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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Labor Day: Light a Fire

Labor Day is one of the most important - and disturbing - holidays in the United States.

In so many ways, the history of work in the US is a history of struggle. Historically, the access, the training, and the opportunity to earn a living wage have all been limited to a lucky few. Actually, "luck" is only the luck of the draw: to have been born with a particular gender and hue, and to come from a certain cultural/economic class, get you most of the distance to home plate. Too bad for everyone else -- they are barely visible anyway, most of the time. Most of us - African-Americans, women, those arriving from distant shores as indentured servants - have never seen the fruits of our labors.

Average Unemployment Figures Mean So Little

"Average" Unemployment Numbers Mean so Little.

Increasingly, the experienced, highly skilled, and super-annuated (by which I mean people over 38 years old), are simply put out to pasture the second a) they pass the median salary for their job grade; and/or b) the moment the CFO tells the boss that it can be done 'for economic reasons' without invoking undue legal risk. That they have a wealth of knowledge, skill, judgment, and experience is of no concern to the bean-counters who know how to count bodies, but are inured to the importance of intangibles like resourcefulness and deep knowledge.

That these skilled, experienced, but formerly-employed workers have families, homes, and bills to pay is of no concern to anyone as far as I can tell. That the suicide rate (at $1.6 million per 'successful' completion) is skyrocketing among such people is of no concern either - particularly to the political and economic "leadership" classes - who could do something to rectify the tragedy but won't.

U.S. Suicide Rate Surges to a 30-Year High - The New York Times

Truly, with every passing Labor Day, I feel less like celebrating and more like rioting.

This article, from the August 3, 2016 Wall Street Journal, describes how the self-injurious casting out of people over their mid-thirties hurts businesses:  For Economy, Aging Population Poses Double Whammy 

The Effect of Population Aging on Economic Growth, the Labor Force and Productivity : Link to the full report, from the Rand Corporation and Harvard University.


ⓒ Sara Wedeman, BECG, LLC

No, it's not "GPS for Human Behavior:" Keeping BE real.
It should be self-evident that financial behavior is a subset of human behavior, and - as such - it is rich with nuance and meaning. Certainly, it is self-evident that most of that meaning lies unplumbed, or at least, unarticulated.

When I first stumbled on the field now known as behavioral economics (BE), or economic psychology (EP), it did not yet have a name. This is not to imply that it did not exist: it has always existed, but not as a respectable field of academic inquiry. That began to change in 2002, when psychologist Daniel Kahneman, and colleagues, won the Nobel Prize in Economics for their work on decision making under uncertainty.

... Which brings me to the comment alluded to in the title of this post: A tweet by Richard Thaler:

Recently, Behavioral Economics has become a meme, which means that it has been reduced to an easily-transmissible idea-unit, shorn of its depth and complexity. One reason for its current popularity, I fear, is its ease of use as a gimmick. Frequently, I am contacted by people/companies that want to use BE~EP knowledge to more effectively manipulate others to do what the user wants them to do. Although many of those I speak with believe they are influencing people to do things that are "good for them,"* others' goals are anything but pro-social, from convincing consumers to apply for credit cards that charge above-market interest rates to "nudging" contractors into accepting reduced compensation. The use of BE in marketing is all the rage, or so it would seem. I'm not suggesting that market is evil or that an understanding of the drivers of financial behavior should not increase a company's effectiveness: it's just that there is so much more to this field than meets the eye. For example, the research shows that social influence techniques work best when implemented ethically (with one exception: when you lie about whether you like or admire someone, it still works).

In short, the knowledge generated by centuries of inquiry and experimentation in multiple disciplines should not be reduced to a list of mental quirks that can be used to influence behavior. One more thing: nobody should claim, or allow themselves to be described as, "the father of behavioral economics." First, this begs the question: Who's the mother? Second, BE~EP, or whatever one calls it, has many ancestors. It is not new - it is newly respectable. The field's respectability is a wonderful thing, which should open it - to further inquiry, to diverse points of view, and to voices not hitherto included in the conversation.

* A contemporary version of "the white man's burden?"

 Plus ça change...
Plus ça change...
Source: Macalester College

Amuse-bouche: My answer(s) to: "What are some mind-blowing facts about behavioral economics?"

Perfectionism: A Blessing and a Curse
I have always believed it is good to have high standards.

A long time ago, a not-wildy-competent coworker in a position of authority said to me that the 'secret' to his 'success' was that he "never sweats the small stuff." I barely knew how to respond, because all I could think was:
  1. You think you're successful?!
  2. What, in your view, constitutes "small"?
  3. I feel sorry for the people who have to depend on you. 
I also believe that intelligence is largely a matter of effort. We are all born with innate talents and weaknesses, but the willingness to expend energy on something that challenges us is a choice. Intelligence exists not just in the cranium, but everywhere in the body. If our muscles have brains, our brains are like muscles, which - if used - get stronger, better, and more courageous. If unused, they molt and turn to cardboard.

I have no time for people who don't extend themselves to learn and to put that learning to use in the real world. Thinking, writ large, takes energy - but it creates its own momentum. Most of the time, even when one turns out to be dead wrong, the learning is worth it. I speak from experience, with the partially-healed bruises and long list of yet-to-be-written apologies, to prove it.

That said, I tend to err in the other direction. This is not in any way to imply that it is a superior direction: au contraire.  While I'm busy researching everything I say to make sure it can be corroborated empirically, via multiple sources, I am a) driving myself nuts; and b) working so hard to protect myself from being wrong that I am missing out on learning from others, and on the thrill of discovery.

This is, BTW, a long-winded way of saying that I really enjoy thinking and writing about this field - whatever one chooses to call it. Behavioral Economics - Economic Psychology (BEEP), whatever.  I have something (err - more accurately, quite a few things) to say. It's time for me to step away from my current program - wherein I spent 96% of my time checking my facts - and to lurch into the public square.

Let's "dance!"


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.