in terms of physical mechanisms of the nervous system. They were evolutionary psychologists, who speculated on life in a state of nature and on animal instincts that are “infused into our bosoms.” And they were social psychologists, who wrote of the moral sentiments that draw us together, the selfish passions that inflame us, and the foibles of shortsightedness that frustrate our best-laid plans.

These thinkers—Descartes, Spinoza, Hobbes, Locke, Hume, Rousseau, Leibniz, Kant, Smith—are all the more remarkable for having crafted their ideas in the absence of formal theory and empirical data. The mathematical theories of information, computation, and games had yet to be invented. The words “neuron,” “hormone,” and “gene” meant nothing to them. When reading these thinkers, I often long to travel back in time and offer them some bit of twenty-first-century freshman science that would fill a gap in their arguments or guide them around a stumbling block. What would these Fausts have given for such knowledge? What could they have done with it?

We don’t have to fantasize about this scenario, because we are living it. We have the works of the great thinkers and their heirs, and we have scientific knowledge they could not have dreamed of. This is an extraordinary time for the understanding of the human condition. Intellectual problems from antiquity are being illuminated by insights from the sciences of mind, brain, genes, and evolution. Powerful tools have been developed to explore them, from genetically engineered neurons that can be controlled with pinpoints of light to the mining of “big data” as a means of understanding how ideas propagate.

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Darwin’s humbling lesson for business

by John Kay

Financial Times
July 2, 2013

Your correspondent is sitting below a large and ugly statue of Charles Darwin, overlooking the bay where the great scientist stepped ashore on Chatham, now San Cristobal, the most easterly of the Galápagos Islands I am here to discuss the ways in which evolutionary theory can contribute to our understanding of social sciences.

It seems barely possible that careful observation of finches, mockingbirds and tortoises could fundamentally change the way we think about the world. But in the 19th century it did. The Galápagos, 700 miles from the mainland of Ecuador, contain flora and fauna that differ from those of the rest of the world and differ, but less, from island to island. The genius of Darwin was to apprehend the process by which this pattern came about.

Evolution is a process with three elements; variation, selection and replication. Changes happen, a few of these changes yield advantages, and such changes tend to be reproduced in subsequent generations. The extraordinary outcome – so far-reaching in its implications that Darwin hesitated to publish his ideas – is that designs of extraordinary complexity and efficiency can be achieved without the aid of a designer. Designs can emerge beyond the comprehension of any individual.

That insight, and the mechanics of variation, selection and replication, are relevant to many problems other than the origin of species. Modern business has developed as a result of the variation that comes from experiments in products and business methods, the selection by customers and capital markets of adaptations that add value (and the rejection of those that do not), and the replication by competitors of strategies that succeed.

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