Tag Archives: Behavioural

Thinking, fast, slow, and other tempos

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Any sentient economist these days is interested in how people make decisions, and how this differs in different contexts. It isn’t as simple as saying the old rationality assumptions are false and the new ‘behavioural’ rules of thumb apply.

For example, Paul Dolan of the LSE (whose new book is [amazon_link id=”0241003105″ target=”_blank” ]Happiness By Design[/amazon_link]) reports a trial to see what kinds of intervention were effective in getting consumers to reduce their electricity usage. A social comparison ‘nudge’ in the shape of a letter (but not an email) about what similar households were paying was very effective, but so was a financial incentive in the shape of money off the bill if certain target reductions were achieved. But the social nudge and the financial incentive when combined led to – zero reduction. So like all supposed silver bullets, nudge policies need to be fired with care and a single shot will rarely hit its target.

Anyway, the ur-books about the psychology behind how people make decisions are Daniel Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking Fast and Slow[/amazon_link] (thinking slow being rational calculation and thinking fast being mainly what we do), and Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings: Short Cuts To Better Decision Making[/amazon_link] – the latter arguing that ‘thinking fast’ is actually rational because it economizes on energy- and effort-intensive calculation.

[amazon_image id=”0241003105″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]  [amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]  [amazon_image id=”0141015918″ link=”true” target=”_blank” size=”medium” ]Gut Feelings: Short Cuts to Better Decision Making[/amazon_image]

I just read another two books underlining how hard people find thinking. One is Ben Goldacre’s [amazon_link id=”000728487X” target=”_blank” ]Bad Science[/amazon_link], which I found on my iPad recently and clearly downloaded ages ago. It’s a terrific book for teaching some mildly numerate critical thinking, and very funny. It’s as good as my previous favourite in this category, Jamie Whyte’s [amazon_link id=”0954325532″ target=”_blank” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_link].

[amazon_image id=”000728487X” link=”true” target=”_blank” size=”medium” ]Bad Science[/amazon_image]  [amazon_image id=”0954325532″ link=”true” target=”_blank” size=”medium” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_image]  [amazon_image id=”006124189X” link=”true” target=”_blank” size=”medium” ]Influence: The Psychology of Persuasion[/amazon_image]

The other is the huge airport bestseller [amazon_link id=”006124189X” target=”_blank” ]Influence: The Psychology of Persuasion[/amazon_link] by Robert Cialdini. This irritated me enormously, partly because it drags out a long article to book length, with a mildly patronising tone throughout; and partly because it poses as a guide to empowering the reader to avoid being manipulated by salesmen but is actually clearly a handbook of sales techniques. Despite having been irritated by it, however, it does convincingly illustrate six psychological characteristics that make people open to persuasion: the compulsion to reciprocate, the desire to be consistent, the power of social ‘proof’ in the form of other people’s choices, the deference to authority, the urge to grab hold of anything in short supply, and our willingness to do things for people we like.

One especially powerful example in the ‘consistency’ for the world of policy, I thought, was that people whose self-image was made into one of ‘public spirited citizen’ through one experimental intervention then continued to act in a public spirited way in other contexts. While salesmen want to exploit quick thinking, so too might policy makers. And as Gigerenzer argues persuasively, thinking ‘slowly’ all the time would be inefficient. Maybe the thinking ideal is, like dancing a good foxtrot, getting a good mix of fast and slow.

Thinking, made simple

Investment and values

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Normally I don’t read books about investment, but I know and like Guy Spier, author of [amazon_link id=”1137278811″ target=”_blank” ]The Education of a Value Investor[/amazon_link], so obviously I was going to buy it. And, once I started, I devoured the book in a couple of train journeys. It is a thoroughly enjoyable and enlightening read.

[amazon_image id=”1137278811″ link=”true” target=”_blank” size=”medium” ]The Education of a Value Investor[/amazon_image]

The investment advice is actually pretty straightforward: be a value investor. Guy is a *huge* admirer of Warren Buffett.

What’s far more interesting, and perhaps even practically useful, in the book is the advice about how to build into your life the capability to be a value investor. Guy does this through recounting his own career, intellectual and psychological trajectory, from ambitious ex-Oxford and HBS financier living the high life in New York to well-grounded, Zurich-based investment fund manager and family man. The personal story carries the underlying message about the psychology and morality of investing in a very appealing narrative.

For the difficulty in actually being a value investor, as Guy explains it, is human psychology – the strength of social pressure, of ‘everybody’s doing it’, the buzz of responding to the latest information, the imperatives created by rivalry and status. He cites the literature on behavioural economics and finance, and also explains how he has put it into practice in his own life. For example, he checks Bloomberg screens and stock prices only occasionally and has the terminal in a separate room from the place he reads and thinks; never places orders during trading hours; has an investment checklist before acting on a decision; has a group of like-minded people to discuss issues with; moved out of New York to run his fund, Aquamarine – whose returns look impressive. I’m not an investor but made a few notes about habits that seem very sensible.

One very interesting chapter is an early one in which he describes his first job at a cut-throat and unscrupulous New York investment bank, D.H.Blair. He had ignored warnings about its reputation on joining the bank as a ‘vice president’, but quickly found that the only way to survive in the Wall Street game was to play by the rules of the game, unpalatable as they are. It reinforced my view that the problem with so much of finance is not that there are some ‘bad apples’ but that it’s systemic – the structure of the barrel turns all the apples bad. So punishing some individuals, or working on bankers’ ethics, will make no difference at all.

Maybe it’s because he and I had the same intellectual formation, having been first taught economics by the wonderful and brilliant Peter Sinclair at Brasenose College, Oxford (albeit some years apart, as Guy is younger than me) that I find the philosophy behind [amazon_link id=”1137278811″ target=”_blank” ]The Education of a Value Investor[/amazon_link] so appealing. Guy & I met and became friends relatively recently, but a teacher who catches you at the right stage of your life is of course a uniquely powerful influence on your life. Interestingly, Guy questions his elite education, though, suggesting it was a good grounding for conventional, worldly success but taught the habits of reductionism and intellectual arrogance. However, in his case at least, a modest and wise man seems to have been forged by it.

The logic of failure

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At the talk he gave last week, Cass Sunstein warmly recommended [amazon_link id=”0201479486″ target=”_blank” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations [/amazon_link]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 [amazon_link id=”0300144709″ target=”_blank” ]Nudge[/amazon_link], [amazon_link id=”0007256531″ target=”_blank” ]Predictably Irrational[/amazon_link], [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link], [amazon_link id=”1846144744″ target=”_blank” ]Risk Savvy[/amazon_link], [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings [/amazon_link] etc etc., if the issue of decision-making is of interest to you.

[amazon_image id=”0201479486″ link=”true” target=”_blank” size=”medium” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations[/amazon_image]

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?

Who is nudging whom?

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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 [amazon_link id=”1476726620″ target=”_blank” ]Why Nudge?[/amazon_link], and Prof Dolan’s (which I haven’t yet) is [amazon_link id=”0241003105″ target=”_blank” ]Happiness by Design[/amazon_link].

 [amazon_image id=”0300197861″ link=”true” target=”_blank” size=”medium” ]Why Nudge?: The Politics of Libertarian Paternalism (The Storrs Lectures)[/amazon_image]    [amazon_image id=”0241003105″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]

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.

Nudge, nudge

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On my train rides yesterday to the Royal Economic Society Conference at my new home institution (from September), the University of Manchester, I read [amazon_link id=”0300197861″ target=”_blank” ]Why Nudge? The politics of libertarian paternalism [/amazon_link]by Cass Sunstein. This is obviously a progression from [amazon_link id=”0141040017″ target=”_blank” ]Nudge[/amazon_link], his bestseller with Richard Thaler, and a reply to the often-made criticism about the paternalism inherent in nudge policies.

[amazon_image id=”0300197861″ link=”true” target=”_blank” size=”medium” ]Why Nudge?: The Politics of Libertarian Paternalism (The Storrs Lectures)[/amazon_image]

The book is a very good short primer on the philosophy of this kind of intervention, drawing on behavioural psychology and economics. It does not cover either how to do ‘nudges’, or the cognitive biases the policies seek to compensate for – for that, you need the predecessor book. The aim here is to argue back against the view that for all the biases in decision-making that we are learning about, it is better for people to be free to make their own mistakes than to have government bureaucrats or politicians tell them what to do.

Sunstein makes two very strong points in his counter-blast. One is that there is no avoiding ‘choice architecture’. For example, if a government decides not to make pension contribution decisions opt-out, it is thereby choosing to make them opt in. If a cafeteria puts chocolate by the check-out, it is choosing not to put fruit there.

The other is that governments make lots of interventions in individual choice, constantly. These range from declaring some activities (taking drugs, say) a crime punishable by prison or fines to regulations (how you make alterations to your house) to tax incentives (a high tax on cigarettes) all the way through to educational campaigns (pictures of diseased lungs) and advertising (pay your tax on time to avoid the fine). Nudges are indeed at the soft end of this spectrum of government actions.

So why do I, like many others with a libertarian streak, feel uneasy about nudging in general? Not the specifics; the pension opt-out is clearly sensible, and using behavioural insights in designing competition remedies similarly a no-brainer. It’s the general idea of governmental Mad Men that’s disturbing, the sense of manipulation and infantilisation of individual voters that implies. Not that I’m naive about the capacity of individuals – including me – to take sensible decisions much the time. As Sunstein points out, the work of Gerd Gigerenzer on decision-making heuristics clearly suggests people would benefit from the short-cuts well-designed choice architecture can create.

The ‘yuk factor’ I felt grew all the stronger on reading: “Personalized paternalism is likely to become increasingly feasible over time. We can imagine highly personalized default rules, attempting to specify diverse rules for people in different circumstances.” Sunstein acknowledges the huge information advantage people have about their own interests compared to any bureaucrat, but evidently thinks that the information asymmetry will reduce – and anyway argues that the structures of public sector policy-making and impact assessment guard against bad nudges.

I’m not so sure, thinking about the growing pressure of increasingly polarised and populist politics on administrative decisions. We should consider the effect of ‘soft’ behaviour-manipulation policies on how the people feel about politics and government: is nudging going to increase or decrease further the low trust voters have in their governments? And one final question is whether behavioural responses will change the more people understand the cognitive biases and the nudges intended to work around them – will we learn? Is there a Goodhart’s Law for nudge policies?

Don Draper for prime minister?