Category Archives: behavioral economics

A perspective on Adam Smith

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James Otteson writes,

Smith’s argument is that human morality is a social system that arises—like languages, like ecosystems, and like markets—on the basis of countless individual decisions, actions, and interactions but without any overall plan and with no overall designer. Each of us begins life with no moral sentiments whatsoever, but with an instinctive desire for mutual sympathy of sentiments. Interactions with others—and, in particular, experiences in which others judge us—trigger our desire for mutual sympathy of sentiments and begin the lifelong process of finding ways to behave that stand a chance of achieving this sympathy, which Smith believes is, along with the desire to procreate, among the strongest social desires humans have. This trial-and-error process, which we conduct with others who similarly wish to achieve mutual sympathy, leads us to develop habits of behavior that reflect successful attempts. These habits eventually become, through suitable refinement, principles of behavior, and then come to inform our conscience. Because we develop these principles with others in our community, they can become a shared system of moral judgment

Otteson’s book and related media can be freely explored here.

Time consistency problems with life decisions

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Agnes Callard writes,

This is true of all big personal decisions: we will know what is great about a college education once we have one; we will know what it is like to love our children only after they exist; we will know what living as an immigrant entails, for us, only after we have emigrated. In these cases, our grasp of the target and its value (e.g. married life) is a matter of living rather than thinking. Marriage is itself a learning experience, one that cannot be pre-empted by calculative reasoning, no matter how sophisticated. We cannot take the measure of our lives in advance.

If I may abuse some jargon, I would say that big life decisions entail a time inconsistency problem, in that you will be a different person after the decision has played out.

Your perspective on quitting a job to start a new career is going to be different years after you make the decision than it was before you make the decision. That is true either way. Your future self will live with a decision that your present self has to make.

One of the most interesting decisions is when to risk either a personal or occupational divorce. How will your future self look at these decisions? As best I can discern by observing myself and others, I would say that

1) if you’ve got a marriage that you feel sort of lukewarm about, then the risk/reward ratio from trying to find someone else is probably higher than you anticipate. It’s worth making more effort to improve your relationship with your spouse.

2) if you’ve got a job that you feel sort of lukewarm about, then the risk/reward ratio of trying a new employer is probably lower than you realize. You probably have already put too much effort into trying to improve your relationship at work.

Behavioral meta-economics

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From my essay on Pascal Boyer’s Minds Make Societies.

Concerning economic inequality, Boyer writes,

… the economy or society as a whole is construed as a gigantic collective action, to which everyone contributes in one way or other, and from which they may receive rewards.
… humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s.

This reinforces the instinct that economic inequality must be derived from power rather than from merit.

You might call this behavioral meta-economics. Like behavioral economics, it looks at human inclinations to commit errors. But what I mean by behavioral meta-economics examines human inclinations to commit errors in assessing markets and large-scale society.

The challenge that economics teachers face is helping their students to understand and overcome behavioral meta-economics. Although he did not use that term, I think Scott Sumner’s post expressing doubts about the value of teaching behavioral economics is derived from a view that teaching behavioral economics might be counterproductive in getting students to overcome their behavioral meta-economics.

The case for no inflation

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The author writes,

But reducing uncertainty about prices by keeping the inflation target at 2% or more might actually increase a sense of uncertainty about real things like home values or investments. While it is right to worry about massive deflation, the historical relationship between deflation and recession is not all that strong. In a 2004 paper, the economists Andrew Atkeson and Patrick Kehoe concluded that most of the evidence of a relationship comes from just one case: the Great Depression of the 1930s.

Sometimes, a viewpoint is particularly interesting because of who holds it. In this case, it is Robert Shiller, arguing from his vantage point as a behavioral finance theorist.

Scott Alexander on the thought process

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He writes,

When I’ve had a lot of coffee, I have more interesting thoughts than usual. New ideas and clever wordplay come easily to me. I don’t think it makes sense to say that coffee makes me smarter. . .More likely I always have some of those thoughts. . .but the relevant angel considers them too weird to be worth scooping out and bringing into the world. This is probably for the best; manic people report “racing thoughts”, a state where the angels build a giant conveyor belt . . . to consciousness and give you every single possible thought no matter how irrelevant. It doesn’t sound fun at all.

The model is one in which there are all sorts of thoughts bidding for your attention, and the thoughts that get through can vary depending on how your hormones are operating. I am reminded of my personal Minsky cycle. I sense that I am creative during the speculative phase, but on occasion I have been overwhelmed by “racing thoughts” as it shifted to the Ponzi phase.

Cognitive failure and the financial crisis

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My review of A Crisis of Beliefs, by Nicola Gennaioli and Andrei Shleifer.

GS directly attack the hypothesis of “rational expectations,” which has dominated the economics profession for forty years. The rational-expectations doctrine holds that when economic actors make decisions that require forecasts, they make optimal use of the available information. They are not guilty of predictable irrationality.

. . .Think of a forecast as employing two types of information about a variable being forecast. One is a “base rate,” which is a very generic property of the variable. The other is “recent information” about that variable or about factors that could affect that variable. Recency-biased forecasting over-weights the recent information and under-weights the base rate.

Virtue signalling may be a signal of less virtue

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Timothy Taylor writes,

In a mild form, moral licensing is an issue for all of us. Anyone who exercises hard and then feels that they “deserve” a high-calorie treat knows the feeling. At an extreme form, it is manifest when some of those who claim to be leaders in family values or social justice or religious/spiritual leadership are found to be acting in ways that counter to the values they claim to profess. Such cases may just be hypocrisy, but I suspect there is often an element of moral licensing as well: that is, being identified with doing good can free someone up to do bad, as well.

Read the whole post, which covers research on the topic.

Pessimistic meta-induction

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Charles Chu explains what it means.

Much of what we believe today is doomed to join other infamous dead theories like Lamarckism (“Giraffes have long necks because they used them a lot.”), bloodletting (“Let me put a leech on your forehead. It’ll cure your allergies. I promise.”), and phrenology (“I’m better than you because I have a bigger head.”).

Philosophers have a name for this concept. To help make it memorable for undergraduates, they kindly titled it the “Pessimistic Meta-Induction from the History of Science”.

The essay makes the case for intellectual humility and for challenging yourself to take the ideological Turing test.

Further (final?) thoughts on Pollan

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Concerning his recent book, How to Change Your Mind, which touts the value and potential of psychedelics.

As I wrote earlier, I am not convinced that taking a trip inside your head is a useful way to expand your mind. Think of our culture as something like a vast archaeological mound. When they are excavating a site where humans have lived for thousands of years, you know how at the top layer they find the artifacts of the most recent inhabitants, and below that are those of inhabitants from a couple hundred years before, and so on, all the way down?

Well, all of humanity has this enormous mound. It’s unfathomably big, and getting bigger all the time (think of all the YouTube videos that are being posted while you’re reading this.)

There are so many ways to explore the mound. You could be like Tyler, and travel the world, reading books, walking through various cities and villages, sampling the street food. Or you could develop deep knowledge about a sport or a craft.

With all those ways to delve into the mound and explore it, I can’t get excited about using a drug that takes some of your sensory experiences and memories and plays them back to you in “shuffle” mode.

As for searching for meaning, I have a joke. There are people who struggle with the existential problems of finding purpose and meaning in their lives. We can label them “seekers.” There are other people for whom such problems are not salient. We can label them “grandparents.”

The grandparents that I know seem to have found peace of mind. There is something very calming about having descendants that you can look forward to watching and maybe guiding a bit as they find their way in the world.

There seems to be a trend toward greater social anxiety and more people expressing political hostility. There could be many reasons for this, but I wonder if part of it is a decline in the proportion of people who are counting on grandchildren.

The problem of self-knowledge

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Steven Ayan writes,

Princeton University psychologist Emily Pronin, who specializes in human self-perception and decision making, calls the mistaken belief in privileged access the “introspection illusion.” The way we view ourselves is distorted, but we do not realize it. As a result, our self-image has surprisingly little to do with our actions.

Read the whole article. It sounds like something out of Simler and Hanson.