When Michael Lewis came to dinner

That Michael Lewis came to dinner at our house once. This was about 30 years ago, when he was dating a friend of mine for a while, and before Liar’s Poker made him famous. He was charming – working in finance – but if only I’d known who he’d turn into, I’d have quizzed him closely about his stellar writing technique.

I’ve just devoured The Undoing Project, his much-trailed book about Daniel Kahneman and Amos Tversky, and their launching of the behavioural revolution in economics, over two evenings. It’s a wonderful book. I heartily recommend it as a Christmas gift for the economists in your life, or a treat for yourself over the holiday.

The book weaves together the personal and intellectual biographies of its protagonists. It explains the ideas, including the paradoxes requiring one to think about probabilities, beautifully clearly. It’s also just a terrific human story about an intense creative friendship as it flowed, and ebbed, over the decades and continents. If they’re not always totally likeable, the two characters are always immensely sympathetic.

It will surely send many readers on to Kahneman’s Thinking Fast and Slow, which requires some mental effort but everybody who fancies themselves an intelligent, educated person ought to have read. Although I’ve read loads of behavioural economics books and papers, and so think I know about a lot of the insights the literature has given us about how our decision-making processes function, there were still some new (to me) ones in The Undoing Project. These are two I found. Tversky had a rule that you must wait a day before replying to any invitation, even one you wanted to accept. It becoms much easier to decline the ones you don’t want. This is advice I definitely need to follow.

The other comes from thinking about reversion to the mean. An exceptionally (beyond average) good or bad performance is usually followed by one that is less good or less bad (closer to average).  Yet coaches and teachers and bosses often hold that if you praise someone for doing well, they do less well next time, and if you shout at someone for doing badly, they do better next time.  “Because we tend to reward others when they do well and punish them when they do badly, and because there is regression to the mean, it is part of the human condition that we are statistically punished for rewarding others and rewarded for punishing them,” wrote Kahneman. This strikes me as profound and something one ought to act on.

It was surprising to learn that at the height of his fame, in the years before his death, Tversky was bugged by the criticism of their work by Gerd Gigerenzer. I’ve never seen Gigernenzer’s argument that heuristic rules of thumb were rational because they economized on brain energy as a fundamental attack on Kahneman and Tversky, more an extension. There’s surely loads still to be discovered about decision making (especially under uncertainty), not least when decisions are conventionally ‘rational’ versus when ‘behavioural’ behaviour kicks in.

As economics is all about decision-making in the domain of resource use and allocation, this overlap with psychology and cognitive science is an exciting area – even though I’m deeply uneasy about the eagerness with which some economists and policy makers are leaping to adopt ‘nudges’ as another handy tool for social engineers to get the people to behave as they ought. We certainly ought to be teaching this at A level and in universities. The Undoing Project is a great book to introduce behavioural economics – and a cracking good story, told by a master.

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Not the smartest animals

The title of Frans de Waal’s latest book is a rhetorical question: Are We Smart Enough to Know How Smart Animals Are? I thoroughly enjoyed reading it. De Waal’s deep knowledge shines through every sentence, as does his delight in all the creatures (especially other primates) he has spent his career studying. The book is about the evolution of cognition and emotion in animals (including humans). It particularly debunks Skinner’s behaviourism – mental processes as a black box, but manipulable using reward and punishment. (This of course the approach behind the present fashion for behavioural economics, a fashion I find troubling because some of its enthusiasts do so clearly see themselves as omniscient scientists ordering society for the better by manipulating the choices of their less intelligent subjects.)

I learned a lot from the book, including that the elephant brain is the one with the most neurons (about 3 times as many as we do). The neural differences between humans and other primates are not sufficient to make us unique in all aspects (although we clearly are in some, notably language). De Waal argues we should assume continuity, a spectrum of cognitive abilities between different animals, rather than sharp and wide distinctions. He notes that psychology is moving to accept this assumption, but the social sciences tend to assume human discontinuity – “But what does it mean to be human?” he reports social scientists asking him. “I usually answer with the iceberg metaphor, according to which there is a vast mass of cognitive, emotional and behavioural similarities between us and our primate kin. But there is also a tip containing a few dozen differences. The natural sciences try to come to grips with the whole iceberg, whereas the rest of academia is happy to stare at the tip.”

The scientific project must therefore be to develop a unitary theory of different cognitions, how cognition operates in general, and then in the case of each particular species. The book emphasises two important contributors: sense perceptions (is vision the most important to the species? or hearing, or smell?); and social relations (is it a species with strict social hierarchies, like chimpanzees, or solitary, like the octopus?) “Cognition and perception cannot be separated… they go hand in hand,” he writes. (Interesting to reflect on what this means for AI. The question is not so much what androids dream of as what they see or hear.)

To crown a wonderful book, it ends with a quotation from David Hume: “Tis from the resemblance of the external actions of animals to those we ourselves perform, that we judget their internal likewise to resemble ours; and the same principle of reasoning, carried one step farther, will make us conclude that since our internal actions resemble each other, the causes, from which they are derived, must also be resembling. When any hypothesis, therefore, is advanced to explain a mental operation, which is common to men and beasts, we must apply the same hypothesis to both.” As Hume summed it up, “No truth appears to me more evident than that beasts are endowed with thought and reason as well as men.”

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Wanting what works to work

A book with the title [amazon_link id=”0674089030″ target=”_blank” ]What Works: Gender Equality by Design [/amazon_link]is very enticing. Could the author, behavioural economist Iris Bohnet, really have the effective, evidence-based techniques for improving the earnings and job market outcomes of women relative to men? Does she have the answer to the dilemma that a woman can get on by acting like a man, only to be criticised and disliked for being unfeminine.

[amazon_image id=”0674089030″ link=”true” target=”_blank” size=”medium” ]What Works: Gender Equality by Design[/amazon_image]

Well, Bohnet’s list of interventions is very persuasive and she cites plenty of supporting evidence. The first part of the book sets out the evidence of bias, conscious and unconscious. Part 2 is about people management, and focuses on businesses’ hiring, promotion and management. Part 3 is about education. The final part is a set of broader insights about ‘designing’ diversity and covers topics such as the importance of role models, the effectiveness of diverse groups in decision-making contexts (boards and elsewhere), and the role of social norms, of transparency, and indeed of ‘design’, a mnemonic for ‘data, experiment and signpost’. Bohnet argues that use of data uncovers bias, experimenting with changes, and using signposts – largely behavioural nudges – to change people’s behaviour. Do this, she promises, and gender inequality could be overcome within years, not decades.

i’m inclined to agree. The book’s evidence seems solid. There are many examples, such as Google’s discovery that its female employees were twice as likely to quit as the average. It mined its data to discover that the issue was really that parents were more likelt to leave, and it therefore extended both maternity and paternity leave. Now there is no difference between male and female quit rates. The Kennedy School’s own points system (Bohnet is a professor there) looks reasonably effective.

However, the question [amazon_link id=”0674089030″ target=”_blank” ]the book [/amazon_link]doesn’t address is what will get institutions and businesses to bother. Even those paying lip service to gender equality don’t have a strong incentive to change their ways, run (largely) by men (largely) for men. Why would they care if profits could be a bit higher in the long run if they acted differently? Things suit them very well as they are. It is hard to see organisations implementing the ‘what works’ measures described here unless they happen to be run by men (or women) who are already converts to the cause. It’s like the old joke about how many psychiatrists it takes to change a lightbulb (only one, but the lightbulb has to really want to change).

So I am ever more certain that tougher legislation will be required to get things moving. Targets for women on the boards of listed companies. Mandated minimum quotas for women and members of minorities in the senior ranks of bodies funded by taxpayers. When that day comes, all those institutions will be able to turn to this book to find out how to do it.

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Taxing you healthy

A guest review by Koen Smets.

Policymaking is increasingly turning to behavioural insights: the Nudge Unit, set up nearly six years ago in the UK, is going from strength to strength, and numerous other countries have followed suit. So it is remarkable to find a new book advocating a boring, conventional economic instrument to influence consumer behaviour: the tax incentive. In [amazon_link id=”1907994505″ target=”_blank” ]Bad Habits, Hard Choices[/amazon_link], ‘recovering economist’ David Fell argues for what he calls a ‘SmartVAT’ to make people choose healthier food and drink.

[amazon_image id=”1907994505″ link=”true” target=”_blank” size=”medium” ]Bad Habits, Hard Choices: Using the Tax System to Make Us Healthier (Perspectives)[/amazon_image]

It is a short book, the length and readable style of which belie both the complexity of the subject matter and the radical nature of the core idea: “a bold proposition that goes well beyond a sugar tax or a fat tax.”

To build his argument, Fell introduces a large number of concepts involved in what he sees as problematic consumption: VAT and excise duties, information asymmetry, market theory and consumer choice theory, externalities, commitment strategies and many more. It is impossible to cover them all in depth in a mere 120 pages, but Fell does a remarkable job in the book in describing and illustrating the various – often conflicting – forces at play.

He discusses the fine balance government needs to strike with its surreptitious taxes, managing the disquiet of businesses, media and consumer while still trying to maximize revenue; as Colbert said, “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Fell also highlights the limitations of the conventional wisdom that says taxation will depress the demand for taxed goods, for example when the demand is inelastic – as it is for petrol.

However, while Fell may be a self-confessed recovering economist, he is clearly not the kind of two-handed economist who drove Harry Truman to distraction. He paints a decidedly one-handed picture, populated with economists as dogmatic market fundamentalists, food manufacturers as manipulative seducers, and hapless consumers whose choice is restricted to products that deliver the returns demanded by ‘capital’. Even for someone agreeing that the suppliers play a significant role in influencing our consumption habits, this becomes increasingly irritating.

The informed consumer, according to Fell, is as much a myth as the hyper-rational homo economicus. The messages we get are biased, partly due to our own cognitive limitations (few people consult the nutrition labels), and partially because what benefits the suppliers is emphasized. Marketeers extol the virtues of luxury goods (another recurring bugbear), but don’t promote the free and healthy activity of walking – leading to the author’s somewhat bizarre claim that, “Capital doesn’t like it when you walk because it gets no reward.” Would we conclude that, say, the Women’s Institute doesn’t like us windsurfing because it does not promote this activity?

Fell uses his own research in [amazon_link id=”1907994505″ target=”_blank” ]the book[/amazon_link], showing for example that 31% of his sample agrees that they “buy more than they need most times they visit the supermarket”. The vagueness of such surveys (for example, how do we define ‘what we need’?) doesn’t stop him drawing strong conclusions.

In short, the author blames information asymmetry, orchestrated by ‘capital’, as the main cause of obesity, and argues that what we need is a collective commitment device. If, as a society, we agree to subsidize ‘good’ food and slap a hefty tax on ‘bad’ food, then that will help us stick to our commitment to eat more healthily – much like setting our alarm clock tonight commits us to getting up on time tomorrow morning.

Fell sets out a 4-step approach to execute his radical proposal. The first two steps rest on a deliberative process: citizens and experts come to a consensus, not only on what constitutes healthy and unhealthy foods, but also on what the subsidy and tax rates should be. Will this work? Fell refers to a few cases where a similar process was used, but these differ both in scope and scale from what he himself calls a “dauntingly difficult” task.

Once it is clear which goods needs to carry which tax, the third step is quite straightforward: implement the new rates, and make the taxes and subsidies salient at the point of sale. The final step is to correct the mistakes the author believes will inevitably be made.

The author confesses to little confidence in the practical adoption of his plan: too much resistance from vested interests: the dreaded economists, the Treasury, the government, the media… and the consumer. That may be so, but there are two even bigger problems.

Fell’s SmartVAT assumes that consumers are rational, responding to the tax incentives. But citizens are resourceful, as the consumption of tobacco illustrates. It is mostly the less well-off who smoke, which suggests that they drop other purchases in order to be able to buy cigarettes. And if people can find ways of importing cheap smokes (legitimately or otherwise), they will do the same for ‘bad’ foods. Ironically, Fell personally illustrates the futility of raising the cost of unhealthy products: the price of cigarettes has risen twice as fast as inflation in the last 25 years, but he is still buying them.

But the most serious criticism that should be levelled at Fell’s idea is that he attaches no value at all to the pleasure people might derive from consuming foods he considers as unhealthy. There is, in his view, no trade-off to be made, and he explicitly rejects the notion that there are no unhealthy foods, only unhealthy diets. So the majority of people who consume ‘bad’ foods in moderation will be penalized, having to pay more for a harmless form of enjoyment.

It is this disregard for the core of all economic thinking, the trade-off, which makes the book ultimately a disappointment for this reviewer.

Koen Smets is an accidental behavioural economist, who works as an organization development specialist. He uses elements from both orthodox microeconomics and behavioural economics to bring about behavioural change. He is on Twitter as @koenfucius

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People and economists

There’s a chapter online from a forthcoming book, Economic Psychology edited by Robert Ranyard, called How Laypeople Understand Economics, by David Leiser and Zeev Krill. Although not entirely surprising, the chapter is very interesting. Those of us who are economists long ago internalised the subject’s distinctive way of thinking and understanding of how variables are related. Most people find economics difficult, even mysterious, however. There are some excellent demystifications, from John Lanchester’s [amazon_link id=”039335170X” target=”_blank” ]How to Speak Money[/amazon_link] to Tim Harford’s [amazon_link id=”0349119856″ target=”_blank” ]Undercover Economist[/amazon_link], and all the rest of the popular economics literature. But as this chapter points out, laypeople – including many politicians – will use one of three strategies for trying to make sense of economic discussions: use heuristics; use metaphors; fall back on teleological or causal explanations.

One example of a common heuristic is ‘good begets good’ – if there is a change in one variable perceived to be good, it is assumed it will cause good changes in other variables. On metaphors, the authors comment: “Understanding of financial marketsrelies onseven metaphors: the market as a bazaar, as a machine, as gambling, as sports, as war, as a living being and as an ocean. Crucially, each metaphor highlights and hides from view certain aspects of the foreign exchange market. Some of themetaphors imply market predictability, others do not. For instance, the sports and themachine metaphors were found to be associated with fixed rules and predictability, whereas the bazaar and war metaphors with unpredictability.”

[amazon_image id=”039335170X” link=”true” target=”_blank” size=”medium” ]How to Speak Money: What the Money People Say-And What It Really Means[/amazon_image]  [amazon_image id=”0349119856″ link=”true” target=”_blank” size=”medium” ]The Undercover Economist[/amazon_image]

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