Posts Tagged ‘Behavioral Economics’

Richard Thaler Wins the Nobel Prize for Economics in 2017

November 15, 2017

Assiduous readers of the Healthymemory blog should recognize the name from previous healthy memory blog posts. Richard Thaler is a behavioral economist. Early in his career he met up with the psychologists Amos Tversky and Daniel Kahneman. Amos Tversky and Daniel Kahneman formulated Prospect Theory. Most economic models are normative. That is they describe what a rational human should do if behaving optimally. Prospect Theory explained what people actually do. The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics. The model is descriptive: it describes what people actually do. Kahneman won a Nobel Prize in 2002 primarily for Prospect Theory. Unfortunately Amos Tversky had passed away and was not eligible for the prize.

Prospect Theory was the beginning of behavioral economics. In addition to describing how people actually behave in the economic realm, it develops techniques to nudge people in making good decisions. For example, making what is regarded as the best decision in a list of alternatives the default decision greatly increases the number of people who choose that option. For example, if making deductions for a pension is the default decision, that is the option most likely to be chosen.

Although it is good to know what the theoretical optimal decisions are, if the interest is in public policy, it is important to know what people will actually do. The field of behavioral economics is still young and there is much to be done. But they are working on how best to understand what people will do to better understand how to influence them to make decisions that will benefit them, individually, and society as a whole.

© Douglas Griffith and healthymemory.wordpress.com, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

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Making Smart Decisions

July 15, 2017

This is the twelfth post in the series The Knowledge Illusion: Why We Never Think Alone (Unabridged), written by Steven Sloman and Phillip Fernbach. Making Smarter Decisions is a chapter in this book. Perhaps the one area it is important to make smart decisions is in finance.

Consider the following question: Assume that you deposit $400 every month into a retirement savings account that earns a 10% yearly rate of interest and that you never withdraw any money. How much money do you think you will have in any account (including interest earned): After 10 years, 20 years, 30 years, and 40 years.

Respondents answering these questions responding with a median response of
$223,000.00 after forty years. The correct answer is almost $2.5 million. Use your spreadsheet to prove this for yourself.

HM’s father passed away before he retired, and he was denied a large amount of the pension he should have received. Nevertheless, both his parents had managed their finances carefully. All they invested in were FDIC insured savings accounts and Certificates of Deposit. HM was amazed at the money his Mom accumulated. She was in fine shape, placed no burden on him, and left him a substantial inheritance.

HM’s parents also never carried credit card debt. No one should ever carry credit card debt. This debt is compounded, and increases at a nonlinear rate just as savings accounts do. But unlike savings accounts, debt is subtracted.

Actually the rates that are charged are usurious and should not be allowed. But the financial industry has effectively bought congress. (You should know that the United States has the best congress money can buy). Added to this are the clever programs where you gain rewards for using the card. Using the card and earning rewards is not a problem unless you do not pay off the card monthly when it is due. You should remember if you carry credit debt you are losing money.

Behavioral economics has some effective ideas to aid in better financial decisions (enter, “behavioral economics” into the healthy memory blog search box to find additional posts on behavioral economics). It has found ways to nudge better decisions. Nudging can be done by setting defaults. Rather than have employees opt in regarding retirement contributions, have them opt out if they do not want to contribute. Have being an organ donor being the default option on a driver’s license, and have them opt out if they do not want to be a donor. The big idea of the nudge approach is that it easier and more effective to change the environment that it is to change the person. Once we understand what quirks of cognition drive behavior, we can design the environment so that those quirks help us instead of hurting us.

We can apply these lessons to how we make decisions as part of a community of knowledge. Realizing that people are explanation foes—that we usually don’t have the inclination or even the capability to master he details of all our decisions, we can try to structure the environment to help ourselves make good decisions despite our lack of understanding.

Reduce Complexity
Simple Decision Rules
Just-in-Time Education
Check Out Understanding

 

© Douglas Griffith and healthymemory.wordpress.com, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Myths of the Triune Brain and the Rational Human Mind

May 10, 2017

This post is motivated in part by Lisa Feldman Barrett’s revolutionary book “HOW EMOTIONS ARE MADE.”  Unfortunately, Carl Sagan popularized the notion of a triune brain in his book “The Dragons of Eden.”  The model begins with ancient subcortical circuits for basic human survival, which we allegedly inherited from reptiles.  Sitting atop those circuits is an alleged emotion system, known as the “limbic system”  that we supposedly inherited from the early mammals.  Wrapped around this so-called limbic system is our allegedly  rational and unique human cortex.  Any expert in brain evolution knows that humans don’t have an animal brain gift-wrapped in cognition.  Neuroscientist Barbara L. Finlay, editor of the journal “Behavior and Brain Sciences” says  that “mapping emotion onto just the middle part of the brain, and reason and logic onto the cortex is just plain silly.  All brain divisions are present in all vertebrates.”  Brains evolve as effective companies do, by reorganizing as they expand to keep themselves efficient and nimble.

Dr. Barrett’s bottom line is this:  “the human brain is anatomically structured so that no decision or action can be free of interoception and affect, no matter what fiction people tell themselves about how rational they are.   Your bodily feeling right now will project forward to influence what you will feel and do in the future.  It is an elegantly orchestrated, self-fulfilling prophecy, embodied with the architecture of the brain.”

One of the most cherished narratives in Western thought, is that the human mind is a battlefield where cognition and emotion struggle for the control of behavior.  Modern neuroscience does not back up this narrative, nor does human behavior.  Much research has clearly debunked this narrative.  There are many posts on this blog on behavioral economics (to find them enter “behavioral economics” into the healthy memory blog search.)  Behavioral economics was born by the research of Kahneman and Tversky.  Unfortunately, mainstream economics is dominated by the assumption of the rational mind.  This assumption makes the underlying mathematics tractable.  They are tractable but wrong.  Mainstream economics did not expect the financial crash of 2008, nor the market crash of 1929 for that matter.

Dr. Barrett writes, “You cannot overcome emotion through rational thinking, because the state of your body budget is the basis for every thought and perception you have, so interoception and affect are built into every moment.  Even when you experience yourself as rational, your body budget and its links to affect are there, lurking beneath the surface.”

Trump and Behavioral Economics

June 2, 2016

On the June 6 & 13, 2016 “New Yorker” Financial Page there is an article by James Surowiecki.  He is the regular “New Yorker” correspondent for economics, business, and finance.  He has also written a book that Healthymemory would highly recommend, “The Wisdom of Crowds.”  His article is titled “Losers” and it is about how behavioral economics explains the attitude of Trump supporters.  The field of behavioral economics was founded by Daniel Kahneman and Amos Tversky. There have been many, many healthy memory blog posts on this topic and about these authors.   Prospect Theory is key to behavioral economics and resulted in a Nobel Prize being awarded to Kahneman.  Unfortunately Tversky had already passed away when the award was made.

Surowiecki notes that Trump plays to one of the most powerful emotions in economic life, which is what behavioral economics call loss aversion.  The basic idea is that people feel the pain of loses much more than they feel the pleasure of gains.  Empirical studies estimate that, in general, losing is twice as painful as winning is enjoyable. Consequently, people will go to great lengths to avoid losses, and to recover what they’ve lost.

Suroweicki notes that Trump’s emphasis on losing is unusual  even in bleak times.  But he believes that it has worked for him, because it resonates with what many Republican voters already feel.  A study by the Pew Research Center last fall found that 79% of those who lean Republican believe that their side is losing politically.  A RAND survey in January found that voters who believed that “people like me don’t have any say about what the government does” were 86.5% more likely to prefer Trump.  Trump supporters feel that they, and the country, are losing economically, too.  In the RAND survey, Trump did better  with the people who were the most dissatisfied with their economic situation, and exit polls from the Republican primaries show that almost 70% of those who voted for Trump were “very worried” about the state of the economy as compared to only forty-five % of all voters in Democratic primaries.

Surowiki notes some surprising things about all this.  The first is that, in objective terms, plenty of Trump supporters haven’t lost that much.  We’re familiar with Trump’s appeal among white working class voters, many of whom truly have seen wages stagnate and jobs dry up.  But Nate Silver has recently pointed out that the median Trump voter is actually better educated and richer than the average American.  But an important point of Kahneman and Tversky’s work is that people don’t look at their status objectively, they measure it relative to a reference point, and for many Republicans that reference point is a past time when they had more status and more economic security.  Kahneman argues that even people who simply aren’t doing as well as they expected to be doing feel a loss.  And people don’t adapt their expectations to new circumstances.  A study of loss aversion by Jack Levy concluded that, after losses, an individual will “continue” to use the status quo ex ante as her reference point.”  Suroweicki notes that Trump’s promise is precisely that he’s going to return America to the status quo ex ante.  He tells his supporters that he will will help recoup their losses and safeguard what they have.

Suroweicki goes on to say that the other surprising thing is that you might expect loss-averse voters to be leery of taking a risk on an unpredictable outsider like Trump, since loss aversion often makes people cautious:  offered the choice between five hundred dollars and a 50 % chance at a thousand dollars or nothing, most people take the sure thing.  However, loss aversion promotes caution only when people are considering gains; once people have sustained losses, impulses change dramatically.  Offered the choice between losing five hundred dollars and a 50% chance of losing a thousand dollars or nothing, most people prefer to gamble—opposite of what they did when presented with the chance to win a thousand dollars.  People are willing to run huge risks to avert or recover loses.  In the real world , this is why people hold falling stocks, hoping for a rebound rather than cutting their losses, and it’s why they double down after losing a bet.  For Trump’s voters, the Obama years have felt like a disaster.  Taking a flyer on Trump actually starts to feel sensible.

Suroweicki continues, noting that historical parallels are always tendentious, that loss aversion has been instrumental in the success of authoritarian movements around the world.   The political scientist Kurt Weyland has argued that it played a crucial role in the rise of such regimes in Latin American, where the fear of Communism drove putatively democratic societies toward the radical solution of strongman rule.  Suroweicki notes that Trump may not quite be an American Peron, but, to his his supporters, his unpredictability is a selling point rather than a flaw.

It is important to remember that the basis thesis of behavioral economics, a thesis that has ben consistently supported, is that humans do not behave or think rationally.  Rather they are driven by emotions.

Healthy memory feels compelled to note other facets of human cognition that contribute to flawed political decisions.  One is the success of the big lie and the continued persistence of these lies.  It is extremely difficult to correct these lies.

Another problem is  the fallibility of memory and how selective memory makes it difficult to correct erroneous beliefs.  Consider the Iraq war that the younger Bush took us into.  The weapons of mass destruction, on which the invasion was predicated, were never found.  France and Germany were urging Bush to delay an invasion until the inspection were completed and the existence of these weapons could have been ascertained.

It was also the case that the King of Jordan and Henry Kissinger warned Bush that an invasion would result in a broken country that would serve as a base for radical Islamist groups..  This is exactly what has happened.  So the costs of this war not just monetary, which added to the national debt, but more importantly human, produced a situation that is worse, not better, than what prevailed, before the beginning of the war.

People also seem to have forgotten the financial crisis left by the Bush administration that resulted in the very real possibility of a depression.  In spite of recalcitrant Republicans, Obama managed to prevent the depression and aid in an important economic recovery.  By most objective standards, the U.S. economy is in good shape, and the American economy is one of the best performing economies.

Healtymemory still wonders about Trump.  It is difficult for him to imagine Trump curling up with a copy of Kahneman’s “Thinking Fast and Slow.”  It is also difficult imagining Trump taking consul with an expert informing him how to exploit human information processing shortcomings for political gain.  Using the word “instinct” is inappropriate here, but Trump has a flair for exploiting human information processing shortcomings so that System 2 processing is avoided and System 1 prevails resulting in emotions rather than reasoning governing their voting.

© Douglas Griffith and healthymemory.wordpress.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Thinking 2.0

March 9, 2016

This  post was inspired by an article in the February 26, 2016 edition of the “New Scientist” written by Michael Brooks.  The title of the article is “A new kind of logic:  How to upgrade the way we think.”    There are many healthymemoy blog posts about the limitations of our cognitive processes.  First of all, are attentional capacity is quite limited and requires selection.  Our working memory capacity is around 5 or fewer items.  There are healthy memory blog posts on cognitive misers and cognitive spendthrifts.  Thought requires cognitive effort that we are often reluctant to spend making us cognitive misers.  And there are limits to the amount of cognitive effort we can expend.  Cognitive effort spent unwisely can be costly.

Let me elaborate on the last statement with some personal anecdotes.  Ohio State was on the quarter system when I attended and my initial goal was to begin college right after graduation in the summer quarter and to attend quarter consecutively so that I would graduate within three years.  Matters when fairly well until my second quarter when I earned the only “D” in my life.  Although I did get one “A” it was in a course for which I had already read the textbook in high school.  I replaced and continued to attend consecutive quarters, but only part time during he summer.  I was in the honors program and managed to graduate in 3.5 years with a Bachelor’s of Arts with Distinction in Psychology.  I tried going directly into graduate studies, but found that I had already expended my remaining cognitive capital.  So I entered the Army to give my mind a rest.

When I returned and began graduate school I was a cognitive spendthrift who wanted to learn as much as I could in my field.  However, I found that I could not work long hours.  If I did my brain turned to mush and I was on the verge of drooling.  So I found it profitable to stop my cognitive spendthrift days and marshal my cognitive resources. It worked and I earned my doctorate psychology from the University of Utah.

Michael Brooks argues that we are stuck in Thinking 1.0.   He mentions that our conventional economic models bear no resemblance to the real world.  We’ve had unpredicted financial crises because of incorrect rational economic models.  This point has been  made many times in the healthy memory blog.  Behavioral economics should address these shortcomings, but it is still in an early stage of development.

Ioannidis’s article has convinced  statisticians and epidemiologists that more than half of scientific papers reach flawed conclusions especially in medical science, neuroscience and psychology.

Currently we do have big data, machine learning, neural nets, and, of course, the Jeopardy champion Watson.  Although these systems provide answers, they do not provide explanations as to how they arrived at the answers.  And there are statistical relations in which it is difficult to determine causality, that is, what causes what.

Michael Brooks argues that Thinking 2.0 is needed.  Quantum logic makes the distinction between cause and effect (one thing influencing another) and common cause (two things responding to the same effect).  The University of Pittsburgh opened the Center for Causal Discovery (www.ccd.pit.edu) in 2014.

Judea Pearl, a computer scientist and philosopher at UCLA (and the father of the tragically slain journalist Daniel Pearl) says “You simply cannot grasp causal relationships with statistical language.”  Judea Perl has done some outstanding mathematics and has developed software that has made intractable AI programs tractable and has provided for distinguishing  cause and effect.  Unlike neural nets, machine learning, and Watson, it provides the logic, 2.0 logic I believe, as to reasoning behind the conclusions or actions.

It is clear that Thinking 2.0 will require computers.  But let us hope that humans will understand and be able to develop narratives from their output.  If we just get answers from machine oracles will we still be thinking in 2.0

© Douglas Griffith and healthymemory.wordpress.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Dan Snyder and the Washington Redskins

September 8, 2015

For people who do not know, Dan Snyder is the owner of the Washington Redskins and has been refusing to change the name to avoid ethnic and racial sensitivities.  People who object to his intractable position or who are disgruntled Washington Redskin fans should enjoy this post, as should people who are interested in successful applications of behavioral economics.

In the National Football League (NFL) in which the Washington team plays, there is an annual draft in which draft picks are made in a designated order.  The picks are ordered in each round so that the order proceeds where the team with the poorest performance picks first up to the best performing team, which picks last in each round.  Draft pick number can be traded among teams, when teams think they will benefit from the trade.  Optimal picks . can be identified using the principles of behavioral economics.  This strategy is described in Misbehaving:  The Making of Behavioral Economics by Richard H. Thaler.  The following five findings from the psychology of decision-making support the hypothesis that early picks will be too expensive:
1.  People are overconfident.  They are likely to think their ability discriminate between the ability of two players is greater than it is.
2.  People make forecasts that are too extreme.  In this case, the people whose job is to assess the quality of prospective players—scouts—are too willing to say that a particular player is likely to be a superstar, when by definition superstars do not come along often.
3.  The winner’s curse.  When many bidders compete for the same object, the winner of the auction is often the bidder who most overvalues the object being sold.  The same will be true for players, especially the highly touted players picked early in the first round.  The winner’s curse says that those players will be good, but not as good as the teams picking them think.
4.  The false consensus effect.  People tend to think that other people share their preferences.  In the draft, when a team falls in love with a certain player they are just sure that every other team shares their view.  They try to jump to the head of the line before another team steals their guy.
5.  Present bias.  Team owner, coaches, and general managers all want to win now.

Thaler and his colleague Cade, performed  behavioral analytics, which are discussed in “Misbehaving:  The Making of Behavioral Economics,” that yielded two simple pieces of advice to teams.  First, trade down.  Trade away high first-round picks for additional picks later in the draft, especially second-round picks.  Second, be a draft pick banker.  Lend picks this year for better picks next year.

When Thaler told Snyder about the project, he immediately said he was going to send “his guys” to see Thaler right away because “We want to be the best at everything.”  Thaler and Cade did so.  They had further discussions at the end of the season.

The next year Thaler and Cade watched the draft that year on television with special interest that turned into deep disappointment.  The team did the opposite of what was expected.  They moved up in the draft, and then traded away a high draft pick next year to get a lesser one this year.  When they asked their contacts what happened, they got the short answer.  “Mr. Snyder wanted to win now.” (see item 5 above).  With the exception of one season when they were eliminated in the first round of the playoffs, the performance of the Washington team has been abysmal.   There was a time when an argument could be made that “Redskin” was not a pejorative term in the DC area.  For many fathers there could be nothing better than for their son to become a “Redskin.”  However, under Snyder’s ownership, that is no longer true.  The team has become an embarrassment for Washington fans.

I have noted the incompetence of many owners of professional sports franchise that makes me wonder, “How on earth did they manage to become wealthy?”

© Douglas Griffith and healthymemory.wordpress.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

2015 Labor Day Post

September 4, 2015

Every Labor Day I go back to my boyhood and remember what future was predicted then for us to be enjoying today.  This was the fifties and at that time it was very unusual for mothers to work outside the home.  The basic prediction was that advances in technology would result in significant leisure time for everyone.   Back then no one dreamed of anything like a personal computer, the internet, iPADs, or wifi.  In other words, technology went far beyond what was imagined.  So I ask again, what I’ve asked in every healthy memory blog post for Labor Day, “Why Are We Working So Hard?”  Today both marriage partners are working.  The predicted increase in leisure time has not materialized.  And we in the US work more hours than those in most advanced countries.  Often this announcement is made with pride, when it should be uttered in shame.

Some of the answers to the question, “why are we working so hard,” can be found in the three immediately preceding healthymemory blog posts.  “The Wellbeing of Nations:  Meaning, Motive, and Measurement” explained why the primary metric for measuring economies, the Gross Domestic Product (GDP) is seriously flawed.  This metric fails to capture many factors that make for well-being and happiness.  Moreover, it requires that economies continue to grown and expand.  Eventually the capacity for growth of the GDP will be limited and the resources for continuing this growth will be depleted.  The blog post also explained that this is an extremely difficult topic and the work in this area is still in its early stages.  Nevertheless, it has begun, so let us hope it will continue.

The healthymemory blog post “Behavioral Economics”  reviewed how classical economics is based on the model of a rational human.  There is ample evidence that we humans are not rational.  Behavioral economics is devoted to identifying behaviors that lead to desirable outcomes.  Again, there is much work to do, but it least it has started.

The  blog post “Why Information Grows”  presents a novel view of what makes economies successful.  The answer is knowledge and know how.  Again, these ideas are very new, but they offer the potential to guide us in the right direction.

Labor Day is a holiday, but  unfortunately it signals the end of summer and the traditional time for vacations and recreation.  I would suggest that Memorial Day, a holiday for the somber remembrance for those who have died fighting for our country, be switched with Labor Day.  Then Labor Day would signal the beginning of vacation and recreation time.

Nevertheless, as Labor Day is a holiday, let us engage in a fantasy so we can enjoy the holiday.  First of all, there would be a heavy investment in education, which would be free at all levels.  Moreover, education would continue throughout our lives.  This provides both for personal growth and facilitates the advancement of new technologies.  There would be ample free time.  Medical care would be guaranteed and free so people would not need to work for medical coverage.  People could drop out from time to time so that they could simply enjoy leisure time.  They could take classes in anything that
caught their fancy and found to be enjoyable.   Retirement, per se, would become obsolete as people would continue to learn and grow throughout their senior years

© Douglas Griffith and healthymemory.wordpress.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Behavioral Economics

August 29, 2015

A number of previous healthy memory blog posts have been on the topic of behavioral economics. Mainstream economics is based on the idea of the rational man.  In 1978 the psychologist Herbert Simon was awarded the Nobel Prize in Economic Science for his research showing that human beings do not, and often cannot, evaluate all available information before making a decision.  He found that people satisfice, that is, use only enough information they think they need to make a decision.  In 2002, the psychologist Daniel Kahneman shared the Nobel Prize in Economic Science for his work with Amos Tversky showing the relevance of psychological research on human judgment and decision making under uncertainty to economics.  Kahneman and Tversky formulated Prospect Theory that showed how human behavior deviated from the economic norm.  Unfortunately, Tversky had passed away, so he was ineligible to receive the Nobel Prize.

Misbehaving:  The Making of Behavioral Economics by Richard H. Thaler provides a well-written and informative discussion of the development of behavioral economics.  Although he is an economist he had the good fortune to be able to work with Kahneman and Tversky early in his career.  So he was an early, perhaps the earliest, economist to come into the behavioral economics fold.  The book unfolds in chronological order so you are able to follow the development of Thaler’s career along with the development of behavioral economics.  His writing is quite entertaining.

Misbehaving: The Making of Behavioral Economics covers the course of the development of behavioral economics up until current times, so the coverage of material is quite large. The book begins with the discussion of SIFs (supposedly irrelevant factors).  These are factors that classical economics wave off as being irrelevant, but which are most certainly not irrelevant.  Early in his career Thaler began making his list of phenomena which were relevant to economics, but which were waved off as being irrelevant.  There are two types of theories:  normative and descriptive.  Normative theories inform us the right way to think about some problem.  Right here refers logical consistency.  Descriptive theories explain how problems are handled.  That is, what people actually do.  This differences is central to the difference between classical and behavioral economics.  Classical economics explains how logically people should be  behave, and behavioral economics explains how people actually do behave.

Perhaps the most dramatic example of this distinction can be found in the recent economic crash.  According to the rational model of man, this crisis should not have happened.  And, indeed, it was predicted by very few economists.   The crisis was due to the irrational, emotional nature of human beings.  The economics Alan Greenspan had a sign reading “Greed is Good” on his door.  Greed is also one of the Seven Deadly Sins.  I remember thinking that adjustable rate mortgages were a big mistake.  People tend to be overly optimistic and often overlook misfortune in their future.  This combined with increases in interests rates could cause many too default on their mortgages.  I had no idea of the extent of shenanigans  that were taking place.  Optimism regarding the never ending increase in real estate values precluded any rationality or safeguards.  Unfortunately, the changes in financial regulation were woefully inadequate, and another market crash looms in the future.  That is unless more attention is paid to behavioral economics and appropriate legislation is passed.  Unfortunately, although the influence of behavioral economics has grown, I was pleased to learn that Thaler had been elected President of the American Economics Association, it has yet to become mainstream.  Until it does, we remain at risk as the rational model of humanity is flawed.  Economics needs to be based on what humans do, not on a theoretical model based on rationality.

Misbehaving: The Making of Behavioral Economics is a real gem.  Unfortunately it presents me with a real dilemma.  I could easily spend several months writing posts based on this book.  However, I fear that some readers would not appreciate the emphasis being placed on economics and become bored.  Moreover, focusing on Thaler’s book would force me to neglect some needed topics.  So, what I shall do is to occasionally reach back to this book for posts that seem especially relevant.

© Douglas Griffith and healthymemory.wordpress.com, 2015. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

There Will Be Another Brief Hiatus in New Posts

February 1, 2015

Nevertheless with more than 550 Healthymemory Blog posts I think there is sufficient reading material.  If I had to recommend one blog post to read it would be “The Myth of Cognitive Decline.”  This can be found by entering this title in the search box of the healthy memory blog.  This search block can be used to identify blog posts on the following topics.

Posts based on whom I regard as the most important cognitive psychologists:  Nobel Prize Winner Kahneman, plus Stanovich and Davidson.  There are posts on the important topics of attention and cognitive reserve.  Other topics of potential interest are The Flynn Effect, mindfulness, meditation, memory champs, contemplative computing, behavioral economics, dementia, and Alzheimer’s.

Of course, you are encouraged to enter any of your favorite topics into the healthymemory blog search block

Enjoy.  I shall return.

© Douglas Griffith and healthymemory.wordpress.com, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Labor Day Message 2014

August 31, 2014

 

Regular readers of the healthymemory blog might receognize some striking similarities between this message and the 2013 message. Unfortunately, not much has changed. When I was in elementary school the predictions were that due to technology we would have much more leisure time (http://en.wikipedia.org/wiki/Leisure) in the future. I’ll remind you that at this time it was highly unusual for married mothers to be working. In my view, some of the technological achievements, particularly in computing and in broadband, have vastly exceeded these predictions. So I ask you, why are we working so hard? We’re working much harder than when I was in elementary school. And it’s getting worse. Americans now work for eight and a half hours more a week than they did in 1979.

I would further ask, exactly what are we producing? Suppose only those who provided the essentials for living and for safety went to work. What percentage of the working population would that be? Make your own guess, but mine would be less than 10%, so what is going on here?. Currently we are working hard to achieve an unemployment rate at or below 5%. But is this a realistically achievable unemployment rate? Remember that the previous two occasions when the employment rate was at or below 5%, the economic prosperity was bogus. There was the dot com bogus, when people expected to become rich via the internet. Then there was the bogus finance/real estate boom where riches were created via bogus and unsubstantiated financial instruments. So why, absent some other fictitious basis for a boom, do we expect to get back to 5% unemployment

To examine the question of why we are working so hard, I present the following study tht can be found in Kahneman’s Thinking Fast and Slow.It found that being poor is bad. Of course, this finding is not surprising. The surprising finding is that a household income of $75,000 represented a satiation level beyond which experienced well being no longer increased. And this was in high cost living areas. In other areas the number would be lower. So, it is clear that we are working more for no real benefit. Why?

The world’s environmental and resource issues also need to be considered here. As the undeveloped world develops, the demands on resources, the pollution of the environment, and the rate of global warming will increase as the developing world hops on the same exhausting treadmill that the developed world has been on.

I think the problem is that classical economics has outlived its usefulness and has become destructive. Economics needs to undergo a paradigm shift. Classical economics is based on the rationale theory of man. Socials scientists have debunked this theory quite well as have behavioral economists. Computing the Gross National Product (GNP) in terms of hard dollars might seem to b objective, but reminds one of the drunk who is looking for his car keys under the streetlamp rather than in the dimly illuminated part of the parking where he dropped them. Economists need to consider subjective, relevant measures as happiness and life satisfaction, but these measures are given only glancing consideration. Perhaps this is due to the extreme economics supermeme that plagues us and has been discussed in previous healthymemory blog posts.

Once appropriate measures and appropriate philosophies regarding self fulfillment and self actualization are adopted we can get off the treadmill and enjoy the fruits of technology and our lives.

You also might visit or revisit the Healthymemory Blog Post “Gross National Happiness.” There is also an entry on this topic on wikipedia.org.

What is Kahnemanite Advertising?

December 10, 2013

According to an article1 in The Economist “Kahnemanite advertising prizes emotion over information and pays more attention to a brand’s “purpose” than to its products.” Daniel Kahneman is the Nobel winning psychologist who is the author of the best selling Thinking Fast and Slow (enter Kahneman into the healthymemory blog search box to find many posts on Kahneman). System one is thinking very fast, most of which occurs below consciousness. System two takes the output of system one and processes, or in conventional parlance, thinks about it. If we didn’t have system one, we would have long ago become extinct. However, the efficiency of System one comes at some cost. It can produce erroneous or incorrect responses, and it is the role of System two to catch and correct these errors. Unfortunately, this frequently fails to happen. Emotional responding is part of System one.

Of course, it is not exactly news that advertisers like to exploit our emotional responses, but conventional advertising also likes to engage System 2. Kahnemanite advertising refers to the emphasis placed on System 1 and the cost of ignoring System 2. I found it interesting that marketers actually speak in terms of System 1 and System 2 processing.

Different methods are used to test whether System 1 is being effectively engaged. Brainjuicer asks subjects to rate an advert by saying which of eight faces, each expressing a different emotion, best reflects the feeling and intensity of the emotion. Another firm, Decode, uses implicit association in which subjects associate images (for example, a chocolate bar) with a concept (for example comfort) and times the reactions. Neuro-Insight monitors electrical activity in the brain when subjects view an advert.

The Economist article finds irony in this. It writes that “Most readers of Thinking Fast, Thinking Slow will end up of mistrusting system one for its propensity to misleading.” But if readers of Thinking Fast, Thinking Slow have correctly understood Kahneman, they will understand that most of the time System one is correct. It is only occasionally that System one will mislead.

Please understand that Kahneman, himself, is not directly involved in any of these activities. You should also be aware that Kahneman, together with his colleague Amos Tversky, are regarded by many as the fathers of behavioral economics. Behavioral economics exposes the fallacy of the rational human being, which is the foundation of conventional economics and which forms the basis of most contemporary policy. This needs to change. To read more about this enter “behavioral economics”, then “gross national happiness” into the healthymemory blog search block.

1Nothing more than feelings, The Economist, December 7th 2013, p.70.

© Douglas Griffith and healthymemory.wordpress.com, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Nobel Prize Recognizes Behavioral Economics

October 27, 2013

Two of the three economists awarded the Nobel Prize for 2013 are behavioral economists. Historically and, unfortunately, currently, economic theory is largely dominated by the rational model of man. In 1978, the psychologist Herbert Simon, was awarded the Nobel Prize in Economic Sciences for his research showing the human beings do not, and often cannot, evaluate all available information before making a decision. He found that people satisfice, that is, use only enough information to think they need to make a decision (see the healthymemory blog post, “More on the Dangers of Information Overload”). In 2002, the psychologist Daniel Kahneman shared the Nobel Prize in Economic Sciences for his work with Amos Tversky showing the relevance of psychological research on human judgment and decision making under uncertainty to economics. Readers of the healthymemory blog should be familiar with Kahneman’s work on the Two System View of Cognition.

Of the three economists awarded the Nobel Prize in 2013, Eugene Fama is a traditional economist who employs the rational model of human beings. He has argued for efficient markets in which all relevant information is immediately incorporated into an asset’s price. Robert Shiller‘s work has criticized the efficient market hypothesis by showing that stock prices behave in a manner not predicted by the efficient market hypothesis. Lars Peter Hansen, who is sympathetic to behavioral economics, built on Shiller’s work and developed statistical methods to test exactly what drives stock price volatility. The financial crises of several years ago were the result of irrational human behavior with respect to the value of real estate and the financial instruments underlying real estate. We humans are not rational, but rather have limited information processing capabilities and are also driven by emotions. These psychological factors are what, at bottom, drives economies. It is interesting to note that Shiller is married to a psychologist.

I am compelled to note that Daniel Kahneman has been honored with the Presidential Medal of Freedom. In addition, the White House has invited psychologists to help transform policy.1

The influence of behavioral economics is only slowly being felt, but there are questions as to why with all this automation we are working so hard (enter “why are we working so hard” into the healthymemory search block to see relevant posts on this question). Perhaps we shall eventually move from measures such as Gross National Production (GNP) as measures of economic success, to more relevant measures such as Gross National Happiness (GNH) (enter “Gross National Happiness” into the healthymemory search block to find relevant healthymemory blog posts on this topic).

1(2013). A Seat at the Table, Observer, September 2013, p.21.

© Douglas Griffith and healthymemory.wordpress.com, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Something to Think About on Labor Day

September 1, 2013

When I was in elementary school the predictions were that due to technology we would have much more leisure time in the future. I’ll remind you that at this time it was highly unusual for married mothers to be working. In my view some of the technological achievements, particularly in computing and in broadband, have vastly exceeded these predictions. So I ask you, why are we working so hard? We’re working much harder than when I was in elementary school. And it’s getting worse. Americans now work for eight-and-a-half hours more a week than they did in 1979.

I would ask further what, exactly, are we producing? Suppose only those who provided the essentials for living and for safety went to work? What percentage of the working population would that be? Make your own guess, but mine would be less than 10%. So what is going on here?

Currently we are working hard to achieve an unemployment rate at or below 5%. We are finding that exceedingly hard to achieve. But is this a realistically achievable unemployment rate? Remember that the previous two occasions when the employment rate was at or below 5%, the economic prosperity was bogus. There was the dot com bogus, when people expected to become rich via the internet, only the path to these riches remained unspecified. Then there was the bogus finance/real estate boom where riches were created via bogus and unsubstantiated financial instruments. So why, absent some other fictitious basis for a boom, do we expect to get back to 5% unemployment?

To examine the question of why we are working so hard, I present the results of the following study.1 It found that being poor, is bad. Of course, this finding is not surprising. The surprising finding is that a household income of $75,000.00 represented a satiation level beyond which experienced well being no longer increased. And this was in high cost living areas. In other areas the number would be lower. And this was for experienced well being. Emotional well being might have carried additional therapeutic costs. So it is clear that we are working more for no real benefit. Why?

Part of the reason might be that the creation of technology sometimes results in more work. This phenomenon was analyzed for housework in a book by Ruth Schwartz Cohen titled More Work for Mother. Household appliances such as washing machines and vacuum cleaner produced higher cleaning standards but not less work. The seasonal work of spring cleaning that had been done by the entire family was replaced by year-round vacuum cleaning and dusting. Clothes that had been word for several days or until they were sweaty and soiled went into the hamper on a daily basis for washing.

There is also the Jevons paradox named after the economist William Stanley Jevons. He noticed in 1865 that the demand for coal was not decreasing with technological innovation and better energy efficiency. Instead , factory and mine operators had access to new, more efficient coal-fired engines increased production or installed engines in parts of their facilities where previously the cost of doing so would have been prohibitive. Thus, increased efficiency resulted in an increased use of technology, which led to an overall increase in energy consumption. Sometimes labor-saving technologies lead people to choose to do things that consume more labor, as well as more time and energy

Another reason might be the that the economic theorists who currently formulate policy are classical economists using the rational theory of man. Behavioral economists have debunked this theory. Moreover, computing GNP in terms of hard dollars might smack of objectivity, but reminds one of the drunk who is looking for his car keys under the streetlamp rather than in the dimly illuminated part of the parking lot where he dropped his keys. Economic measures should include such subjective, but relevant, measures as happiness and life satisfaction. But they do not. Perhaps this is due in part to the extreme economics supermeme that plagues us and has been discussed in previous healthymemory blog posts.

Perhaps with the appropriate measures and appropriate philosophies regarding self fulfillment and self actualization we can get off the treadmill and enjoy the fruits of technology and our lives.

You also might visit or revisit the Healthymemory Blog post “Gross National Happiness (GNH).

1Kahneman, D., & Angus, D. (2010). High Income Improves the Evaluation of Life but Not Emotional Well Being. Proceedings of the National Academy of Sciences 107, 16489-93

© Douglas Griffith and healthymemory.wordpress.com, 2013. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Happy Labor Day: Why Are We Working So Hard?

September 2, 2012

For Labor Day I think it is appropriate to repost “Why, With All This Technology Are We Working So Hard?”

When I was in elementary school the predictions were that due to technology we would have much more leisure time in the future. I’ll remind you that at this time it was highly unusual for married mothers to be working. In my view some of the technological achievements, particularly in computing and in broadband, have vastly exceeded these predictions. So I ask you, why are we working so hard? We’re working much harder than when I was in elementary school.

I would ask further what, exactly, are we producing? Suppose only those who provided the essentials for living and for safety went to work? What percentage of the working population would that be? Make your own guess, but mine would be less than 10%. So what is going on here?

Currently we are working hard to achieve an unemployment rate at or below 5%. We are finding that exceedingly hard to achieve. But should we be? Remember that the previous two occasions when the employment rate was at or below 5%, the economic prosperity was bogus. There was the dot com bogus, when people expected to become rich via the internet, only the path to these riches remained unspecified. Then there was the bogus finance/real estate boom where riches were created via bogus and unsubstantiated financial instruments. So why, absent some other fictitious basis for a boom, do we expect to get back to 5% unemployment?

To examine the question of why we are working so hard, I present the results of the following study.1 It found that being poor, is bad. Of course, this finding is not surprising. The surprising finding is that a household income of $75,000.00 represented a satiation level beyond which experienced well being no longer increased. And this was in high cost living areas. In other areas the number would be lower. And this was for experienced well being. Emotional well being might have carried additional therapeutic costs. So it is clear that we are working more for no real benefit. Why?

One reason might be the that the economic theorists who currently formulate policy are classical economists using the rational theory of man. Behavioral economists have debunked this theory. Moreover, computing GNP in terms of hard dollars might smack of objectivity, but reminds one of the drunk who is looking for his car keys under the streetlamp rather than in the dimly illuminated part of the parking lot where he dropped his keys. Economic measures should include such subjective, but relevant, measures as happiness and life satisfaction.

Perhaps with the appropriate measures and appropriate philosophies regarding self fulfillment and self actualization we can get off the treadmill and enjoy the fruits of technology and our lives.

You also might visit or revisit the Healthymemory Blog post “Gross National Happiness (GNU).

1Kahneman, D., & Angus, D. (2010). High Income Improves the Evaluation of Life but Not Emotional Well Being. Proceedings of the National Academy of Sciences 107, 16489-93

© Douglas Griffith and healthymemory.wordpress.com, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.

Why, With All This Technology, Are We Working So Hard?

July 1, 2012

When I was in elementary school the predictions were that due to technology we would have much more leisure time in the future. I’ll remind you that at this time it was highly unusual for married mothers to be working. In my view some of the technological achievements, particularly in computing and in broadband, have vastly exceeded these predictions. So I ask you, why are we working so hard? We’re working much harder than when I was in elementary school.

I would ask further what, exactly, are we producing? Suppose only those who provided the essentials for living and for safety went to work? What percentage of the working population would that be? Make your own guess, but mine would be less than 10%. So what is going on here?

Currently we are working hard to achieve an unemployment rate at or below 5%. We are finding that exceedingly hard to achieve. But should we be? Remember that the previous two occasions when the employment rate was at or below 5%, the economic prosperity was bogus. There was the dot com bogus, when people expected to become rich via the internet, only the path to these riches remained unspecified. Then there was the bogus finance/real estate boom where riches were created via bogus and unsubstantiated financial instruments. So why, absent some other fictitious basis for a boom, do we expect to get back to 5% unemployment/

To examine the question of why we are working so hard, I present the results of the following study.1 It found that being poor, is bad. Of course, this finding is not surprising. The surprising finding is that a household income of $75,000.00 represented a satiation level beyond which experienced well being no longer increased. And this was in high cost living areas. In other areas the number would be lower. And this was for experienced well being. Emotional well being might have carried additional therapeutic costs. So it is clear that we are working more for no real benefit. Why?

One reason might be the that the economic theorists who currently formulate policy are classical economists using the rational theory of man. Behavioral economists have debunked this theory. Moreover, computing GNP in terms of hard dollars might smack of objectivity, but reminds one of the drunk who is looking for his car keys under the streetlamp rather than in the dimly illuminated part of the parking lot where he dropped his keys. Economic measures should include such subjective, but relevant, measures as happiness and life satisfaction.

Perhaps with the appropriate measures and appropriate philosophies regarding self fulfillment and self actualization we can get off the treadmill and enjoy the fruits of technology and our lives.

1Kahneman, D., & Angus, D. (2010). High Income Improves the Evaluation of Life but Not Emotional Well Being. Proceedings of the National Academy of Sciences 107, 16489-93

© Douglas Griffith and healthymemory.wordpress.com, 2012. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Douglas Griffith and healthymemory.wordpress.com with appropriate and specific direction to the original content.