Archive for category Economics

Monkeys show loss aversion, too

Given a choice between a risky decision and a safe decision, people choose differently depending on whether the payoffs are described as a gain or losses. This is known as “loss aversion”. Laurie Santos and her colleagues worked out how to give monkeys a choice that could be presented either as a gain or loss. Their choice patterns matched the behaviour of humans, as she reveals in this TED talk which really gets going after about eight minutes. It turns out that “a monkey financial advisor is just as dumb as your human financial advisor.”

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Drive: Why Money Doesn’t Motivate

Dan Pink’s talk (previously featured) and some wonderful, witty animation combine to make a short film about the psychology of motivation. This illustrates why the economic concept of incentive is problematic: it’s just not the case that more monetary incentive means that work will be done more enthusiastically. Pink comments on the success of projects such as Wikipedia which are dependent on free labour.

The above is an extract from a forty-minute talk that you can see in full without the illustration.

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Interactive graphs for learning about hyperbolic discounting

Would you rather have 100 pounds in 12 months’ time, or 110 pounds in 13 months’ time? Most of us would take the latter option and wait just a month longer for 10% more money.

But now, move everything forward by 12 months: would you rather have £100 right now, or wait a month for £110? Suddenly an extra month seems a long time to wait: many of us would rather take the hundred.

This is an example of what’s called a preference reversal. The choice is essentially the same, but merely by transposing the choice in time, we can affect which option people prefer. Even if £110 seems more attractive to you in both cases, there will still be a similar reversal when we fine-tune the times and amounts of money. Read the rest of this entry »

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Science shows why business is stupid

Another excellent talk from TED.com about behavioural economics (to add to those already covered on this blog). Dan Pink, a former speech writer for Al Gore, explains how a lot of business practice still relies on extrinsic motivation which is known scientifically to be counter-productive (explained previously on this blog). He echoes Phil Rozenweig’s charge that the business world is lacking in scientific critical thinking, and offers Wikipedia versus Encarta as an example of how intrinsic motivation wins out. It’s not only an engaging talk, but another nail in the coffin of the concept of incentives which is core to rational-choice economics.

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What makes humans happy?

Last week I gave a talk about happiness research. Here are some notes for posterity. I haven’t deliberately sought out happiness research, but bias research (my area of interest) overlaps with it a great deal.

First, a disclaimer. When we talk about one group being happier than another, we’re talking about the average of a large number of subjects. All the different life stories that arise from, say, having children, are boiled down to a single figure. I would prefer to see longitudinal studies of happiness displayed as a “heat map” rather than a line on a graph.

Second, a correction. Last week I hadn’t read Bella DePaulo’s Singled Out, which takes a close look at research on the effects of marriage. So when I said that marriage makes people happier by a wide margin, I was unaware of how much this apaprently “common-sense” finding was based on bad research which has been influenced by the “family values” lobby. Some of DePaulo’s findings: Read the rest of this entry »

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Behavioural Economics Videos

Behavioural economists have been quick on the uptake in using video lectures to convey their message. Here is a short round-up focusing on quality rather than comprehensiveness.
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Book Review: Free Market Madness

Review of Peter A. Ubel (2009) Free Market Madness: Why human nature is at odds with economics  – and why it matters. Harvard Business Press, ISBN:9781422126097

Despite the title, this book sings the praises of the free market. However, it soundly debunks a libertarian free-market fundamentalism that draws its legitimacy from the rational-choice assumptions of economics.

The author is a medical doctor and decision scientist, not to mention an accessible writer. The book is based on many important scientific studies, including the author’s own research, so there’s a high fact-to-opinion ratio. In his medical work, Ubel sees first-hand the obesity crisis, the stressful conditions in which we make medical decisions and the inefficiency of a market medical system. This in turn shows the danger of believing that people always make decisions in their own best interest. Read the rest of this entry »

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Dan Ariely’s Predictably Irrational, and so are we

Review of Dan Ariely (2008) Predictably Irrational: The hidden forces that shape our decisions Harper Collins. ISBN: 978-0-00-725-652-5

This is a gem of a book: short, engagingly-written and connected both to the science and the policy implications. Ariely is a seasoned bias researcher (he sees himself as a behavioural economist rather than a psychologist) and this book runs through many of the experiments he has been involved in, as well as related research.

Unlike other introductions to bias, such as Sutherland’s Irrationality or Fine’s A Mind of Its Own, this is not a systematic review of different classes of bias but one person’s perspective on some experiments and their implications.

The main thrust of the book, as suggested by the title, is the economist’s idea of rational choice does not describe how we actually behave, because we are irrational in predictable ways (or, as I prefer to call it, biased). I was particularly interested in his attack on supply and demand curves, those central pillars of introductory economics. In place of the economic constructs, you can learn a set of ideas from psychology (e.g. contrast effects; arbitrary coherence; anchoring; “hot state” decisions) which more reliably fit how people behave.

The undermining of homo economicus has a number of implications for how we can live better and happier lives: we cannot leave it to the free market to fix things; we can achieve more by voluntarily restricting our choices; we need to self-police our selves to counter our tendency to rationalise immoral behaviour.

Ariely’s personality comes through as warm, humane and humourous, clearly concerned about the effects of irrational (or immoral choices but optimistic that by being aware of bias we can compensate for it.

I recommend anyone interested in the topic of bias taking this on a long train ride, and taking a lot longer to think about the implications.

My detailed notes on the book: not a substitute for reading it yourself.

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Accepting the Reality of Denial

The term “Holocaust denial” is, I hope, widely understood. It refers to pretend scholarship that challenges the idea that the Holocaust happened. This has no connection at all with Holocaust scholarship. Whereas real historical scholarship examines multiple, converging lines of evidence to assemble a picture of what happened at a particular time, denial takes a tenuous “what if?” scenario and treats it as proven fact, or at least equal to scientific evidence (a useful introduction to this distinction is the first chapter of Michael Shermer’s The Borderlines of Science).

Holocaust denial exists because there is a demand for it. It’s an economic fact that there are people happy to pay for, or otherwise support, validation of their opinions. The better supported a claim is with real evidence, and the more intensely biased people are against it, the more there will be this need to legitimise a contrasting opinion. Read the rest of this entry »

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Capital Punishment and Homicide

Many comparative studies show that capital punishment provides no deterrent whatsoever against murder. However, there are widely cited econometric studies that seem to show that for each person executed, several murders are prevented. Why the discrepancy? Because the econometrics is junk science.

This post originally appeared on the Kewl Doodz’n’Chyx community blog.

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