A wise man knows one thing – the limits of his knowledge

by John Kay

Financial Times
November 29, 2011

John Maynard Keynes, who never tried to conceal that he knew more than most people, also knew the limits to his knowledge. He wrote “about these matters – the prospect of a European war, the price of copper 20 years hence – there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

And Keynes was right. He published these observations in 1921, and 20 years later Britain was engaged in a desperate, and unpredictable, struggle with Germany.

But lesser men find prognostication easier. I have been looking at some of the models people use, in both the public and private sectors to predict events.

The models share a common approach. They pose the question: “How would we make our decision if we had complete knowledge of the world?” With such information you might make a detailed assessment drawing together many different pieces of relevant information on matters such as costs, benefits, and consequences.

But little of this knowledge exists. So you make the missing data up. You assume the future will be like the past, or you extrapolate a trend. Whatever you do, no cell on the spreadsheet may be left unfilled. If necessary, you put a finger in the air.

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The Neuroeconomics Revolution

by Robert J. Shiller

Project Syndicate
November 21, 2011

Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”

Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial.

Then something exciting comes along from someone who was never involved with these methods – some new idea that attracts young scholars and a few iconoclastic old scholars, who are willing to learn a different science and its different research methods. At a certain moment in this process, a scientific revolution is born.

The neuroeconomic revolution has passed some key milestones quite recently, notably the publication last year of neuroscientist Paul Glimcher’s book Foundations of Neuroeconomic Analysis – a pointed variation on the title of Paul Samuelson’s 1947 classic work, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Glimcher himself now holds an appointment at New York University’s economics department (he also works at NYU’s Center for Neural Science).

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Ugly People Prejudice

The Daily Show with Jon Stewart
November 14, 2011

Jason Jones reports on the injustices uglo-Americans suffer due to their below-average looks.

The Daily Show with Jon Stewart
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The Reach of 'Prospect Theory'

The Chronicle of Higher Education
November 8, 2011

Based on thousands of citation records from Thomson Reuters, this chart shows the scholarly influence of "Prospect Theory: An Analysis of Decision Under Risk," written by Daniel Kahneman and Amos Tversky, and published in Econometrica in 1979. The theory has turned up as a reference for an increasing number of journal articles and book chapters (nearly 8,000 items in all), and it has spread into a diverse range of disciplines. Thomson Reuters makes an effort to classify the major scholarship within journals and books into 280 categories; this representation of the paper’s influence condenses these classifications even further.

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Thinking, Fast and Slow: Why even experts must rely on intuition and often get it wrong

by William Easterly

Financial Times
November 5, 2011

There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Daniel Kahneman’s Thinking, Fast and Slow.

Kahneman, a winner of the Nobel Prize for economics, distils a lifetime of research into an encyclopedic coverage of both the surprising miracles and the equally surprising mistakes of our conscious and unconscious thinking. He achieves an even greater miracle by weaving his insights into an engaging narrative that is compulsively readable from beginning to end. My main problem in doing this review was preventing family members and friends from stealing my copy of the book to read it for themselves.

Kahneman presents our thinking process as consisting of two systems. System 1 (Thinking Fast) is unconscious, intuitive and effort-free. System 2 (Thinking Slow) is conscious, uses deductive reasoning and is an awful lot of work. System 2 likes to think it is in charge but it’s really the irrepressible System 1 that runs the show. There is simply too much going on in our lives for System 2 to analyse everything. System 2 has to pick its moments with care; it is “lazy” out of necessity.

Books on this subject tend to emphasise the failings of System 1 intuition, creating an impression of vast human irrationality. Kahneman dislikes the word “irrationality” and one of the signal strengths of Thinking, Fast and Slow is to combine the positive and negative views of intuition into one coherent story. In Kahneman’s words, System 1 is “indeed the origin of much that we do wrong” but it is critical to understand that “it is also the origin of most of what we do right – which is most of what we do”.

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Who You Are

by David Brooks

New York Times
October 20, 2011

Daniel Kahneman spent part of his childhood in Nazi-occupied Paris. Like the other Jews, he had to wear a Star of David on the outside of his clothing. One evening, when he was about 7 years old, he stayed late at a friend’s house, past the 6 p.m. curfew.

He turned his sweater inside out to hide the star and tried to sneak home. A German SS trooper approached him on the street, picked him up and gave him a long, emotional hug. The soldier displayed a photo of his own son, spoke passionately about how much he missed him and gave Kahneman some money as a sentimental present. The whole time Kahneman was terrified that the SS trooper might notice the yellow star peeking out from inside his sweater.

Kahneman finally made it home, convinced that people are complicated and bizarre. He went on to become one of the world’s most influential psychologists and to win the Nobel in economic science.

Kahneman doesn’t actually tell that childhood story in his forthcoming book. Thinking, Fast and Slow is an intellectual memoir, not a personal one. The book is, nonetheless, sure to be a major intellectual event (look for an excerpt in The Times Magazine this Sunday) because it superbly encapsulates Kahneman’s research, and the vast tide of work that has been sparked by it.

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Are Children Selfish?

Wall Street Journal
October 11, 2011

To determine the altruistic tendencies of 3-year-olds, scientists gave each of 150 of them six packets of stickers and said they could give some of their stickers to a kid in a room next door. Kevin Helliker has details on Lunch Break.

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'It's Mine!' The Selfish Gene

Wall Street Journal
October 11, 2011

A 3-year-old is handed six sets of colorful stickers.

"You can keep all of them," he is told. "Or you can give some to a child you don't know. He doesn't have any stickers. Do you want to keep all of your stickers? Or do you want to give some to a child you don't know?"

That was the basic script for a study that took place recently in an Israeli playroom which doubled as a social-science laboratory. A child-care-professional-turned-researcher asked 136 children, aged 3 and 4 years old, to step one at a time into the playroom to shed light unwittingly on a hot topic in behavioral science: Are children altruistic?

It seems they are, and part of the explanation may be genetic, according to the study, published last month in the online scientific journal PLoS One. About two-thirds of the children chose to give one or more sets of stickers to an unknown recipient, described to them only as a child who had no stickers. There were no significant differences in generosity between boys and girls.

Among those who declined to share, many had something in common: a variation in a gene, known as AVPR1A, that regulates a hormone in the brain associated with social behaviors. Researchers found that this genetic variant was associated with a significant decrease in willingness to share.

Until recently, only limited research existed on altruism in children, and what it showed was younger children acting less generously. "Younger children appear to weigh costs to the self more than do older children when deciding whether to assist others and are less attuned to the benefits," says a professional guide called the Handbook of Child Psychology.

But young children all along have displayed greater levels of altruism than what most adults might expect. "If parents think that generosity isn't possible at age 2, they won't try to encourage it," says Nancy Eisenberg, an editor of the handbook and an Arizona State University psychology professor.

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How the Dismal Science Stopped Being Dismal

by Justin Fox

New York Times
October 7, 2011

Listen to the economic debates of the past couple of years, and it’s tempting to conclude that no progress has been made in the field in over half a century. There’s John Maynard Keynes on the one side, arguing for deficit spending to offset the aftereffects of a once-in-a-lifetime financial crisis. On the other side there’s Ludwig von Mises (his fellow Austrians Joseph Schumpeter and Friedrich von Hayek seem too moderate for the role), thundering that all govern­ment intervention in the economy is doomed to failure.

Keynes and Mises are of course both long dead. But it is the resilience of their ideas that makes studying the history of economics so rewarding for non­economists. As a rule, economists don’t know much about history. So at times like these, anyone with a bit of familiarity with the giants of the past can weigh in on big economic issues with about as much authority and credibility as the credentialed experts.

Alfred Marshall, in 1892

This is one explanation for the continuing popularity of Robert L. Heilbroner’s book The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers. Another is that once a book makes its way onto undergraduate required-­reading lists, as Heilbroner’s did, it doesn’t easily fall off. Heilbroner wrote his irreverent group portrait of Keynes, Schumpeter, Karl Marx, Adam Smith and others in the early 1950s while studying for a doctorate at the New School for Social Research in Manhattan. (Mises was so marginalized at the time he didn’t rate a mention.) He died in 2005, but his book lives on, with more than four million copies sold.

That kind of success makes a tempting target for imitators, and over the past decade, word spread among economics writers that Sylvia Nasar was at work on a new Worldly Philosophers — something to update and possibly supplant Heil­broner. Nasar is no knockoff artist; a professor at Columbia Journalism School and a former economics correspondent for The New York Times, she wrote what is perhaps the best economics-­related book of the past quarter-­century, A Beautiful Mind, a near-perfect biography of the game theorist John Nash.

Now Nasar’s new book, Grand Pursuit: The Story of Economic Genius, is here. As it turns out, it isn’t really a Heilbroner update. For one, it doesn’t make much chronological headway: the postwar giants Paul Samuelson and Milton Friedman get a few pages, as does the philosopher and development economist Amartya Sen, who is still alive and writing books. But the major developments of post-1950 economics are for the most part ignored. So, for that matter, are the major developments of pre-1850 economics. Heilbroner was out to provide an easy-to-digest survey of economic thought through the ages. Nasar has set herself a task at once narrower and more ambitious. She has a story to tell, a story of tragedy, triumph and, as the subtitle says, economic genius.

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The Schrödinger’s Cat Experiment, Explained

Η τυραννία της ακρασίας

του Χαρίδημου Κ. Τσούκα

Καθημερινή
18 Σεπτεμβρίου 2011

–Μπαμπά, θα χρεοκοπήσουμε;

– Κανείς δεν μπορεί να ξέρει, αλλά θεωρώ ότι είναι μια πολύ πιθανή εξέλιξη.

– Τι σε κάνει να το πιστεύεις αυτό;

– Οι πιο έγκυροι οικονομολόγοι προβλέπουν κάποιας μορφής χρεοκοπία. Χωρίς δραστική αναδιάρθρωση του χρέους, η χώρα δεν σώζεται. Δεν είναι αυτό όμως που με κάνει τόσο απαισιόδοξο όσο η δική μας ακρασία.

– Τι εννοείς;

– «Ακρασία» είναι ένας όρος του Αριστοτέλη για να περιγράψει το φαινόμενο όπου ξέρω τι είναι ορθό να πράξω αλλά δεν το πράττω. «Ο ακρατής πράττει εν γνώσει του άσχημες πράξεις υπό το κράτος του πάθους του» (Ηθικά Νικομάχεια, 1145β 12-13). Ο ακρατής είναι ανίκανος να ζήσει όπως θεωρεί ότι θα έπρεπε.

– Περίεργο δεν είναι αυτό;

– Ναι, το ίδιο έλεγε και ο Σωκράτης. Η υποβέλτιστη πράξη οφείλεται στην άγνοια, όχι στην ακρασία. Για τον Αριστοτέλη, όμως, η ακρασία είναι όχι μόνο υπαρκτή αλλά και επικίνδυνη. Η ακρασία προκύπτει στο μέτρο που το άτομο κυριαρχείται από τα πάθη του, έτσι ώστε να αποκτά ψευδή εικόνα των πεποιθήσεών του. Νομίζει ότι θέλει κάτι (π. χ. να κόψει το τσιγάρο), αλλά δεν το εννοεί.

– Και τι σχέση έχει αυτό με την κρίση που περνάμε;

– Μεγάλη. Η κυβέρνηση δεσμεύεται έναντι των δανειστών της να υλοποιήσει ρηξικέλευθες πολιτικές για τη μείωση του χρέους, αλλά διστάζει να τις υλοποιήσει. Καταφάσκει μεν, συμπεριφέρεται αντιφατικά δε. Τα παραδείγματα, πολλά. Τα προστατευμένα επαγγέλματα δήθεν άνοιξαν. Οι ιδιωτικοποιήσεις συμφωνήθηκαν, αλλά ακόμη περιμένουν. Η εργασιακή εφεδρεία αναβάλλεται διαρκώς. Δεσμευτήκαμε για συγκεκριμένα αποτελέσματα αλλά δεν πασχίζουμε να τα παραγάγουμε. Ο καθηγητής Σταύρος Θωμαδάκης, διακεκριμένος οικονομολόγος, μας έλεγε πρόσφατα στο Πανεπιστήμιο Κύπρου ότι φοβάται default by default! Κινδυνεύουμε να χρεοκοπήσουμε λόγω αδράνειας - γιατί αδυνατούμε να δράσουμε διαφορετικά.

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Rationality, games and conflict

Robert Aumann interviewed by Romesh Vaitilingam

Vox
September 9, 2011

Nobel laureate Robert Aumann of the Hebrew University of Jerusalem talks to Romesh Vaitilingam about his work on ‘rule rationality’, the development of game theory and its potential for understanding conflict – from the Pax Romana to the modern day Middle East. The interview was recorded in August 2011 at the Fourth Lindau Meeting on Economic Sciences, which brought together 17 of the 38 living economics laureates with nearly 400 top young economists from around the world.

Listen to the interview here

Fourteen magic words that can increase voter turnout by over 10 percentage points??

by Andrew Gelman

The Monkey Cage
September 4, 2011

Christopher Bryan, Gregory Walton, Todd Rogers, and Carol Dweck did two experiments in which they increased people’s voter turnout in real electionsby over 10 percentage points by simply asking them the following survey question on election day:

• How important is it to you to be a voter in the upcoming election?

In the comparison condition, potential voters were asked:

• How important is it to you to vote in the upcoming election?

Unfortunately, there doesn’t seem to have been a control condition in the experiments, so all they could really do was compare these two treatments to each other.

The gimmick of the experiment is that it harnesses humans’ natural belief in essentialism (see, for example, reference 14 in the link above), the idea that being “a voter” is more essential than being a person who happened to vote.

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Joe Heller (The Green Bay Press-Gazette)

The Sugary Secret of Self-Control

by Steven Pinker

New York Times
September 2, 2011

Ever since Adam and Eve ate the apple, Ulysses had himself tied to the mast, the grasshopper sang while the ant stored food and St. Augustine prayed “Lord make me chaste — but not yet,” individuals have struggled with self-control. In today’s world this virtue is all the more vital, because now that we have largely tamed the scourges of nature, most of our troubles are self-inflicted. We eat, drink, smoke and gamble too much, max out our credit cards, fall into dangerous liaisons and become addicted to heroin, cocaine and e-mail.

Nonetheless, the very idea of self-­control has acquired a musty Victorian odor. The Google Books Ngram Viewer shows that the phrase rose in popularity through the 19th century but began to free fall around 1920 and cratered in the 1960s, the era of doing your own thing, letting it all hang out and taking a walk on the wild side. Your problem was no longer that you were profligate or dissolute, but that you were uptight, repressed, neurotic, obsessive-compulsive or fixated at the anal stage of psychosexual development.

Then a remarkable finding came to light. In experiments beginning in the late 1960s, the psychologist Walter Mischel tormented preschoolers with the agonizing choice of one marshmallow now or two marshmallows 15 minutes from now. When he followed up decades later, he found that the 4-year-olds who waited for two marshmallows turned into adults who were better adjusted, were less likely to abuse drugs, had higher self-esteem, had better relationships, were better at handling stress, obtained higher degrees and earned more money.

What is this mysterious thing called self-control? When we fight an urge, it feels like a strenuous effort, as if there were a homunculus in the head that physically impinged on a persistent antagonist. We speak of exerting will power, of forcing ourselves to go to work, of restraining ourselves and of controlling our temper, as if it were an unruly dog. In recent years the psychologist Roy F. Baumeister has shown that the force metaphor has a kernel of neurobiological reality. In Willpower, he has teamed up with the irreverent New York Times science columnist John Tierney to explain this ingenious research and show how it can enhance our lives.

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Demographic-economic paradox

From Wikipedia

The demographic-economic paradox is the inverse correlation found between wealth and fertility within and between nations. The higher the degree of education and GDP per capita of a human population, subpopulation or social stratum, the fewer children are born in any industrialized country. In a 1974 UN population conference in Bucharest, Karan Singh, a former minister of population in India, illustrated this trend by stating "Development is the best contraceptive."

The term "paradox" comes from the notion that greater means would necessitate the production of more offspring as suggested by the influential Thomas Malthus. Roughly speaking, nations or subpopulations with higher GDP per capita are observed to have fewer children, even though a richer population can support more children. Malthus held that in order to prevent widespread suffering, from famine for example, what he called "moral restraint" (which included abstinence) was required. The demographic-economic paradox suggests that reproductive restraint arises naturally as a consequence of economic progress.

It is hypothesized that the observed trend has come about as a response to increased life expectancy, reduced childhood mortality, improved female literacy and independence, and urbanization that all result from increased GDP per capita, consistent with the demographic transition model.

Current information suggests that the demographic-economic paradox only holds up to a point though. Recent data suggests that once a country reaches a certain level of human development and economic prosperity the fertility rate stabilizes and then recovers slightly to replacement rates.

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The Measure of Human Happiness

by Clive Crook

The Atlantic
July 1, 2011

A theme at many sessions at this year's AIF has been happiness--what it is, how you advance it, how you measure it. Fascinating. Justin Wolfers and Robert Frank had an interesting exchange on this earlier in the week, and I'm continuing to turn their arguments over in my mind.

Wolfers tore into the "Easterlin Paradox", which is the claim that happiness does not rise with income beyond a certain point. That finding (see Richard Easterlin: Does Economic Growth Improve the Human Lot?) gave rise to the popular view that, for rich countries at least, economic growth is a treadmill. People are struggling to improve their status, and feel happier if they succeed, but the race for status goods is zero-sum. Growth in absolute income cannot raise everybody's relative position. It allows higher consumption but expands desires at about the same rate. The gain in happiness, if any, is small. For a rich country, the obsession with growth in GDP is an error.

Wolfers walked through his impressive array of data--derived from a remarkable project of international comparisons undertaken by Gallup--and argued that the Easterlin claim is simply and unambiguously false. Higher incomes make people happier. It takes ever larger increases in absolute income to yield a given improvement in happiness (happiness rises with the log of income), but there is no point of saturation. Within countries, richer people are happier than poor people. Globally, rich countries are happier than poor countries. He examined some of the statistical evidence which is said to point the other way, and showed it was wrong. Economic growth does what it is supposed to.

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The Fear of Reason: In defense of rational argument

by Leon Wieseltier

New Republic
June 23, 2011

“I just want to point out,” declared the student at the far end of the seminar table, “that when Maimonides offers a proof of God’s existence, he is not saying that he has really proved it. What he’s saying is: This works for me, and if it works for you, great.” I was teaching a graduate seminar on The Guide of the Perplexed at a fine American university, and I was pleased to see my students warming to my insistence that the old masterpiece is still alive, and one of the most formidable obstacles ever erected against a thoughtless existence. We returned repeatedly to the question of what medievals can teach moderns about the indispensability of a worldview, and about the proper methods for justifying one. But the young man’s comment about the subjectivism of Maimonides’s proof—anyway the least interesting part of the book--startled me. It was so American and so wrong. After explaining why it was not just historically correct, but also philosophically respectable, to conclude from the text that its author really could have believed that a proof was possible, I proposed that we quit the twelfth century and put a little pressure on the talismanic words “and if it works for you, great.” I began a discussion of the shortcomings of pragmatism, which allowed me to launch into a withering—and of course intellectually devastating—analysis of the ideas of Richard Rorty and their poisonous impact upon thinking in America. My students offered surprisingly little resistance; but then they had signed up for a winter of rationalism and religion--this countercultural band was not ashamed of its interest in the idea of truth. Yet the Rortyan shrug was still there in the young man’s comment, and so I asked him for his opinion about reason. He said that it frightened him and discouraged him. The problem with reason, he explained, was that it claimed to settle matters once and for all, and that this was arrogant, and that it left him with nothing more to say. Rationalism made him feel excluded and late. I replied that he had it backward. It is not reason, but unreason, that shuts things down. You cannot argue against an emotion, but you can argue against an argument. That is why we were still contending with Maimonides, and why he was still contending with Aristotle. A reasoned discussion is always open and a reasoned intervention is always timely. Unreason is more arrogant, more impatient, more cruel, than reason. Since reason is general, it is inclusive. Reason, I said, is strict but fragile, forever hounded, forever distracted, the minority cause, provisional, fair, curious, fallible, public—not tyrannical but heroic, in its lonely insurrection against the happy and popular hegemony of passions and interests. I told my students about Maimonides’s life, the persecution, the tragedy, the depression, the paranoia, so that they would see the creatureliness of the rationalist, and honor his confidence in the mind as a human triumph. Reason is even poignant.

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Extraverts More Likely to Believe in Free Will

Miller-McCune
June 8, 2011

Philosophers’ views on freedom and moral responsibility are influenced by inherited personality traits. If they can’t be objective, can anyone?

Philosophers are trained to think things through logically and reach conclusions based solely on reason. But as science provides increasing evidence for the interconnectivity of mind, body and emotions, is that sort of intellectual objectivity truly possible?

A newly published study suggests the answer is no — at least when it comes to addressing one fundamental issue. It finds deep thinkers with a specific type of personality — warm and extraverted — are more likely to believe that free will remains a viable concept, even in the light of research suggesting our behavior is largely determined by unconscious impulses.

While this may sound like a theoretical argument, the researchers, led by Eric Schulz of the Max Planck Institute for Human Development in Berlin, argue it has potentially profound implications. If expert opinion is partly a matter of personality, it negates the notion that trained specialists can and do provide cool, clear-minded assessments of the facts — a concept that is at the foundation of our legal system.

“Even highly skilled professionals such as lawyers, judges, ethicists and philosophers may not be immune to the influence of their different personalities,” they write in the journal Consciousness and Cognition. One could easily add other experts to that list, including economists, sociologists — and journalists.

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Rational After All: Toward an Improved Theory of Rationality in Economics

by Yulie Foka-Kavalieraki and Aristides N. Hatzis

Revue de Philosophie Economique
Vol. 12, No. 1, June 2011

In this paper we critically review the literature on rational choice theory (RCT) and the critical approaches to it. We will present a concise description of the theory as defended by Gary Becker, Richard Posner and James Coleman (as well as others) at the University of Chicago from the mid-1970s to the early 1990s, we will discuss its epistemological assumptions and predictions and we will also examine the most important arguments against it. We will give our main emphasis on the critique coming from behavioral economics and we will try to see if humans’ supposed cognitive constraints lead to a failure of rationality or if they constitute rational responses to the scarcity of information, time and energy. In our discussion we will use findings from experimental economics and the sciences of the brain, especially evolutionary psychology and neuroeconomics. Our intention is to present an improved theory of rational choice that, informed from the above discussion, will be descriptively more accurate but without losing its predicting power. Moreover, we will conclude by trying to answer the most important related policy question: when rationality seems to fail, does this necessarily imply that agents should be paternalistically protected against themselves? We will briefly defend the thesis that, in the long-run, it is much better for them and the society at large for the individual decision makers to be let alone to develop rational responses to their cognitive constraints.

Keywords: Rational Choice Theory, Behavioral Economics, Evolutionary Psychology, Rationality, Cognition, Paternalism

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