Top down *and* bottom up

Charles Stafford’s plea in Economic Life in the Real World: Logic, Emotion and Ethics, is for his fellow anthropologists to take more seriously the methodologies of two other disciplines, economics and psychology. I learned a lot about anthropology from this book, including how much anthropologists disdain economics (I fear we return indifference, on the whole).

Stafford’s argument, in a very interesting and readable book, is that the approaches are complementary: anthropologists focus on the most micro of details, while both economics and psychology are interested in generalisation about human behaviour. Intriguing to see these two bracketed together when psychology has – during the behavioural rvolution – been portrayed as a more realistic version of choice than that (assumed to be) assumed by economists – of course economists have always known that the rational choice version is not ‘realistic’.

He writes: “As a matter of routine, anthropologists accuse economists of being obsessed with ‘individual rational choosers’, but it is surely anthropolgists who are obsessed with detail.” There’s a bit of a paradox here: economics does apply methodological individualism on the whole, and easily overlooks social influences (though not entirely). Yet our concern is with outcomes at aggregate as well as individual levels. Economics is certainly universalist. It was interesting to see psychology being put in the same camp, as a universalist approach.

The plea is therefore for anthropologists to recognise that human psychology is at the heart of economic agency – it isn’t all about historical and cultural context. There is a nice chapter analysing the pros and cons of Robert Lucas’s approach to human capital and economic development, confrinted with the way people in a Taiwanese village think about the education of their children. The book ends too by pointing out that while anthropology resists quantification at all costs, the people whom the author had spent time with during his fieldwork considered numeracy and quantification to be important, not least for their economic lives.

There is surely an interaction between general human characteristics and cultural specificities. Both approaches are needed for a rounded understanding of society. I am particularly interested in the possibility for qualitative methods to inform causal inference, given that empirical identification of statistical relationships in complex systems of economic interactions is pretty much impossible. Identification needs to come from outside the model, rather than by torturing statistical correlations with dubious ‘instruments’.

Anyway, I enjoyed reading this book and welcome the anthropo-econo debate.

51Mcz+Z4MHL._SY344_BO1,204,203,200_I’ve also nearly finished Jeanette Winterson’s Frankisstein, which is terrific.

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Wolves on the trading floor

My lockdown days have become filled with Zoom meetings at the expense of reading on tubes and trains. I’m definitely going to try to cut down on the online calls, which are exhausting (& I hope tech-land is working out why, and trying to fix it).

Meanwhile, I read a very good biography of Walter Gropius by Fiona MacCarthy, another of the wonderful Maigret novels, and also The Hour Between Dog and Wolf: risk taking, gut feelings, and the biology of boom and bust by John Coates.

It’s a really interesting book about the role biological/neurological responses in decision-making, applied to the financial market context. It will surprise nobody to learn that testosterone is one of the key players, generating bull markets (hah!) and excess risk-taking. “Traders are walking time bombs, and banks invariably light the fuse, dangling before them huge risk limits and bonus payments.” There seem some obvious regulatory interventions in the financial context eg ban bonus structures and mandate 50% female employees on trading floors. The book points out that at most 5% of traders are women, even though they outperform men over the long term.

The book braids together sections on the biology and sections tracking the various hormones and nervous impulses in a financial market boom. It’s a terrific read and super-clear. The author is a financial markets guy turned research scientist and having both sets of insights is illuminating.

The part that most interested me though – and that put me on to the book via an FT article about the impact of uncertainty on our health – was pondering what it means for a computer to think and make decisions when human decision-making is so firmly embodied, driven by our physical features, the way the chemicals in the blood stream and the nervous signals shape perception and emotion. The book I’ve now started (Economic Life in the Real World by Charles Stafford ) cites Antonio Damasio’s work in Descartes’ Error: people whose emotions are affected by brain injury are worse at making ‘rational’ decisions. Reason and emotion – involving biochemical and neurological phenomena – go hand in hand. Meanwhile, we are building AIs according to an idea of ‘reason’ modelled on homo economicus.

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Nudging people to be free

I read Cass Sunstein’s latest, On Freedom, while on the train today. It’s both slim and small – just over 100 passport sized pages – so the argument is pretty straightforward. Sunstein is addressing the ‘libertarian paternalism’ critique of nudging. His argument is that suitable choice architecture makes people more, rather than less, free. The book points to earlier responses, such as the fact that there has to be a default so why not use a better one than the status quo? There is always a design. If advertisers are constantly nudging people to eat junk food, why would you *not* want the authorities to nudge in the other direction.

The new element here is the argument that freedom of choice is meaningless without navigation aids: “Freedom of choice is important, even critical, but it is undermined or even destroyed if life cannot be navigated.” His analogy is GPS: people can choose where they want to go but should be helped find the most straightforward route. Freedom needs to be actionable. I was surprised the book didn’t pick up on the attention scarcity point so eloquently set out in Mullanaithan and Shafir’s book Scarcity; it would have been another strand to the argument.

I’m one of those made uneasy by the trend towards nudging, not being sure I do want my government treating me like one of the recipients of an advertising exec’s wiles. One chapter in On Freedom considers the prospect that preferences are endogenous and can be determined by nudges. “After being nudged, they will be happy and even grateful.” This is a highly counter-productive argument for me. Yet I see the strength of some pro-nudge arguments too. Anyway, this book is a very clear and by construction concise case for nudges as freedom.

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A behavioural economics primer

There are so many books about behavioural economics, including bestsellers like Kahneman’s Thinking Fast and Slow, Thaler’s Misbehaving, Ariely’s Predictably Irrational, and the original Sunstein and Thaler Nudge, you might wonder if we need another. It turns out the answer is yes. Behavioral Economics: Moving Forward by Fabrizio Ghisellini and Beryl Chang is aimed at students rather than a more general audience – it even has a few equations. Its real contribution though is to explain the distinction between the ‘American’ approach, which lists many psychological ‘biases’ and frames them as deviations from the standard rational model, and the ‘German’ approach (ie. Gerd Gigerenzer) which accounts for the well-known ‘behavioural’ behaviours as rational satisficing given a limited attention and brain energy budget.

The first half of the book discusses the shortcomings of the standard rational maximising approach (a bit overdone for my tastes), and explains the behavioural alternative, especially the ‘German’ version, which is presented here in the light of Herbert Simon’s work on satisficing and attention. The second half consists of seven open questions for behavioural research, including how to make sense of the proliferation of apparent ‘biases’, how to deal with time preference, the tensions in ‘libertarian paternalism’ and biased nudgers, and the formation of expectations.

So having started with the same question the authors use to open the book – do we really need another one – I’d agree with them that there is a gap to fill. This is a really useful book for introducing students to behavioural economics and the key research questions in the field, far more so than the pop behavioural literature, excellent as some of it is. Unfortunately, it won’t get widely used given the shocking pricing by the publisher (Palgrave Macmillan) – it must be so frustrating for authors to have a publisher who sets prices only libraries will ever pay (and decreasingly often at that).

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The Community of Advantage

I very much enjoyed reading Robert Sugden’s The Community of Advantage: A Behavioural Economist’s Defence of the Market. It tackles the aspect of behavioural economics that has always troubled me: the presumption that there’s a wise policy-maker who somehow knows better than I do what’s good for me and will act like a government version of Mad Men to non-coercively get me to choose accordingly. In other words, libertarian paternalism is a contradiction in terms, and in reality. In fact, I’m torn because – like many other “experts” –  I do think economists (or doctors, or engineers, or farmers, or nuclear physicists etc) often do know better than most of us what makes for a better outcome. Even in less expert domains, such as the provision of news, it is surely better not to give people exactly what they want, if that’s bias-confirming news rather than impartial and accurate news.

However, Lord Reith and other paternalists didn’t pretend to be ensuring people got what they *really* want, rather than what’s good for them according to the paternalist. As Sugden points out early in this excellent book, most behavioural economics implicitly assumes it’s possible to discern a set of ‘true’ but latent individual preferences, undistorted by the various psychological mechanisms identified in the literature. It addresses policy prescriptions to a benevolent social planner, the policy maker – in other words it takes what’s referred to as “the view from nowhere”, an impartial spectator outside society. This enables a normative assessment of behavioural policies. It’s an appealing idea in many ways, and an admirable effort to take this impartial perspective. But it is of course open to the standard public choice critique and has led (as I argued in my Tanner Lectures some years ago) to bad economic policy choices. Sugden also criticises Sen’s alternative of finding impartiality in the ability of a proposition to withstand reasoned public debate; “I cannot see why I am morally required to justify my private choices by reasoned arguments and to expose those arguments to public scrutiny,” he writes.

Sugden advocates instead a contractarian approach, so rather than asking is aggregate welfare maximized, the question is: “is it in the interest of each individual to accept the rules of that institution, on the condition that everyone else does the same”. The behavioural challenge is devising economic institutions satisfying this condition with respect to individuals who do not know what their preferences are. To translate this into a normative criterion useful for policy, Sugden proposes that: “It is in each individual’s interest to have more opportunity rather than less.” In other words, there is an an analogue to the invisible hand theorem: “The guiding idea is that a well-ordered economy is an institutional framework that allows individuals to co-operate with one another in the pursuit of what they perceive as their common interests.” He traces the approach to Hume’s view of good institutions in a well-ordered society as self-reproducing and self-enforcing conventions – self-enforcing because of mutual advantage, albeit emerging in an evolutionary way in society. Moral reasoning is addressed to individuals rather than a nebulous ‘policymaker’ outside of society.

A couple of technical chapters demonstrate that the contractarian approach is a generalisation of the usual welfare theorems in an exchange economy. The book then turns to policy questions: what kind of regulation can be justified in normative terms if the criterion is expanding individual opportunity (rather than satisfying their ‘true’ latent preferences)? For example, what about someone choosing how much to save for their retirement, a well-known behavioural policy example. Sugden suggests: “Behavioural economists’ propensity to interpret context-dependent preferences [like the opt-out/in pattern] as evidence of self-control problems may be a side-effect of their commitment to the model of the inner rational agent.” He argues that the policy drive to increase personal retirement savings is driven by policy regimes in which pensions are privately provided – so the behavioural policy is there to serve the regime rather than the individual. “A contractarian solution to this problem may require some form of compulsory saving.” In short, the nudge is a fig leaf and the better policy (increasing individuals’ opportunity sets) would be a straightforward regulated contribution.

The term ‘community of advantage’ comes from Mill. Sugden is making an ardent liberal case, while recognising the realities of human psychology. I remain somewhat torn. To go back to Lord Reith, British TV viewers, when asked, are very clear that they prefer watching sport, comedy, movies and soap operas, but they also definitely want their licence fee to support the provision of impartial news, children’s programmes, educational material and other wholemeal stuff. Those preferences are not latent, but rather acknowledge explicitly the mutual as well as the individual benefit. However, Sugden’s approach is very attractive & I’d say The Community of Advantage is a must-read for those interested in behavioural and welfare economics.

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