Economic Psychology

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Economic Psychology

How and why markets aren't rational. Navigational tips for charting the Bermuda Triangle of human economic behavior.

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Looking Back, Looking Forward
I started this blog on December 19, 2002 - with a post entitled Episode one, where I decide to take the plunge. When I did so, I don't even think I knew that just two months beforehand, psychologists Daniel Kahneman and Amos Tversky (Tverky, posthumously), as well as experimental economist Vernon Smith, had just won the Nobel Prize in Economics, for the former's (empirical) work on judgment and decision making, and the latter's use of experimental methods to test economic hypotheses.

From the Nobel organization's press release announcing the award:
Traditionally, economic theory has relied on the assumption of a "homo œconomicus", whose behavior is governed by self-interest and who is capable of rational decision-making. Economics has also been regarded as a non-experimental science, where researchers – as in astronomy or meteorology – have had to rely exclusively on field data, that is, direct observations of the real world. During the last two decades, however, these views have undergone a transformation. Controlled laboratory experiments have emerged as a vital component of economic research and, in certain instances, experimental results have shown that basic postulates in economic theory should be modified. This process has been generated by researchers in two areas: cognitive psychologists who have studied human judgment and decision-making, and experimental economists who have tested economic models in the laboratory.
The breakthroughs recognized by the judges were twofold:
  1. Establishing, based on empirical evidence, that the assumption underlying western Economics (that human economic decisions are rational, focused entirely on self interest and the best available information) was tightly-bounded-to-baseless.

  2. That economic hypotheses can and should be tested using rigorous, empirical methods - rather than relying on external, existing measures, whose construct, content, and external validity had never been established.
I still think experimental economics has a very long way to go before it achieves an acceptable level of psychometric integrity (by which I mean: the test items measure what they intend to measure, do so consistently across time, space, and groups involved), but Vernon put the field on a path whereby such integrity is at least achievable.

Kahneman and Tversky - through careful, empirical, valid and reliable research - did the world a great service by demonstrating to a skeptical academic public that which anyone with reasonable powers of observation should have already noticed: people rarely, if ever, make economic decisions on a primarily rational basis.

In the next few posts, I'll discuss some of the ways in which Behavioral Economics/Economic Psychology (BE/EP) and blogging have changed since that day in 2002 when I decided to "take the plunge" - and my views thereof.

Time: Not a grid, but a wave, or - in this case - a vortex.
This opinion piece, from the Washington Post, missed the mark, and widely at that. The author, Dana Milbank, argues that Bernie Saunders may be right about the need for a revolution, but "As Sanders is learning, you can’t have a populist revolution without people."

Oh really? How soon we forget (viz, "Those who cannot remember the past are condemned to repeat it." George Santayana (1905) Reason in Common Sense, p. 284, volume 1 of The Life of Reason).

Remember the 'opiate of the masses'? The concept has a life of its own and a shape-shifting role. The Telecommunications Act of 1996, esp. Title 3  set the stage for the gutting of the news business and its takeover by corporate titans with a decided stake in keeping the people inert. It is the new opiate of the masses.

There's no accident here, nor is there any evidence that the human spirit has suddenly gone flaccid. Telecom 1996, which replaced the Communications Act of 1934, is in so many ways analogous to the Gramm-Leach-Bliley Act of 1999, which gutted Glass-Steagall - among other legal protections preventing crashes like those of 1929 and 2008. 

Who was behind Telecom 1996 and Gramm-Leach-Bliley? The constituency was/is one and the same: those who favor conglomeration of power and money to further their own ends. To be clear, I am suggesting that in the current era, corporate bosses either hire reporters blind to the bigger picture - or censor those who are not - to please advertisers like the Kochs. You don't really need that many actual human beings in a world where "corporations are people, my friend." Therein lies the rub.

Cartoon penned by Joseph Keppler and published in the January 23, 1889 issue of Puck

Plus ça change...

Worker Autonomy
It should come as no surprise that greater autonomy* leads to greater worker productivity and satisfaction, especially when the type of work is complex or requires more creativity. Yet, in my experience, it is something that few managers are willing to grant. In this fascinating, nuanced article, Rick Nauert PhD describes research conducted by two professors at Concordia University in Montreal, CA. Among other things, the article discusses what autonomy means in different cultures.

A must-read for anyone who cares about effective management and/or working well with people from across the globe.

* Definitions, cobbled together from various dictionaries: immunity from arbitrary exercise of authority, freedom to act independently based on one’s own judgment; the right or power to govern oneself.

Audacity Rules
Paul Krugman ++   Focus Hocus Pocus
True Dat!

Throwing Good Money After Bad
Doesn't anybody ever learn? Can a metastasized greed machine on Wall St., a "for sale to the highest bidder" Congress, and a group of flexian self-promoters in the civilian bureaucracy help Main Street? Heaven forbid. Their help will be the death of us all. This is like asking for a blood transfusion from a vampire.

Wall Street deserves none of our sympathy -- nor do the "regulators" who have let Wall Street's con artists dating back to the year dot (most notably, the Reagan Administration) -- nor do the congress people and senators who have enabled them, bailing them out with OPM (AKA 'taxpayer funds') in return for campaign contributions (contributions necessary to pay incumbent Telco kleptocrats for TV ads and robo-calls).

Money from Wall Street has blood on it. My blood. Lawmakers and their civilian lackeys, from both parties, have let them gouge away at us, despite our best efforts to keep our eyes on the prize. None of these corrupt fools have earned my trust. Au contraire --despair, disgust, and a deep sense of betrayal are the bitter seeds they have sown.

The holy book(s) say: "As ye sow, so shall ye reap." The operating philosophy of the American ruling class bespeaks an entirely different modus operandi:  "As I sow, so shall ye reap."

A return to the original is the only ‘change I can believe in.’ No substitutes will be accepted. 

(I wrote this letter to the Huffington Post regarding a WAPO article entitled:Unemployment plan would change rules on bank bailouts).