Interesting thought from Daniel Kahneman (by way of this Economist article) on the role of overconfidence in the economy:
A cheery disposition may be necessary for societies to function. Daniel Kahneman, a psychologist and Nobel economics laureate, has a chapter in his book “Thinking Fast and Slow” which describes overconfidence as “the engine of capitalism”. No entrepreneur can be sure that his planned investment will succeed but if no one took a risk, new products and jobs would never be created. A certain blindness to the odds may be necessary.
I really need to read Kahneman’s book …
Clive Thompson, who I usually really dig, has an unexpected (for me at least) take on Instagram. He likes it (which I also do), but specifically he thinks the filters encourage people to look at things with a more critical/artistic eye. Makes me think about a few things: 1) I think Thompson’s point is true of photography generally. When people have a camera they look at everything as a possible photo and that changes the way things look. 2) It makes me think of Daniel Kahneman’s research around remembering self versus experiencing self and how Instagram encourages optimization around memory instead of experience and 3) My favorite comment about Instagram was from someone (can’t remember whom), who said that the app makes everyone seem like they’re living in this weird depressed state. I agree.
With all that said, I do like Instagram … So take it all with a grain of salt.
Back in 2009 Obama famously choose to employ some behavioral economics strategies in distributing the stimulus to citizens. The administration choose to dole out payments in small pieces over an extended period instead of delivering it in one lump sum. The logic went something like this: “By giving people the sense that their incomes had grown, doling out the money paycheck by paycheck was supposed to make recipients more likely to spend it, thereby lifting the economy.”
Except it didn’t exactly work that way and it now looks like lump sum payments work better than the slow drip. A serious blow to behavioral economics? Not exactly …
Traditional economic theory predicts that the design of a tax credit like Making Work Pay should have no effect on its efficacy: A tax cut is a tax cut, whether it comes in a check, reduced paycheck withholdings, or, for that matter, a briefcase full of cash. How money is delivered should have no effect on whether people spend or save.
So the failure of the program actually proves that people are not perfectly rational about the way they spend, otherwise it would have made no difference. A real failure would have been if the Obama approach had the exact same outcome as lump sum.
Yesterday I posted a link to the Michael Lewis profile/review of Daniel Kahneman’s new book. Since yesterday I’ve repeated this little nugget on how Kahneman discovered behavioral economics three times and thought it was worth sharing:
I can still recite its [a 1970s paper on the psychological assumptions of economic theory] first sentence: “The agent of economic theory is rational, selfish, and his tastes do not change.”
I was astonished. My economic colleagues worked in the building next door, but I had not appreciated the profound difference between our intellectual worlds. To a psychologist, it is self-evident that people are neither fully rational nor completely selfish, and that their tastes are anything but stable.
It’s a nice way to think about the difference between psychology and economics.
Michael Lewis profiles Daniel Kahneman, one of the father’s of behavioral economics. Kahneman has a new book coming out: “The story he tells has two characters—he names them ‘System 1’ and ‘System 2’—that stand in for our two different mental operations. System 1 (fast thinking) is the mental state in which you probably drive a car or buy groceries. It relies heavily on intuition and is amazingly capable of misleading and also of being misled. The slow-thinking System 2 is the mental state that understands how System 1 might be misled and steps in to try to prevent it from happening. The most important quality of System 2 is that it is lazy; the most important quality of System 1 is that it can’t be turned off. We pass through this life on the receiving end of a steady signal of partially reliable information that we only occasionally, and under duress, evaluate thoroughly. Through these two characters the author describes the mistakes your mind is prone to make and then explores the reasons for its errors.”
Of course, in his own Michael Lewis way he brings it back to baseball, finding a letter from baseball statistician Bill James to Kahneman’s biggest collaborator:
“Baseball men, living from day to day in the clutch of carefully metered chance occurrences, have developed an entire bestiary of imagined causes to tie together and thus make sense of patterns that are in truth entirely accidental,” James wrote. “They have an entire vocabulary of completely imaginary concepts used to tie together chance groupings. It includes ‘momentum,’ ‘confidence,’ ‘seeing the ball well,’ ‘slumps,’ ‘guts,’ ‘clutch ability,’ being ‘hot’ and ‘cold,’ ‘not being aggressive’ and my all time favorite the ‘intangibles.’ By such concepts, the baseball man gains a feeling of control over a universe that swings him up and down and tosses him from side to side like a yoyo in a high wind.” It wasn’t just baseball he was writing about, James continued. “I think that the randomness of fate applies to all of us as much as baseball men, though it might be exacerbated by the orderliness of their successes and failures.”
As an aside, Kahneman is also the guy behind remembering self versus experiencing self.