Dennis J. Snower, President of the Kiel Institute for the World Economy makes another attempt to dump the rational man concept used in economics.
Archive for the ‘Behavior Eco/Fin’ Category
This memorandum was released nearly a month ago by Indian Finance Ministry.
The idea is to reduce usage/wastage of paper in Finance Ministry. So it passed on certain instructions/nudges to lower the same.
More can be done like autofixing word processors to type in single space. Similarly all printers auto default should be both sides printing and so on.
Then in order to make people realise/feel guilty some kind of posters (that will use some paper alright) can be put showing how much was paper wastage last week/month and whether it has reduced this month. In the same poster one can be made to feel proud by showing that by cutting paper wastage so many trees have been saved. Likewise departments can be compared saying who saved more paper than the other..
May be these reports can be put on the website as well to let others emulate..
Kaun Banega Crorepati or KBC (a serial based on Who will become a millionaire) is currently in its 8th edition.
In each edition there are these new lifelines which make the serial really interesting. This blog is a huge fan of the way these lifelines are framed and how people choose them. Given a choice one would love to look at the data and see at what stage do people opt for what kind of lifelines, which lifelines work (on this I am quite sure that phone a friend fails most of the time) etc etc.
So, what does KBC 8 offer? Instead of one ask the guest we have ask the three guests (called triguni), Power Paplu is gone from this edition and so on.
However, what interested me most is this new idea which reminded me of the Nudge literature.
The way our brains work is key to understanding how consumers really make choices, argues Nobel Laureate Daniel McFadden.
Some consumers suffer from “agoraphobia” or a fear of markets according to new research presented by Nobel laureate Daniel McFadden that throws doubt on the classical idea that people are driven by relentless and consistent pursuit of self-interest to maximise their well-being. Professor McFadden entitled his paper The New Science of Pleasure, to purposefully play on a phrase coined by Anglo-Irish political economist Francis Edgeworth some 130 years ago.
He told the audience of young economists and fellow laureates at the 5th Lindau Meeting on Economic Sciences on 22 August that new studies of consumer behaviour that drew on psychology, sociology, biology and neurology gave economists a deeper understanding of how consumers made choices.
Rational analysis says that we should relish choice and the opportunities offered by markets. “Yet we are in fact challenged by choice and we use all kinds of ways such as procrastination to avoid having to make choices. One of the reasons is that there are risks associated with making choices,” he said.
…Interestingly pleasure and pain are in different circuitries in the brain while decisions involving gains or losses take place in separate parts of the brain. The net result is that there is therefore a physiological basis for the cognitive anomalies such as loss aversion, the endowment effect and hyperbolic discounting that psychologists have identified.
The classical economic of choice is therefore far too simple as it does not capture what goes on in people’s brain when they make choices. “It is also much too static to capture the sensitivity and dynamics of the process,” he said.
However he said that welfare economists based on neurological measures of utility and brain functioning was coming. “But we are not there yet. Wait for it – but even better get involved in the types of research and the bridge between economics and other disciplines and play a role in making this come true.”
Behavioral economics is gradually and slowly gaining respect amidst mainstream economists..
Though, the lessons are not as easy to learn. One needs to be careful and not overdo the budges. The human mind gets used to it and starts ignoring them (we are predictably irrational always looking for short cuts and high speed):
One doesn’t know when academicians and researchers became ivy league types. One way to look at ivy league is to differentiate a select set of universities/colleges from others. But then it has also moved into another direction where Professors/researchers ( I mean economics ones) are completely cut-off from the real world. The end result has been chasing research which matters little and little as days pass by. Even teaching has been highly inspirational as one sees a very different world from what is taught. What better way to explain this than the famous Occupy Harvard where students walked out of Prof Mankiw’s class.
So it is kind of odd to read articles like this. HBSWK reviews research of Prof Nava Ashraf of HBS. She apparently descends from the Ivy League and involves people for whom the researchis being done.
Journal of Economic Perspectives’s new edition has some articles on entrepreneurship.
A team of four econs have written this paper bringing beh econ perspectives to entrepreneurship. They say returns from entrepreneurship are not high. But variance is high. Why do we still have people trying their luck at opening their businesses?
The big B day is over. Enormous noise and brouhaha going on. The blog will see whether it will write something on the budget laters.
Meanwhile, was trying to scan the economic survey -2013-14 presented yesterday. Chapter 2 which has become kinda famous for being different, this time it speaks on issues and priorities. It has the usual set of words which will please the market sentiment.
Came across these interesting lines in the middle:
Default setting for government intervention in the economy needs to change from ‘prohibited unless permitted’ to ‘permitted
Nice to see the words picked from behavioral eco literature. So far, the default for most eco activity in India is “Well, it must be banned till it is allowed”..this was fine in command and control economy. This default needs to change in the market economy to” Well, it is allowed till not banned”.
Simple play of words but changes the entire approach. That is what nudges strategy is all about…:-)
John C. Driscol of Fed and Steinar Holden of University of Oslo write this paper.
It gives a good account of the progress made so far in introducing beh eco in macro models and challenges as well:
Over the past 20 years, macroeconomists have incorporated more and more results from behavioral economics into their models. We argue that doing so has helped fixed deficiencies with standard approaches to modeling the economy—for example, the counterfactual absence of inertia in the standard New Keynesian model of economic fluctuations. We survey efforts to use behavioral economics to improve some of the underpinnings of the New Keynesian model—specifically, consumption, the formation of expectations and determination of wages and employment that underlie aggregate supply, and the possibility of multiple equilibria and asset price bubbles. We also discuss more broadly the advantages and disadvantages of using behavioral economics features in macroeconomic models.
Nice way to start figuring the developments..
There is another interesting debate over whether the western world has run out of major innovations and are now going to be on a steady decline. Robert Gordan has been making this argument for a while. Ofcourse, there are people who disagree and say innovation likely to continue and generate future growth. Here are the debates — one, two, three.
Coming to the title of the post. Prof Gordon often asks this question which innovation do you value most – A toilet with piped water or a smartphone?
Are all of mankind’s best inventions behind us?
Economist Robert Gordon thinks so. When giving speeches, the Northwestern University professor often flashes a photo of a smartphone and a toilet on a screen and asks his audience what they would do if they had only two options: Keep everything invented up until 2002, or keep everything invented up until today—but give up running water and toilets. The answer to him is obvious: Indoor plumbing changed how people live, he says, smartphones are just a handier form of what already exists.
Which would you choose?
The answer here most likely (atleast for me) is toilets. Here there is a case of lack of supply as well. Much of India does not have toilets but phones have become too common.
But the same post takes a poll but frames the question differently:
Which invention of the past would you rather live without?
Here the choice is smartphones not toilets. But unknowingly you end up ticking on toilets!
Importance of framing the questions and nudging people into making choices.