Who Are We Really?

Behavioural economics finds it's significance from the way it reframes the economic perspective of human beings. We are no longer simply called homo economicus. We are allowed to selfless, confused and cooperative.

But that is not entirely satisfactory. The economic paradigm is still in place. We are still primarily consumers. We exist to consume, and consume to exist. We may occasionally give some of our consumption to others, but our primary purpose is unchanged.

There are, as I see it, two main drivers of this consumption complex. Our philosophical leaders (economists and their mindless followers; politicians) who tell us that consumption is everything. And us, who seemingly have an innate drive to get more stuff. More stuff than we had yesterday, more stuff than our neighbours have today.

The problem is that consumption isn't everything. We are more complex than that. Happiness is not just a function of consumption (c.f. friends, family). We cannot be reduced to one-dimensional, consuming robots.

And if that were not enough to make us think twice, limitless consumption is not actually achievable. Our environment has limits. The planet has limits. There are only so many fish in the sea. As Stewart Wallis (of the think tank the new economics foundation) recently said in a TED talk, we need to move on from seeing ourselves as consumers to stewards. Based purely on pragmatism, a serious change in our self-image is needed.

Book Review: Economyths

Economyths by David Orrell is an accessible critique of economics as we know it, summed up by the following statement:

"Neoclassical economics isn't a theory, it's an excuse."

Orrell attacks economics on ten fronts:

• The economy is more complicated than economics assumes
• The economy is more connected than economics assumes
• The invisible hand cannot explain booms and busts
• Economics cannot predict the future
• Humans are irrational (this chapter covers behavioural economics. While it is only one chapter Orrell successfully weaves it into a larger narrative of disenchantment with neoclassical economics)
• Economics bears all the flaws of a male-dominated discipline
• Economics condones gross inequality
• Economics ignores our dying planet
• Economics cares not for human happiness
• Economics is only sustained by vested interests

Orrell is perceptive when he reasons why Neoclassical economics has lasted so long:

"it tapped into something more enduring... it is based on ideas of unity, stability and symmetry that have characterised Western science since the time of the ancient Greeks." 

And what it promises:

"The neoclassical model for economic growth is unsustainable and unsatisfying, not just because it requires infinite resources and harms the environment, but also because it relies on an eternal desire for more, which can be definition never be satisfied. It offers, not happiness, but the eternal promise of happiness, if we can just work harder and upgrade our lifestyles to the next level before everyone else does."

Part of the solution, according to Orrell, is to open up economics to other disciplines. Let psychologists, philosophers, political scientists, engineers, ecologists, mathematicians and physicists all critique economics. Any economists out there are probably feeling a bit bullied by now, but rest assured the status quo is totally biased in your favour.

Orrell is clearly influenced by Nassim Taleb's The Black Swan (review to follow) - much of it is not original, but that does not stop it from being an engaging argument. I am unsure to what extent I agree with Economyths, but I recommend anyone interested in capitalism or economics read it. There is only a bit on behavioural economics, but it thoroughly reviews the wider context of the economic debate.

Genre: Economics
Accessibility: 8/10
Accuracy: 7/10
Readability: 7/10
Usefulness: 7/10
Verdict: A Good Read

Book review: The Economics of Good and Evil

The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlacek is quite possibly the most gripping book I have ever read. I found myself reading it late at night, on the toilet and even (gasp) in lectures.

I don't agree with everything Sedlacek writes, but boy has reading his work opened my mind. I could easily fill this review with things I disagree with, but that would miss the point. I don't recommend The Economics of Good and Evil because it is tells the truth, but because it will get you questioning: What is the truth? What is economics? Why do we conduct economics in the way that we do? Why do we persist with economics when it persistently fails to live up to its own expectations? Should economics include the ethics of good and evil? Why must the economy always grow?

What marvels me most about the book is that it deals with complex topics in such a fascinating way. Not once did it lose my interest. If you study, or plan to study, economics at any academic level you MUST read this book. As for the casual reader, I still recommend it, but do not be under any illusions - it does cover economics in-depth. It did take me a while to read (although as I say, I was gripped at every point).

The first half of the book takes a historical perspective of economics, mush of which was new to me (having always been taught that economics did not exist before Adam Smith). The second half of the book takes a more thematic approach (this is less brilliant, but still worth reading). Amongst other concepts, Sedlacek challenges utility, homo economicus, ceteris paribus, the need for growth, mathematics in economics, economics as religion and the invisible hand.

The one complaint with the book that I will mention is Sedlacek's attempt to be a theologian - he is not averse to taking biblical passages out of context - I do not advise using him as a guide to Christianity.

Having only just finished the book I am unsure how much I agree with, but this I do know: I am very glad to have read it and am definitely a better economist for doing so.

Genre: Economics/Meta economics
Accessibility: 6/10
Accuracy: 5/10
Readability: 7/10
Usefulness: 10/10
Verdict: Required Reading for Economists

Turn it up to 11

A problem for economists who think that people are rational is that we are sometimes influenced by things that we really shouldn't be. Much thanks to the friend who recently showed me this clip from the comedy Spinal Tap which parodies human irrationality:

Sailing Times - I'm A Harrier And I'm Okay

At the start of a week's sailing on the beautiful Norfolk Broads, a question occurred to me... are we rational with regards to time?

I was a leader on Harriers B - a fantastic camp for 15-18s. On the first evening on the cruise, when commanded by the Commodore, we all changed our watches to something called cruise time. Cruise time is an hour later, so at 21:45 all our time-keeping devices were changed to 22:45. The rationale behind it is that as a small fleet of yachts we need to get into moorings early each day while there is still space. So cruise time helps us be earlier. For example, we get up at 7am cruise time and are usually moored up by 5pm cruise time. This sounds a lot better than getting up at 6am every day to be in by 4pm. And because it sounds better it feels better. And because it feels better we do more at that ungodly hour of the morning. Thus cruise time works. It genuinely makes us earlier.

Admittedly there was some protest this year from one of the leaders...

Commy: I'll wake you all up at 7am tomorrow...
Matt: It's 6am!
Commy: No it's not!
Matt: You can't fool my body!

(And in fairness Matt did his very best to prove this was the case throughout the week, never knowingly getting up).

However, most of us swiftly adjusted to cruise time. We were probably better at getting up in the  morning in the mindset of it being 7am than 6am, even though it was all a trick.

According to traditional economics we, as homo economicus, should be unaffected by cruise time. We should behave just the same. It is just a simple trick - the real world time is unaffected. We are not deceived into changing our watches, we all know what we're doing and why we're doing it.

But given that we do change our behaviour when we're told that it's 7am not 6am, even when we know that is not the case, I suggest that this presents a challenge to the belief that we're all the perfectly rational homo economicus.

Recommended listening:
I'm A Harrier And I'm Okay (see verse 5)

Preference Reversal – I Need A Dollar

As we discovered last time, for traditional economics relies upon economic agents being consistent and thus rational. Today we will uncover a common phenomenon: preference reversal.

Let’s start with a little experiment...

You have a choice. There are two options of differing payoff and probability. Imagine that you, the subject, will get to keep any payoff you get. I, the experimenter, will pick a ball at random from a bag (a la bingo) to decide whether you are awarded any payoff. If you choose Option A I will use a set of balls that give you a 70% chance of getting the payoff (of £24), if you choose Option B I will use a set of balls that give you a 25% chance of getting the payoff (of £80).

	Probability	Payoff
Option A	0.7	£24
Option B	0.25	£80

• If you had to choose between them, which option would you rather have?

• Now think about how much each option is worth to you: what amount of money would be of equal value as each option? (What would you deem a fair price for each option to be?)

If you’re anything like me you will have chosen Option A. You may also have valued Option A at something like £17 and Option B at around £20. 

And if you did, you were irrational. 

Why? Because you said you prefer the Option A in the straight choice, but value Option B higher. This is inconsistent. We can infer that you both prefer Option A and Option B (because you valued it at a greater sum of money). You have ‘reversed’ your preferences. This is ‘standard preference reversal’ (‘non-standard’ is where someone chooses Option B, but values Option A higher). PR is asymmetric; the overwhelming majority of preference reversals are the standard type.

If you were inconsistent, don’t worry, you are not alone. If you were consistent you are probably smug, well done. 

Preference reversal (PR) is the phenomenon where individuals change what they say they prefer, purely because the way they were asked was different. Interestingly, people change their preferences in a highly predictable, yet irrational, way. 

The psychologists Lichtenstein and Slovic (1971) first demonstrated PR using their, now famous, experiment design (as roughly replicated above). They called Option A the ‘P-bet’ and Option B the ‘$-bet’.

The first economists to take notice of PR were David Grether and Charles Plott in 1979. They set out to ‘discredit’ the psychologists findings. They failed. Badly. After testing 13 theories they were forced to conclude that PR was not caused by flawed research. My favourite of their theories include:

Theory 12: The original experiments were done on psychology students who are ‘unsophisticated subjects’.

Theory 13: The original experiments were done by psychologists ‘who have a reputation for deceiving subjects’. 

Alas, it turns out that PR is real and here to stay. We will explore the causes of PR in later blogs, but the debate is basically between economists and psychologists over whether it is inherently daft to assume that people have underlying preferences. Psychologists argue that we only ‘construct’ preferences when we face decisions, while economists argue that our preferences already exist and we just refer to them.

I will finish by giving an example of PR in the real world (controversial, I know)...

http://static.guim.co.uk/sys-images/Guardian/Pix/pictures/2012/1/31/1328027920111/high-speed-train-Eurostar-007.jpg

Imagine you own a sheep farm in the Chiltons. However, the Government wants to build a high-speed rail link right through your land. The new line can either go straight past your delightful little cottage (causing you a big headache), or it can take a longer route going through your fields (taking up more of your prime sheep farming land). The Government wants to know which route you’d prefer. They can either ask you which option you would chose in a straight choice, or they can ask you how much compensation you will demand for each option (and choose the cheapest). Governments worldwide use both methods of asking people all the time, assuming they yield the same preference. 

PR would suggest that they might not...

Recommended listening:

I Need A Dollar by Aloe Blacc