The logic of failure

At the talk he gave last week, Cass Sunstein warmly recommended The Logic of Failure: Recognizing and Avoiding Error in Complex Situations by Dietrich Dörner. So warmly that I bought a copy and read it on my train journeys yesterday. It’s a very good account of what goes wrong with decision-making in complex situations – including any economic context – although I wouldn’t be quite as glowing in my praise as Prof Sunstein was. Still, definitely one to read, along with Nudge, Predictably Irrational, The Invisible Gorilla, Risk Savvy, Gut Feelings etc etc., if the issue of decision-making is of interest to you.

Some of the psychological territory it covers is familiar from the now-ample behavioural economics literature. This includes the difficulty of making calculations, the salience of recent events or things we just happen to have noticed, the problem of limited attention. However, less familiar was the diagnosis of how hard many people find it to take account, not only of interactions between variables, but also dynamics – it seems almost impossible for many people not to extrapolate in straight lines, and not to be too impatient to wait for feedback.

The book uses the results of lab experiments to illustrate the point over and over, including very simple challenges like including a time delay between setting a regulator dial and achieving the target temperature. The relationship between dial and degrees C is simple and linear in this example, but only one participant is patient enough to wait for the response to her first moves of the dial before finding the right setting. This inability to wait is obviously a near-universal characteristic. Certainly, my husband has this issue with every shower he gets into despite my calmly explaining it to him many times, and ends up with the totally predictable oscillating temperatures as he over-reacts to short-term feedback. (Of course, he does have the patience to be married to an economist.)

The book concludes that people can learn to be better decision makers but concludes with a very long list of the traits that we need to acquire to achieve good outcomes in non-linear dynamic and complex contexts with limited information i.e. the world. I finished reading it feeling more pessimistic. There are many examples given of participants in experiments who concluded that it was efficient to have inflicted a famine on a country on the computer, or that a bad outcome was the result of a conspiracy (by the computer!) against them. As the world is ever more replete with instant feedback, what are the chances of getting a more patient and psychologically sophisticated politics?

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Who is nudging whom?

Cass Sunstein has been visiting the UK and last week I attended a breakfast at which both he and the LSE’s Paul Dolan spoke. Prof Sunstein’s latest book (which I have read) is Why Nudge?, and Prof Dolan’s (which I haven’t yet) is Happiness by Design.

    

As ever, the evidence about the effectiveness of various nudges is impressive. Nor is there any answer to the point that some choice architecture is inevitable, the only issue is whether you want it to be the status quo or something that can achieve better outcomes. But neither speaker could answer the question I have about the legitimacy of nudging: who decides what is ‘better’? Is it the (largely) white, male, middle class experts who work in the policy world? What will the wider consequences be of adopting nudges that get ordinary people to pay more income tax and cheat less on benefits, without looking for nudges that get bankers to pay themselves lower bonuses or extract more corporate tax revenues from big companies?

Both speakers made some interesting points, though, about the research agenda. There are conflicting behavioural findings to be somehow reconciled, more needs to be understood about how context makes a difference to outcomes, and there is a straightforward need for much more evidence from RCTs.

Fascinating stuff. Surely the fact that we can’t not nudge in some way makes the legitimacy question all the more urgent.

The Enlightened Economist Prize, 2014

A month ago I announced the shortlist for the Enlightened Economist Prize this year – as a reminder, the rules are that any book I happened to read during the previous 12 months is eligible, and the choice is entirely mine. The prize is the offer of dinner to the winner.

It has been a tough choice this year as I enjoyed all the books and there was no obvious standout. So it has taken much deliberation for me to decide to award the prize this year to Complexity and the Art of Public Policy by David Colander and Roland Kupers. It wasn’t the easiest read on the shortlist, but is a thought-provoking book from which I learned a lot. Here is my review of the book. Congratulations to the authors, and if they should be visiting London, dinner is on me!

 

Who owns the future? Not you

It’s taken me a while to get through Jaron Lanier’s Who Owns the Future? It was highly recommended to me and I found it an interesting read. But as it’s a book about digital economics by a non-economist, and therefore written in a language foreign to the way I think about the issues, it was a surprisingly difficult read. I don’t think normal people would have the same difficulty.

The theme of the book is that the economy has developed in ways that enable what Lanier calls ‘Siren Servers’ to appropriate the past and present labour of many other people for themselves, and thereby hollow out the middle classes. This situation is the result of the way the Siren Servers – he means Amazon, Facebook, Google etc – have used the presumption that “information is free”, specifically the data they all gather about all of us and by all of us, but advertising is paid for. Lanier quite rightly points out that the customers of these titans are the advertisers, not the individual users. Lengthy user agreements that nobody reads means the corporations take no risks, only revenues.

Lanier seems to believe that eventually this economic structure will become unsustainable because it is destroying normal middle class livelihoods and there will be nobody to buy the products being advertised. The Siren Servers become so big that they eat their environment (just as the financial markets did).

His proposed solution is nano-payments attached to information generated by individuals, whether that’s their ‘data’ or their creative or digital products. “If the system remembers where information originally came from, then the people who are the sources of information can be paid for it.” He points out that HTML, although marvellously convenient, only links one way, while Ted Nelson, an early thinker about linking, argued for two-way links. This is less convenient because of the additional updating required. In fact, the book left me completely unclear how two way linking to enable nano-payments would work in practice. However, Lanier argues: “This is the only way that democracy and capitalism can be in alignment.” Without greater symmetry between supplier and acquirer of information, the information economy will collapse.

I have an instinctive sympathy with the book’s argument, but do not think the unsustainability in capitalism we all can see at present boils down to the absence of micro-payments implemented via two-way hypertext linking. One question is Jean Tirole’s: will new digital giants benefiting from network effects come along and displace Google et al? If that hasn’t happened within, say, a decade, then the time would come to regulate these vital utilities to ensure they serve the public interest. More generally, I would look at beefing up competition policy as one of the levers to loosen the political power acquired by ‘Siren Servers’ – in which category I’d include the financial sector as well as the ICT sector.

The question of distributing productivity gains to the population as a whole is not confined to the digital economy either. While it’s right to be concerned about the jobbing musicians and journalists whose jobs are being destroyed by “free” online content, there are lots of other standard middle class jobs seeing living standards decline, so the economic and political issues go far beyond what’s covered in Who Owns the Future? For of course this started some time ago with blue collar jobs. However, it’s an interesting book, and it’s always worthwhile to hear what experts in other fields have to say about economic issues, for their different perspective. I think Lanier’s diagnosis and solution will have quite wide appeal.

Gloomy thoughts about systemic risks

The ever-grimmer news about the spread of Ebola reminded me of the section about epidemics in the globalized world in The Butterfly Defect by Ian Goldin and Mike Mariathasan. The book is about the fragilities inherent in such an inter-linked world – economic, financial, social, environmental. And these are linked: a global pandemic will certainly have financial and economic consequences.

One of their key recommendations is that the international community needs to prepare for the realisation of big risks and be ready to act swiftly. As they acknowledge, there is nothing new about pandemics – think the Black Death or Spanish Flu after World War I. They also point out that the World Health Organisation  dealt swiftly in response to SARS, and H5N1 – indeed, they say the ability of public health authorities to act on a global basis is a model for, say, financial authorities. SARS is a “superspreader” and quickly affected large cities. Speed of response is vital, however – the book contrasts the fast reaction to SARS with the tragically slow reaction to HIV/AIDS, initially a pariah disease which prompted little response until famous people started to fall ill.

In short, early detection and system-wide early reaction are everything. It’s not clear to me that the global public health response to Ebola – a disease staring in poor, rural countries – has been fast enough.