Category Archives: behavioral economics

Another FITs update

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This is number 4. Robert Wright cites one of the books that influenced me most strongly. And I comment,

Halberstam’s book is probably the best treatise on organizational behavior you could ever read. Principal-agent problems are everywhere. The problem of whether you can trust an expert is a principal-agent problem, and it is central to many problems that we face today. I think of the game of acquiring status in principal-agent terms, and The Best and the Brightest presents a powerful case study of people who acquired status in the foreign policy world on the basis of connections and adherence to groupthink.

NOP’s model of mental processes

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Scott Alexander (pick number 4, but still my number one pick) writes,

My model has several different competing mental processes trying to determine your actions. One is a prior on motionlessness; if you have no reason at all to do anything, stay where you are. A second is a pure reinforcement learner – “do whatever has brought you the most reward in the past”. And the third is your high-level conscious calculations about what the right thing to do is.

These all submit “evidence” to your basal ganglia, the brain structure that chooses actions. Using the same evidence-processing structures that you would use to resolve ambiguous sense-data into a perception, or resolve conflicting evidence into a belief, it resolves its conflicting evidence about the highest-value thing to do, comes up with some hypothesized highest-value next task, and does it.

It’s part of an overall framework that he calls Bayesian, in which different neurological systems feed information to a central decision-making system, with the weights on the different inputs determining the decision.

Experiments vs. tampering

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Alex Tabarrok wrote,

the experiment forces people to reckon with the idea that even experts don’t know what the right thing to do is and that confession of ignorance bothers people.

Recently linked by Tyler Cowen.

W. Edwards Deming distinguished experiments from tampering. With an experiment, you change a process and explicitly compare the results to a baseline. With tampering, you change the process without rigorously examining the results.

For example, in education, most curriculum changes involve tampering. Schools rarely test to see whether a curriculum works.

I once sat next to a high official in the Department of Education, and he was horrified when I suggested experiments in education. “Would you want your child to be part of an experiment?” he asked, incredulously. “The schools do it all the time,” I responded. “They just don’t bother checking to see whether their experiments work.”

Another example is the pandemic. When I complain about the unwillingness of health officials to conduct experiments to see what factors affect the spread of the disease, few people agree with me (readers of this blog are an exception). They quickly invoke Joseph Mengele.

But nobody invokes Joseph Mengele when it comes to lockdowns, which are simply experiments whose results are not rigorously evaluated by those who conduct them.

It is very hard to make a moral case against experiments that is not also an even stronger case against tampering. But we have a much higher tolerance for tampering than for experiments. I am inclined to fall back on Alex’s answer. Saying that you are conducting experiment implies that you are uncertain. Tampering implies that you know what you are doing. Sadly, people have a higher tolerance for tampering.

Don’t hire TIVs

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Rahav Gabay and others write,

The present research investigates this Tendency for Interpersonal Victimhood (TIV), which we define as an ongoing feeling that the self is a victim, which is generalized across many kinds of relationships. People who have a higher tendency for interpersonal victimhood feel victimized more often, more intensely, and for longer durations in interpersonal relations than do those who have a lower such tendency. Based on research on victimhood in interpersonal and intergroup relations, we present a conceptualization of TIV, introduce a valid and reliable measure, and examine its cognitive, emotional, and behavioral consequences.

. . .anxious attachment is associated with a combination of being unable to regulate hurt feelings, and being very sensitive to others’ responses, and with an ambivalent perception of others that involves anticipating rejection or abandonment, while depending on others as a source of self-esteem and self-worth (Mikulincer & Shaver, 2016). Thus, anxious attachment should be positively associated with TIV.

This is a study that is dubious yet appealing. It is appealing because it reduces the cry-bullies of the Woke movement to a personality type. It is dubious because it reduces a political orientation to a personality type. It is dubious because these sorts of psychological studies are not reliable.

But if you could test for this sort of personality, I would recommend not hiring anyone like this, regardless of their political orientation.

Scott Alexander on human decision-making

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He writes,

the brain compares the strength of various preferences and executes the strongest. Anything that strengthens your urges at the expense of your goals makes you more likely to do things you don’t endorse, and makes you worse off.

Suppose that when you wake up with a hangover, your goal is to never get drunk again. But later on you find yourself in a social situation that encourages drinking, and your preference for taking another drink becomes stronger than the preference to satisfy your goal of never getting drunk again.

So, should you seek treatment to try to get rid of the preference for taking another drink? Should someone else nudge you to get treatment? Should someone else do more than just nudge?

I don’t see a simple answer.

Accordingly, I don’t see a simple answer to the question of how to think about mental illness.

Why we tend to be negative and paranoid

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Michael Shermer writes,

Psychologists Paul Rozin and Edward Royzman were the ones who originally coined the term negativity bias to describe this asymmetry. “Negative events are more salient, potent, dominant in combinations, and generally efficacious than positive events,”

. . .We tend to focus on the constellation of threats as signifying some systematic program aimed at doing us harm. This is a manifestation of what I call “agenticity”—our tendency to infuse patterns (especially patterns of threat or harm) with meaning intention and agency. And so we imagine that disconnected misfortunes are commonly directed by intentional agents, sometimes operating invisibly. Souls, spirits, ghosts, gods, demons, angels, aliens, governments, religious officials and big corporations all have played this role in conspiracist lore (and, in the case of the latter three entries, real life, too, it must be conceded). Taken together, patternicity and agenticity form the cognitive basis of conspiratorial cognition.

There are many other paragraphs in the essay that I wanted to excerpt.

We automatically search for patterns and for stories–preferably involving supposedly culpable individuals–to explain those patterns. Recall that Ed Leamer’s macroeconomic textbook is titled Macroeconomic Patterns and Stories. Blaming the Fed is the simplest conspiracy-theory type explanation, which I try to resist.

Blaming every weather event on climate change would be another example.

Ayn Rand on the spectrum?

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Shanu Athiparambath writes,

Ayn Rand, in all likelihood, knew nothing about the autism spectrum. But she could draw from her own life and experiences. The creator of Howard Roark worked obsessively, evening after evening. She rarely went out. Ayn Rand was extremely nervous before public functions, but there was a violent intensity about her. She observed, rightly, that boredom preserves the precarious dignity of people who love small talk. Her sensitivity to cruelty and injustice has largely escaped her readers. All her life, she collected things, and kept them in separate file folders. Her grandmother gifted her a chest of drawers to store her collections, and her mother complained about all the rubbish she collected. She loved ordering and categorizing things, something very fundamental to the autistic cognitive style. Ayn Rand ticks way too many boxes.

I speculate similarly ten years ago.

The annuities puzzle

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Timothy Taylor writes,

Among economists, it’s sometimes known as the “annuities puzzle”: Why don’t people buy annuities as frequently as one might expect?

I think that the puzzle is why economists insist that annuities are a terrific idea.

The idea of an annuity is this:

1. Suppose that at age 65, you have $500 K and you retire.

2. If you are going to live to age 75, you can afford to spend a lot of money every year. But if you are going to live to be 100, you can afford much less.

3. If you trade your $500 K for an annuity, you can then spend the amount appropriate for an average life expectancy, regardless of how long you actually live. If you don’t live very long, the company that sells you the annuity wins. If you live longer than the average person, then the company loses.

Economists think that old people who do not annuitize their wealth are dumb. I decided a long time ago that it is the economists who are dumb.

Old people face many risks other than the risk of living longer than average. Many risks give rise to needing to spend a lot of money at once. You might develop an illness that is treatable but very expensive to deal with. You might find that you have grandchildren living in a different city, and while you are still relatively healthy you want to visit a lot or even pick up and move there.

The risk of excess longevity is one that you can transfer to your children. That is, you might plan to leave $250 K to your children if you die at age 85, but you leave them nothing if you die at age 95.

Russ Roberts and Arthur Brooks

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You may have already listened. I do schedule these posts in advance. Brooks said,

When you treat somebody with contempt and feel like you are right, you get dopamine, too. It’s kind of amazing how ubiquitous in our learned behavior that reinforces rewards. It’s involved in–there’s a part of the brain called the nucleus accumbens that imprints habitual behavior. But, the neurotransmitter that it is occurring with is dopamine. So, for sure, when we have a habit of doing it, it gives us a little reward; the reward is reinforced neurochemically; so therefore it gets harder and harder to get out of that cycle. The thing that we need to keep in mind is that, with most things that give us a little bit of dopamine–hence a little bit of satisfaction–that the reward is very different in the short run and as it is in the long run.

The conversation is not about any particular economic or political issue. It is more “meta,” to use a fancy-sounding buzzword. Brooks claims that mutual contempt is a dangerous element in today’s partisanship.

A question that comes to mind is why this is happening now. And I am tempted to blame the technology. On Twitter, you get a lot of short-term reward for expressing contempt for the other side. Saying things that would improve relations with the other side gets you rewarded less. In fact, it gets you punished by your “base.”

What I’m reading

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Range, by David Epstein. You can listen to a Russ Roberts podcast with him here. The book argues for the virtues of cultivating talents in multiple areas.

I find the main argument convincing. One of my rules for financial life is

When you have little left to learn on your job, it is time to move on.

2. But I don’t buy everything in the book. He has a chapter on problems that stumped specialized experts but were solved by outsiders. OK, but what makes those stories fun is that more often the reverse is true. Specialized experts solve problems that would stump outsiders. Don’t get carried way with this outsider problem-solving stuff.

3. He points to research suggesting that teachers improve when they change schools. Of course, any research that claims to measure teacher effectiveness and show significant differences is suspect. The Null Hypothesis does not concede defeat so easily.

4. But I can readily imagine that changing organizations would improve anyone’s performance. Your supervisors and colleagues provide you with cultural learning. When you go to a new organization, you get exposure to another set of cultural practices, and you can pick the best from both. Unless you are rigidly attached to the first organization’s approach, or the second organization doesn’t let you port over any good ideas from your first organization, you should get better.

5. Look at the guests that Tyler Cowen interviews for his conversations with Tyler. They are almost always generalists. A top-tier economist (or top-tier anything) with little or no experience or interests outside of his or her specialty would be really dull to interview.

6. One can argue that you need multiple cultural influences to be an interesting person and, in the modern world, to be an effective person. The small-town resident who has never traveled more than 50 miles, the professor who has never functioned outside of academia, the professional who has never had an adult friend or colleague who lacked a college degree–all of these people are stunted in their cultural growth.