Category Archives: behavioral economics

What I’m Also Reading

Posted on by

A review copy of How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness. So far, my favorite passage:

Because of our romantic views of their happiness and importance, we are happy, in Smith’s eyes, to be subservient to the politically powerful and even to tolerate their abuse. Even the tyrant can be adored because of our inclination to be overly sympathetic to greatness…we idealize his greatness and happiness.

The book is a reformulation of Smith’s Theory of Moral Sentiments. Roberts takes Smith’s positive theories and draws normative lessons.

Gender and Risk-Taking

Posted on by

Jason Collins favorably reviews The Hour Between Dog and Wolf, a book by John Coates, who says that hormonal responses to success and failure serve to reinforce risk-taking and risk aversion. I note from the book description on Amazon:

Dr. John Coates identified a feedback loop between testosterone and success that dramatically lowers the fear of risk in men, especially younger men—significantly, the fear of risk is not reduced in women.

I count this as additional support for what I have said I would do if I were financial regulatory czar: change the gender of the CEO’s of the largest banks.

Politics, Reasoning, and Group Affiliation

Posted on by

Daniel Kahan writes that one should view culturally motivated reasoning (CMR)

as a form of reasoning suited to promoting the stake individuals have in protecting their connection to, and status within, important affinity groups. Enjoyment of the sense of partisan identification that belonging to such groups supplies can be viewed as an end to which individuals attach value for its own stake. But a person’s membership and good standing in such a group also confers numerous other valued benefits, including access to materially rewarding forms of social exchange (Akerlof & Kranton 2000). Thus, under conditions in which positions on societal risks and other disputed facts become commonly identified with membership in and loyalty to such groups, it will promote individuals’ ends to credibly convey (by accurately conveying (Frank 1988)) to others that they hold the beliefs associated with their identity-defining affinity groups. CMR is a form of information processing suited to attaining that purpose.

That sounds right to me. I wonder if Kahan would consider the possibility that this description applies as much to climate-change activists as it does to their opponents.

Related and recommended: Scott Sumner’s post on intellectual decay.

Matt Yglesias on the Era of Mood Affiliation

Posted on by

He writes,

The deep nature of the division is illustrated by the suspicious way in which legal opinions and policy preferences are lining up on this issue. Essentially everyone who believes the Affordable Care Act was an important step toward securing social justice also agrees that it would be absurd to construe the statute in a manner that’s plainly inconsistent with congress’ goals. And essentially everyone who believes it’s crucially important to give the crucial sentence the most straightforward possible reading rather than defer to the IRS’ efforts to make sense of the law as a whole, also believes that the law is a scandalous boondoggle.

Pointer from Scott Sumner. I also see mood affiliation in macroeconomics. As I point out in my memoir, in theory one could hold left-wing political views and reject Keynesian economic theory, or conversely. In practice, this is almost never the case.

Of course, Haidt and Kahneman would not be a bit surprised by any of this. They believe that emotional reactions drive “rational” analysis, rather than the other way around.

The Prisoner Swap

Posted on by

I should not comment on this sort of news, but there is nothing else going on right now. [ed. so how about just not posting for a while?] Anyway, this caught my eye.

Todd Sandler, an economist at the University of Texas-Dallas, studied four decades of data and found that, for every kidnapper paid, 2.5 more abductions occurred.

I look at this from a spy-novel perspective. In that case, the American intelligence community might send an American to “wander off,” get captured, pretend to be a deserter, and gather intelligence. When his usefulness has ended, you swap five ex-Taliban for him. Of course, you have convinced those ex-Taliban to spy for you.

Surely, the Israelis only exchange prisoners who they believe will provide them, wittingly or otherwise, with useful intelligence when they are released?

Of course, if the terrorists keep kidnapping Americans and Israelis, that means they either (a) don’t know about the spy-novel stuff or (b) don’t think that Americans or Israelis are that clever/dastardly or (c) don’t mind absorbing new spies, because the publicity from kidnapping and exchanging prisoners helps with fundraising and recruiting.

The Tribalism Hormone

Posted on by

I am still not very far into Nicholas Wade’s Troubled Inheritance, but I found out something I did not know but which fits well with my world view. It turns out that oxytocin is not some generic “trust hormone” that makes one feel at ease with all sorts of strangers. Instead, describing the implications of recent research by Carsten de Dreu, Wade writes,

Oxytocin engenders trust toward members of the in-group, together with feelings of defensiveness toward outsiders.

SNEP Solution: Flexible Benefits and Extreme Catastrophic Health Insurance

Posted on by

The problem is high implicit marginal tax rates on many people who are eligible for benefits from means-tested government programs. I think that a generic solution might consist of flexible benefits.

One approach would be to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit. For this purpose, we might also think of unemployment insurance as a means-tested benefit.

The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods.

Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high.

Suppose that a household receives $7500 in flexdollars per member. Thus, a family of four with zero income would receive $30,000 in flexdollars. A family of four with $20,000 in income would lose 20 percent of $20,000, or $4,000, to fade-out, and hence would receive only $26,000. A family of four with a $50,000 income would receive $20,000. A family of four with a $100,000 income would receive $10,000. A family of four with a $150,000 income would receive nothing.

At the end of the year, unused flexdollars could go into flexible savings accounts. Tghese could be used for medical emergencies, down payments when buying a home, or to save for retirement.

There are two ways in which this represents an improvement over the current approach. First, it ensures that implicit marginal tax rates are low for benefit recipients. As it is now, people with low incomes easily can find that if they work they lose more in benefits than they obtain in pay. I think that is very corrosive, and I would put a high priority on restoring the incentive for people to work, while still giving them the means to meet basic needs.

The second benefit is that it gives recipients more flexibility and choice. Just as food-stamp recipients can decide for themselves what groceries to buy, flexdollar users can decide for themselves how much to allocate to housing vs. food vs. training.

One problem with a negative income tax or with flexdollars is that some families are needier than others, particularly with respect to medical issues. Someone with a lot of ailments and little in the way of resources will not have enough flexdollars to pay medical bills (remember that there is no longer Medicaid in this approach).

The solution I would propose would be to have taxpayers provide extreme catastrophic health insurance that kicks in if a household’s medical expenses exceed $30,000 in a year. For every additional dollar of medical expenses over $20,000, the government would pay 90 percent. For example, a household requiring $100,000 would receive $72,000. Of course, households would be permitted to obtain private insurance to cover lower levels of spending and/or to cover the remaining 10 percent of higher levels of spending. Overall, this idea bears some resemblance to the idea of “catastrophic reinsurance” that was floated about ten years ago.

I am thinking that we would eliminate Federal support for unemployment compensation. Instead, perhaps a private-sector form of unemployment insurance might emerge, and households would be able to buy this using flexdollars. If it turns out that nobody wants to spend their flexdollars on unemployment insurance, then that might be a sign that unemployment insurance is not such a great thing.

It might be best to phase in implementation. The first phase might be to fold in the EITC, food stamps, housing vouchers, and health insurance subsidies. Those are all programs that already take the form of cash or vouchers given to households. A later phase would be to replace Medicaid and unemployment insurance with flexdollars given to households. (Of course, if states want to continue to continue Medicaid or to provide unemployment compensation, without any Federal dollars to support the, they are welcome to do so. I doubt that would happen.) Another phase would be to wind down all forms of housing assistance, mortgage subsidies, Federal aid to education, training programs, Pell grants, and student loan programs, and replace these with flexdollars.

One challenge with implementation is in deciding which goods and services are eligible for flexdollars. Just as the food stamp program has to decide which groceries are eligible, the flexdollar program has to decide what counts as eligible medical services, housing services, and education services. Yes, that opens up the floodgates for lots of rent-seeking. If that gets really out of control, then it would be better to give people a straight cash benefit.

This is just a concept I am toying with. Criticism welcome.

Note that I once wrote an essay that I called The FlexDollar Welfare State that was not about an idea of this character. Instead, the essay criticized the George W. Bush Administration’s domestic policy initiatives. Actually, the best thing about the essay is the discussion of the oxymoron of “company benefits.”

What is interesting is that workers are not naturally suspicious of companies that pay “good benefits.” Apparently, most people believe that “good benefits” reflect generosity and sharing by the company, rather than a shrewd, calculated effort to save on compensation costs. My guess is that the people who see through the scam of “good benefits” tend to gravitate toward self-employment, which allows them to take their payments in cash and buy benefits themselves.

Basing Decisions on Rank-Order Framing

Posted on by

Neil Stewart, Stian Reimers, Adam J. L. Harris write,

people behave as if the subjective value of an amount (or probability or or delay) is determined, at least in part, by its rank position in the set of values currently in a person’s head. So, for example, $10 has a higher subjective value in the set $2, $5, $8, and $15 because it ranks 2nd, but has a lower subjective value in the set $2, $15, $19, and $25 because it ranks 4th

Pointer from Robin Hanson. As usual, I wonder how well this works in a world where people learn from their past behavior. But this does provide a general theory of a lot of behavioral economics findings concerning biased decisions with respect to risk and time.

Trying to Understand

Posted on by

I was sent a review copy of The Moral Foundation of Economic Behavior, by David C. Rose. Here is what I think is a key passage, which is italicized in the book, on p. 140:

the moral foundation of economic behavior is a norm of unconditional trustworthiness made possible by a preponderance of people possessing an ethic of duty-based moral restraint while not regarding moral advocacy as a moral duty.

I have not been able to follow the argument in the book. This podcast with Russ Roberts gets me closer. Here is what I think Rose is saying.

1. Trust is difficult as groups get large. You cannot completely rely on incentives, reputation, and the like.

2. The best way to obtain trust in a large group is for people in the group to be committed to following moral rules. They won’t cheat, even if they can get away with it, because they think that it is wrong to cheat.

3. People have two potential motives to break rules. One motive is to obtain personal gain. Another motive is to achieve some higher moral objective. Rose wants to say that either motive serves to undermine trust. Therefore, telling someone to focus on higher moral objectives (to “think globally, act locally”) is to encourage that person to break rules, which ultimately will lead to a breakdown in trust.

Again, I do not necessarily get the argument, so do not take my interpretation as gospel. In a way, I see this through the lens of the alleged distinction between act-utilitarianism and rule-utilitarianism. Act-utilitarianism says that you should choose each act in order to make people better off. Rule-utilitarianism says that you should follow rules that, if they were always followed, make people better off. I see Rose as saying that rule-utilitarianism is better, because act-utilitarians cannot be trusted. The act-utilitarian may break his promise for what he sees as perfectly defensible reasons. The rule-utilitarian keeps his promise, regardless. (There is a well-known philosophical problem with the distinction between act-utilitarianism and rule-utilitarianism. You can argue that the former reduces to the latter, or vice-versa. Try to ignore that philosophical problem here, since Rose himself does not rely on that distinction.)

4. Another way to put this is that there are two types of opportunism. There is selfish opportunism, which is breaking the rules to gain for yourself. And there is what I might call utilitarian opportunism, which is breaking the rules in order to achieve what you think is a higher good. About this utilitarian opportunism, Rose would say that:

a) our moral intuition, which is based on based on small-group society, is that utilitarian opportunism is fine. However, this is incorrect.
b) in fact, in a large-scale society, utilitarian opportunism does as much to undermine trust as selfish opportunism.
c) our current educational system and elite culture, rather than urging people to follow rules, urges them to behave morally. It encourages, in both individuals and politicians, utilitarian opportunism.
d) This trend in education and culture threatens to undermine trust.

Again, I am just trying to understand. Had I been the editor of this book, I would have gone back and forth with the author until I was satisfied that the points were made clearly.

Peak Political Psychology

Posted on by

Chris Mooney gives a careless, almost entirely uncritical review of two books that I recently read: Predisposed, by John R. Hibbing, Kevin B. Smith, and John R. Alford; and Our Political Nature, by Avi Tuschman. Mooney writes,

Liberals and conservatives, conclude Hibbing et al., “experience and process different worlds.” No wonder, then, that they often cannot agree. These experiments suggest that conservatives actually do live in a world that is more scary and threatening, at least as they perceive it. Trying to argue them out of it is pointless and naive. It’s like trying to argue them out of their skin.

Note that it is conservatives who Mooney characterizes as intractable. The implicit assumption is that progressives have it right. Political psychology helps to explain the persistence of the wrong-headed view.

Mooney waxes enthusiastic about the genetic/psychological explanations for political differences. The authors of both books are careful to point out that the correlations between personality traits and political beliefs are, while statistically significant, not overwhelmingly large. They explain much less than half of the variation in political beliefs.

Mooney leaves readers with the impression that psychologists explain a larger share of political differences than they themselves claim to explain. In contrast, my guess is that they explain less. These are the sorts of studies that tend to suffer from publication bias (20 studies are tried, one out of 20 passes the “significance test” of having a 5 percent probability of being true by chance, and that study gets published). In these sorts of studies, attempts at replication sometimes fail completely, and even when successful the effects are smaller than in the original published study.

In fact, my guess is that we are approaching peak political psychology. I would bet that ten years from now the links between political beliefs and psychological traits will be regarded as a very minor field of inquiry.

For me, the main problem with this research is that it is almost impossible to reconcile with well-established findings on voting behavior. In my own review of Tuschman’s book, I wrote,

Consider, for example, the fact that Jews and blacks vote predominantly for liberal Democrats. According to Tuschman’s model, this must mean that Jews and blacks are less ethnocentric than other voters (notwithstanding the apparent tribal solidarity of their voting behavior), as well as more Open and less Conscientious. That seems doubtful.

In his conclusion, Mooney advocates tolerance for other political points of view. That is generous of him. Others who have thought that their political opponents had psychological issues came up with idea of the Gulag.

Want more fun? Read Ethan Watters on the germ theory of political beliefs.

he is certain that the most effective way to change political values from conservative to liberal is through health-care interventions and advances in providing clean water and sanitation. “That is clearly the conclusion that the bulk of evidence supports,” Thornhill says. “If you lower disease threats in countries they become more liberal, and that is true for states in this country. The implication is that if you effectively target infectious diseases then you will liberalize the population.”

That explains why Japan liberalized earlier than England. It explains why Germany turned to Hitler. I don’t know why I didn’t think of this theory before. Pointer from Tyler Cowen, who is not buying it, either.

This is not charitable, but what I want is a psychological explanation for why progressives need to make disagreement with their outlook a pathology. I want to know why their capacity for critical thinking disappears when they read studies that make them feel better about being on the left.