At what point did B+ become average? Why bother grading at all?
Of course, "irrelevant" can mean different things to different people for different reasons. Consider how many voters ignore facts and data or pick only those that confirm their confirmation biases. They still believe they are more rational and more informed than other voters.
Economic models are based upon assumptions that have either 1) been demonstrated to be true to a level of confidence deemed acceptable or 2) are simply taken to be true because that's the given among those who adhere to whatever school of economic "truth" one belongs to. The old joke that economists laid end to end will never reach a conclusion fits the latter.
The truth is that when human nature confronts reality, all assumptions are really on their own. Despite all of the rules and processes of research, people still find many ways to apply human idiosyncrasies to them. There's an old saying in geology: I wouldn't have seen it if I didn't believe it. And yet, in the end, science — social and otherwise — is still far superior to whatever is in second place.
Eclectic Pragmatism — http://eclectic-pragmatist.tumblr.com/
Eclectic Pragmatist — https://medium.com/eclectic-pragmatism
4
Yes math is very difficult for many people, and of course for most of the human race emotion is way more prevalent than rational thinking. That is why people believe in Medicare for all, free college, and many other progressive promises without any consideration of their costs or unintended consequences. And averages without distribution data are mostly worthless, another thing that most don't understand.
1
Spock would prefer the $1200 lump sum if it came at the beginning of the year. He could put it in the bank and draw out $100 to spend every month, until only the accrued interest remained. But if the lump sum was to come at the end of the year, he'd take the $100/month: higher present value.
4
Cash is not an ideal gift, because it takes time and energy to decide what to buy with that cash. Better to get something you were going to buy anyway (saving you the trouble of shopping for it), and even better than that is something you didn't know you wanted until you got it.
2
That would be fine if it worked out. But too often "something you were going to buy anyway" turns out to be something LIKE something you were going to buy but without the feature that made you want to buy it. And if I didn't want something, I still don't want it after I get it. There's no problem with cash; you don't need to spend it if you don't want to. Just put it in the bank until you need it. The only inconvenience is the trip to the bank.
The solution would be for people to stop giving so darned many gifts to people who are well off and can buy whatever they need.
The solution would be for people to stop giving so darned many gifts to people who are well off and can buy whatever they need.
1
Cash is the ideal gift, you can save it rather than wasting it on consumption.
1
I teach economics, and in my public moments, I teach students that models are simplifications, and a good economist, as Keynes described, needs to be as close to the ground as a politician and as lofty as a philosopher, use history as well as understand psychology and business thinking. The results of the test do not surprise me. The simple rationality presented in simple models, is a simplification. That some people see this simplification as the whole of economics is a serious problem.
Models are tools, and as tools, they need to be supplemented with the learnings from psychology, sociology, history, and politics for good policy. That doesn't make them less useful. it just means you can't build a house with just a hammer and nails, you need the pipes, wires, wood... etc.
In Canada, way back in the 80s, we introduced a GST tax (6 or 7%). I tell my students about it, because it was done stupidly, though the tax is a good one. It was introduced in a recession, and the policy-makers decided that businesses could choose whether to hide it or add it at the cash register. It replaced a hidden 13% manufacturers sales tax, which no one thought about, but cost us competitively.
Now, the GST is added at the cash register by all, choice caused extra cost for businesses who guessed wrong. visibility causes extra annoyance (disutility). Most economists know people are people, and looking at what is good policy means supplementing the pure model with psychology, politics, etc.
Models are tools, and as tools, they need to be supplemented with the learnings from psychology, sociology, history, and politics for good policy. That doesn't make them less useful. it just means you can't build a house with just a hammer and nails, you need the pipes, wires, wood... etc.
In Canada, way back in the 80s, we introduced a GST tax (6 or 7%). I tell my students about it, because it was done stupidly, though the tax is a good one. It was introduced in a recession, and the policy-makers decided that businesses could choose whether to hide it or add it at the cash register. It replaced a hidden 13% manufacturers sales tax, which no one thought about, but cost us competitively.
Now, the GST is added at the cash register by all, choice caused extra cost for businesses who guessed wrong. visibility causes extra annoyance (disutility). Most economists know people are people, and looking at what is good policy means supplementing the pure model with psychology, politics, etc.
1
Or as I might insist somethings are too complex to be properly understood, most human interactions fall in that category.
1
I know very little about economics, but I found this article to be very interesting.
What impressed me was the story of the students and raising the maximum score to 137 so that a grade in the 70 percentile would generate a score in the 90's. I kept thinking to myself "If you had been a professor of Psychology, this article would have been about Pavlovian Classical Conditioning"
I believe your students reacted as they did because they had been conditioned by classroom experiences prior to college where a score of 100 resulted in a grade of 100%.
Most elementary, middle-school and high-school classes do not require you to calculate your percentages, so if you see 96 on a quiz, your brain immediately interprets this as an "A", whereas a score of 70 is immediately interpreted as a "C" regardless of whether, or not this is actually the case.
Therefore a higher score is immediately interpreted, often sub-consciously as a greater achievement and are immediately rewarded with a feeling of satisfaction and accomplishment.
Yet, here also can we tie Psychology and Economics together. Pavlovian Classical Conditioning can account for a great percentage of our worldly perceptions, whether for good or ill. Often how we handle our personal finances is the result of learned behavior from our parents, families, friends and personal circumstances, and the longer we make bad decisions, the more conditioned to them we become.
I must end this now as I've run out of room to type. :)
What impressed me was the story of the students and raising the maximum score to 137 so that a grade in the 70 percentile would generate a score in the 90's. I kept thinking to myself "If you had been a professor of Psychology, this article would have been about Pavlovian Classical Conditioning"
I believe your students reacted as they did because they had been conditioned by classroom experiences prior to college where a score of 100 resulted in a grade of 100%.
Most elementary, middle-school and high-school classes do not require you to calculate your percentages, so if you see 96 on a quiz, your brain immediately interprets this as an "A", whereas a score of 70 is immediately interpreted as a "C" regardless of whether, or not this is actually the case.
Therefore a higher score is immediately interpreted, often sub-consciously as a greater achievement and are immediately rewarded with a feeling of satisfaction and accomplishment.
Yet, here also can we tie Psychology and Economics together. Pavlovian Classical Conditioning can account for a great percentage of our worldly perceptions, whether for good or ill. Often how we handle our personal finances is the result of learned behavior from our parents, families, friends and personal circumstances, and the longer we make bad decisions, the more conditioned to them we become.
I must end this now as I've run out of room to type. :)
4
Yes conditioned and also conditioned not to think. Even when it was explicitly stated that they were being manipulated most did not even notice.
As a freshman at Princeton and introduced to the curve for students in my classes, I was delighted by a 72 score on a test. As the ranges if you through out the aberrant genius grades generally ran from 80 to 60.
Doesn't this article essentially explain why economics, unlike physics, is not a science? All electrons behave identically, while people all behave uniquely - whether irrationally or not. Hence mathematics works when describing the physical behavior of electrons, but not economic (or political) behavior of people.
3
What it explains is that there are a whole lot of economists who don't realize that the point of economics is group psychology, not just statistics.
7
No. What this shows is that some people are incapable of telling the difference between simplifying assumptions and reality. Physicists, biologists, chemists all make wrong assumptions when working on certain problems because the assumptions make the math easier and allow you to discard irrelevant information. The problem comes up when people get confused and use the assumptions in the wrong context.
2
Good point, but at some level your idea of Physics breaks down and becomes a statistical issue. One that can be studied and understood unlike humans.
Behavioral nudges are not just for individuals: knowing how corrupt the government is, I prefer to pay taxes on retirement accounts later because I fear that any promise not to tax again when I retire in 35 years will be reneged upon by the government. I don't trust them not to get their fingers back into the pie again. The government is not just an Econ, and I don't think they can see money moving without salivating a bit.
1
"...comforted by the knowledge that in markets these factors just wouldn’t matter."
But I think that is the problem with arguments against market economics. The argument goes that "markets" don't work because people do not act as "econs" (to use your term). The thing is, that doesn't mean that the theory of markets is incorrect, what is incorrect is an expectation that people would participate in markets as econs. The correct answer lies in your thesis - SIFs - people bring the SIFs INTO the marketplace. That is, markets are a fundamental reality of how people interact in the economy, but they do so with SIFs in the calculus of their market interactions.
As you say: "It is much easier to make money by catering to consumers’ biases than by trying to correct them." Well, it's still a market. That people decide based on SIFs doesn't make it not a market interaction.
But there again - as you say, you admit to tests on a scale of 137 - you aren't going to change human behavior. You aren't going to change SIFs. You aren't going to change the fundamental market based modality of economic interaction.
So just as you realized it is futile to try to thwart human behavior, so too is it futile to thwart the human behavior of markets economics and SIFs. Which is why anti-market policies fail - you can't thwart basic human behavior. And basic human behavior is market economics and SIFS in those market behaviors. Maybe it's time economic policy admit markets work on a "scale of 137".
But I think that is the problem with arguments against market economics. The argument goes that "markets" don't work because people do not act as "econs" (to use your term). The thing is, that doesn't mean that the theory of markets is incorrect, what is incorrect is an expectation that people would participate in markets as econs. The correct answer lies in your thesis - SIFs - people bring the SIFs INTO the marketplace. That is, markets are a fundamental reality of how people interact in the economy, but they do so with SIFs in the calculus of their market interactions.
As you say: "It is much easier to make money by catering to consumers’ biases than by trying to correct them." Well, it's still a market. That people decide based on SIFs doesn't make it not a market interaction.
But there again - as you say, you admit to tests on a scale of 137 - you aren't going to change human behavior. You aren't going to change SIFs. You aren't going to change the fundamental market based modality of economic interaction.
So just as you realized it is futile to try to thwart human behavior, so too is it futile to thwart the human behavior of markets economics and SIFs. Which is why anti-market policies fail - you can't thwart basic human behavior. And basic human behavior is market economics and SIFS in those market behaviors. Maybe it's time economic policy admit markets work on a "scale of 137".
1
In defence of the non-Econs, the economic choices we face are deliberately obscured. I don't understand my paycheck, do you? Does your phone pricing plan make sense? How about a coffee shop – are you paying for beverages or table rent? Do you source your shoes from the cheapest Chinese suppliers? We're bombarded with market distortions, not prices.
Our preferences are also highly non-linear. Having enough money forever beats having more now. Keeping up with your peers beats having more absolutely. The utility of goods swings wildly with novelty and marketing. Small luxuries eat up our marginal utility. Can you blame people for low economic literacy? It's hard!
Our preferences are also highly non-linear. Having enough money forever beats having more now. Keeping up with your peers beats having more absolutely. The utility of goods swings wildly with novelty and marketing. Small luxuries eat up our marginal utility. Can you blame people for low economic literacy? It's hard!
1
I don't know about in the UK, but I always understood my paycheck. Now in some areas a utility bill is another story.
It seems to me the problem with economics is that it sees itself as a latter-day metaphysics. Whereas the economy is artifice; a human institution, an artifact as much as a bridge is. If you want to understand why one bridge uses suspension and one is cable-stayed you don't enquire into the "nature of things bridges", you ask the engineers who designed them. Ports, the Federal Reserve, 401Ks, chambers of commerce, free trade agreements... these all exist because someone planned for them to exist and had a reason.
His grading example reminds me of my chemical engineering classes, though most of my friends and I saw the utility of having the class average land between 40 and 50. It meant I could score a 79 and be top of the class and perhaps more importantly, I could score a 2 out of 100 (class average in the low 30s) on one of five tests and still get a B in the course. Keeping the class average below 50 gives the good students room to shine at the top and allows average students to recover from one or two bad test scores.
2
So, if I understand this correctly, if voters were the "econs" of political sphere, we would have the best government we could get simply by informed voting, , but since they are not, we now have the best government money can buy.
Almost - we have the government that the politicians can fool the people with SIFs into voting for. If the voters were "econs" they wouldn't be voting for promises of freebies and handouts. But since they vote on SIFs rather than as "econs", that's exactly what they vote for.
Informed voting is almost impossible, first most would never put in the effort to become informed, and some of the rest would not understand the information.
“Exams will have a total of 137 points rather than the usual 100."
A most original and ingenious idea. Those who teach might want to try it with a maximum score of (e^π)*10 = 231.4 or something similar. :-))
A most original and ingenious idea. Those who teach might want to try it with a maximum score of (e^π)*10 = 231.4 or something similar. :-))
1
"Fortunately, economists open to new ways of thinking are finding novel ways to use supposedly irrelevant factors to make the world a better place."
So economists can make the world a better place? This is news to me.
So economists can make the world a better place? This is news to me.
3
Economists, like most social scientists, are imperialistic and like everyone else, motivated by little other than self-interest (which is their case is to publish or perish).
I think this is a bit off. This is all about utility. The author is assuming that the only REAL source of utility is the final curve-based letter grade. But there are many students who get satisfaction from "doing well" meaning that they are succeeding in the learning that is the point of the class. Now if you are in a class full of dummies and get a C that does not feel as good as being in a class of brilliant students and get a C. The quality of the class makes a students perception of the same grade change. So the professor's trick in changing the number scale is not a non factor, it might lead each student to legitimately think he or she is doing better, regardless of whether or not the final letter grade changes, because that student perceives the higher scores as reflecting an indication that the professor thinks the class as a group is better than a class he gives an average score of 70.
This is the basis of the counter argument to counter argument of "irrational consumer". The problem is that economists _presume_ a particular measure of "utility". So they argue that when people don't act based on what their _presumptions_ of utility are, then they must be acting "irrationally".
The thing is, people ARE in fact acting rationally on whatever is _their_ particular measure of utility. If their "utility" is to "play now" rather than to work toward a better future, well that is their "utility" and playing now and not going to school or whatever, is a rational choice toward that "utility". That it is perhaps unwise to do that on account of _future_ utility, doesn't make it not a "rational" choice on the measure of utility that is in effect at the time that choice is made.
The thing is, people ARE in fact acting rationally on whatever is _their_ particular measure of utility. If their "utility" is to "play now" rather than to work toward a better future, well that is their "utility" and playing now and not going to school or whatever, is a rational choice toward that "utility". That it is perhaps unwise to do that on account of _future_ utility, doesn't make it not a "rational" choice on the measure of utility that is in effect at the time that choice is made.
People do not act rationally. There have been plenty of experiments which have shown that people change their behavior based on the presence of irrelevant alternatives or exhibit intransitive preferences.
But the basis of your comment is even more incorrect. Economists do not generally presume a particular measure of utility and then complain when people do not appear to behave as predicted. When people behave differently, they take their model to be wrong in some manner and move on to some other model. Only strawmen do what is described by Dr. Thaler.
But the basis of your comment is even more incorrect. Economists do not generally presume a particular measure of utility and then complain when people do not appear to behave as predicted. When people behave differently, they take their model to be wrong in some manner and move on to some other model. Only strawmen do what is described by Dr. Thaler.
I am not a teacher of economics, but of English, but this makes perfect sense to me. Only a small percentage of my students love literature and writing when they walk into my classroom, but I am responsible for teaching all of them and making sure they improve, no matter what their reading level or their ability in writing, no matter whether they love to read and write or not. Thus, the SIF's (supposedly irrelevant factors) matter a great deal to students and they matter enormously when it comes to student achievement across the board. One must make them like you, even if they don't like to read or write. Then they will work. You must make them feel important, you must make a personal connection with each one, and they are all very different people, with differing motivations. One must make the lessons somewhat interesting--and if they like you because you have already worked on that part of the equation, then the less interesting lessons won't matter as much. You get the picture? Everything is really about psychology and relationship--whether we are talking economics or English or Chemistry or whatever. This article will help me explain that to some newer teachers who can't understand why the students are not as fascinated with their subject as they are. It also helps to explain why some target groups in our student populations sometimes fail to learn: they haven't been taught by people who attend to these SIF's--the key to everything in the irrational human mind.
6
I teach too, Economics interestingly, and think this is an interesting reply. I majored in Econ when I was in college, and I distinctly remember racing to the college office to declare Econ as my major after taking my first introductory class. The teacher was truly inspiring and very interesting TO ME. That's not to say everyone was enthralled, but isn't that way it's supposed to work in college? I was interested in the subject and worked hard, read the textbook, completed the assignments, took the tests etc. I do not recall that the teacher probably cared a hoot about whether I liked him or his class, it just was what it was. Now when I teach classes, I do attempt to do the things you suggest, and I believe for the most part most of my students do benefit from going through my class. But I know that there's a wide variance in the interest level, I am never going to turn the whole class into "Econs", but I give it my best effort, continually try to bring in new and interesting features to my lessons and sleep well at night knowing I have given enough of myself, the rest must be the responsibility of the student to put in the effort on their end.
2
Yes you should be interested in your major, but today college is to get a job as well, one that will pay back your loans.
"A $1,200 lump sum would have the same effect on consumption as monthly paychecks that are $100 larger. "
No it wouldn't. Time value of money bro.
Especially in the early years of the Obama administration when the S&P and the Dow were flying through the roof. I thought you were an economist.
No it wouldn't. Time value of money bro.
Especially in the early years of the Obama administration when the S&P and the Dow were flying through the roof. I thought you were an economist.
2
I believe Prof. Thaler is conflating innumeracy with irrationality.
2
True. I think this an important distinction. The problem with the "irrational" argument is that it would suggest that people make random choices without consideration of their interest or utility or unconnected to what they see as their interest or utility. Now, they may not have a full and correct assessment of what is or is not in their actual interest (optimal well being - which is itself subjective and not objective as those claiming the "irrational behavior" argument believe) but it is "irrational" to think that a person would not make a decision based in a "rational" assessment of what they think are the circumstances pertaining to their interests and utility.
It's like the saying garbage in/ garbage out. Just because you get garbage out of a computer does not mean it wasn't the result of a program (rational thought) when the input was garbage.
It's like the saying garbage in/ garbage out. Just because you get garbage out of a computer does not mean it wasn't the result of a program (rational thought) when the input was garbage.
Would one then logically infer that smoking is rational and in a persons best interest? Humans make all kinds of bad or flawed (irrational?) decisions every day. It is only economists who try to spin these irrational decisions into 'value neutral' logical expressions of the individuals best interest. Milton Freedman tried to convince people that they were not free if anyone were to suggest that anyone knew better than the isolated individual. That was a powerful story for Americans steeped in the rhetoric of freedom and individualism. Only problem is that is not how humans work and is at best a fib. Economists are victims of their preoccupation with the elegance of calculus.
Just FYI to the author, 137=1/(fine structure constant) in quantum electrodynamics.
2
I had numerous dialogues with a Libertarian*, who was explaining his ideology in relation to various questions of law and policy.
Over and over again, his arguments relied explicitly on the rational decision-making of citizens (or at least, the great majority of them). I remember thinking, "this ought to function in the real world about as well as Karl Marx's prescription".
________________
*When I write Libertarian with a capital L, I mean a believer in a certain doctrinaire materialistic ideological cant (see Libertarian Party, Cato Institute, etc.) as distinguished from libertarian, by which I mean a person like myself who prefers personal liberty over imposed external control absent some Mighty Good Reason.
Over and over again, his arguments relied explicitly on the rational decision-making of citizens (or at least, the great majority of them). I remember thinking, "this ought to function in the real world about as well as Karl Marx's prescription".
________________
*When I write Libertarian with a capital L, I mean a believer in a certain doctrinaire materialistic ideological cant (see Libertarian Party, Cato Institute, etc.) as distinguished from libertarian, by which I mean a person like myself who prefers personal liberty over imposed external control absent some Mighty Good Reason.
3
A recent paper from the NBER indicates that not even Econs think like Econs. It turns out that the order in which they review the literature affects dramatically the chances of citing one study or another ("It's Good to be First: Order Bias in Reading and Citing NBER Working Papers").
3
Yes bias is everywhere, and in yourself it is almost impossible to identify and correct. Now in most of this paper that is not an issue.
Could you keep that tax break analysis from Denmark to yourself? I like my 401(k) the way it is (tax deferred).
2
Actually, Spock had emotions, and human ones at that--he was half-human. He just (usually) did a very good job at controlling how those emotions were expressed.
He learned how to do this from full-blooded Vulcans, who also had emotions, and very strong ones--but who learned, out of necessity, to control them.
The metaphor here for mindfulness could make a useful counterargument to your point.
I can't fault you for not being intimately familiar with half-century-old pop culture, but...okay, actually I will.
He learned how to do this from full-blooded Vulcans, who also had emotions, and very strong ones--but who learned, out of necessity, to control them.
The metaphor here for mindfulness could make a useful counterargument to your point.
I can't fault you for not being intimately familiar with half-century-old pop culture, but...okay, actually I will.
4
Yes and that is the real point, almost everything is a choice. Unfortunately being in a position to make that choice is beyond most humans, they are way too emotionally driven. And yes if you use something in your analysis you should understand it.
The greater question is "Why is the average grade a B+?" This sounds like Lake Wobegon, where all of the children are above average.
8
It's a good question but the answer is embedded in his essay: "As a young professor worried about keeping my job, I wasn’t sure what to do."
2
No he already had that B+ cooked in. Now perhaps it was justified by having a select group of students. He cooked the number not the grade to address his students being unhappy (another emotion).
Apparently SIFs operate not only in economic behavior but in the teaching of economics as well. Otherwise why would a professor of economics design his test to "sort out the stars, the average Joes and the duds" when his objective should rationally be to instruct all students in economics? Perhaps the professor has irrational needs of his own. Who knows? In any event the article suggests the irrelevance of his subject matter. If knowledge of economics were a science, like anatomy, say, and the professor dissembled in this manner in a medical classroom, he would find himself looking for work elsewhere.
2
I wondered that, too. My mother worked with an elementary teacher who said she never gave higher than a B on the first grade card, no matter what the student had earned. Since she taught math, the others asked what she did with students who legitimately got 100s on all the tests. "I find something they've done wrong--writing sloppily or something. I think those smart kids need to be taught they aren't so smart."
I had several teachers who were less concerned with what the class was learning than with fitting us into categories.
I had several teachers who were less concerned with what the class was learning than with fitting us into categories.
It's classical economics vs. common sense. Behavioral economics seems to incorporate the latter.
1
The test with 137 points reminds me of the guitarist in "Spinal Tap" who prefers an amplifier because, "This one goes to 11."
5
This just in: most people behave irrationally most of the time.
Still, fun to read well-documented examples.
Still, fun to read well-documented examples.
4
This proves what I have always argued: that almost all economics students are third-rate mathematicians, and have no better a grasp of simple arithmetic than your typical humanities student.
At the age of about twelve, I was quickly working out in my head my percentages in every paper, test and exam I sat, no matter what the total mark. To get a rough answer for my percentage on a paper that had 137 total marks, I would simply have rounded up the maximum to 140, similarly rounded up slightly my absolute score, then adjusted my final percentage accordingly.
Hence, 96 out of 137? That's a bit more than 98 out of 140, which is 7 out of 10 – or roughly 70%. The actual answer is 70.1%
In short, if you're a first-year economics student and you can't quickly estimate in your head 96 out of 137 in your head as an approximate percentage, then you shouldn't be studying economics. Stick to politics or history, English Lit or media studies.
At the age of about twelve, I was quickly working out in my head my percentages in every paper, test and exam I sat, no matter what the total mark. To get a rough answer for my percentage on a paper that had 137 total marks, I would simply have rounded up the maximum to 140, similarly rounded up slightly my absolute score, then adjusted my final percentage accordingly.
Hence, 96 out of 137? That's a bit more than 98 out of 140, which is 7 out of 10 – or roughly 70%. The actual answer is 70.1%
In short, if you're a first-year economics student and you can't quickly estimate in your head 96 out of 137 in your head as an approximate percentage, then you shouldn't be studying economics. Stick to politics or history, English Lit or media studies.
9
I would LOVE to have Paul Krugman comment/respond to this article!
2
he would be talking about how MY spending is HIS income--and that would be the end of it.
1
That makes no sense...
In your model, Professor Thaler, you seem to assume that Econs can make almost effortless computations. In reality, for most of us, these computations entail considerable expenditure of effort. This expenditure needs to be included in the costs of acting like a rational Econ. Therefore, it is quite possible that an Econ, when taking these computational costs (of ordinary people) into account, would make the same choices as the rest of us.
At a certain level you must know this. Why did you choose 137 as the point scale? To make the calculation of converting that scale into percentages more difficult and thus increase the computational costs, assuming, correctly, that because of the extra cost, students would be less inclined to make the conversion.
At a certain level you must know this. Why did you choose 137 as the point scale? To make the calculation of converting that scale into percentages more difficult and thus increase the computational costs, assuming, correctly, that because of the extra cost, students would be less inclined to make the conversion.
SIFs are difficult to quantify and something immeasurable is difficult to factor when analyzing or attempting a prediction. Kind of like love, hate, fear, or anger, and the subsequent actions prompted by those emotions, no one can know with certainty what will come next in almost any situation where emotion is involved. Money is all about emotion to most people. It is mixed up in their minds with with actual survival and is often complicated by mob psychology. So it is little wonder that economics (most especially macroeconomics) is an inexact science and subject to SIFs.
One has to start somewhere. Pretending that people are perfect rational actors and that information is instantly available to all of them was a useful simplification when economics was a new science, but reality is more complicated.
4
Answer your own problem. The issue is in thinking people don't act rationally _with the information available_. The issue isn't acting "irrationally", it is one of acting "rationally" giving incomplete or incorrect information upon which to act rationally.The resulting action/choice may appear to be irrational in the larger context of full, complete and correct information, but that doesn't mean it wasn't arrived at rationally in the context of the information _available_ to that choice.
For example, if you walk across a floor that appears to be perfectly safe and intact only to fall through it, did that mean you acted irrationally? No. If you didn't know a priori that the floor was unsound, you acted _rationally_ with the information available to you at that time. Also, arguably, how rational would it be to assume that every footstep is going to fall through the floor?
If you knew the floor was unsound, it would be irrational for _you_ to walk across that floor, but you can't say that the person not knowing that acted irrationally in so doing just because it would be irrational for you to have done so having that knowledge.
For example, if you walk across a floor that appears to be perfectly safe and intact only to fall through it, did that mean you acted irrationally? No. If you didn't know a priori that the floor was unsound, you acted _rationally_ with the information available to you at that time. Also, arguably, how rational would it be to assume that every footstep is going to fall through the floor?
If you knew the floor was unsound, it would be irrational for _you_ to walk across that floor, but you can't say that the person not knowing that acted irrationally in so doing just because it would be irrational for you to have done so having that knowledge.
It's still useful today. You just can't go applying those assumptions in every context.
Actually, one of the big benefits of the tax break for IRA's or 401K's is not the tax break itself, but the limits on the contributions. Having a $6500 limit on an IRA contribution, for example, induces me to save $6500. No more, no less.
To an econ, that limit would be irrelevant as a savings target. But as a non-econ, it gives me a target that I feel good about achieving, and a rational for choosing it, even though it was the government who chose the target, not me.
Loved the article.
To an econ, that limit would be irrelevant as a savings target. But as a non-econ, it gives me a target that I feel good about achieving, and a rational for choosing it, even though it was the government who chose the target, not me.
Loved the article.
1
I love the definition of Econs!
Also the World Development Report 2015, the flagship World Bank publication called for a closer look at behavioral sciences for policy design.
Have a look here: http://blog.coleurope.eu/2015/01/28/wb-wdr2015-development-goes-behaviou...
Substance is the very same, it is time for behavioral economics to help shaping policies!
Also the World Development Report 2015, the flagship World Bank publication called for a closer look at behavioral sciences for policy design.
Have a look here: http://blog.coleurope.eu/2015/01/28/wb-wdr2015-development-goes-behaviou...
Substance is the very same, it is time for behavioral economics to help shaping policies!
2
I sometimes wonder whether econcomics majors are required to take a basic statistics course as part of their degree curriculum. If they do, then many professional economists appear to have checked some of statistics' most critical principles at their theoretical doors.
Folks, the so called Market is a stochastic construct. A statistical model of aggregate behavior across a large number of organisms (people).
Many treat the market as having a transcendent existence independent of human activity; then treat individuals as automatons in service of the construct (Thaler's "Econs"), and are then confounded when individuals fail to behave in accordance with an assumed "ideal actor".
This is confusing the map with the territory.
Fallacious reification is not unique to economics of course; psychometrics has an ongoing love affair with constructs like IQ, forgetting that they are mainly statistical artifacts. Economists do seem bafflingly resistant to fessing up to the constructed nature of their core model however.
There's an "dirty little secret" at the core of current media presentation of economics, namely: The promised outcomes of the "free market" should come with the caveat: "on average, over time". There are no guarantees for an individual; not everyone benefits proportionally, or immediately, or (for that matter) ever.
It's intellectually dishonest not to make that explicit; though a slew of more or less perverse incentives not to do so are readily imagined.
Folks, the so called Market is a stochastic construct. A statistical model of aggregate behavior across a large number of organisms (people).
Many treat the market as having a transcendent existence independent of human activity; then treat individuals as automatons in service of the construct (Thaler's "Econs"), and are then confounded when individuals fail to behave in accordance with an assumed "ideal actor".
This is confusing the map with the territory.
Fallacious reification is not unique to economics of course; psychometrics has an ongoing love affair with constructs like IQ, forgetting that they are mainly statistical artifacts. Economists do seem bafflingly resistant to fessing up to the constructed nature of their core model however.
There's an "dirty little secret" at the core of current media presentation of economics, namely: The promised outcomes of the "free market" should come with the caveat: "on average, over time". There are no guarantees for an individual; not everyone benefits proportionally, or immediately, or (for that matter) ever.
It's intellectually dishonest not to make that explicit; though a slew of more or less perverse incentives not to do so are readily imagined.
5
Do you actually talk to economists? Most will readily admit that in markets, there are winners and losers. And most do not reify markets except insofar as it helps make it easier to explain a concept or process.
Never mind the economics, the article illustrates one thing very clearly, which is what's broken in the modern education system. Students are treated as "customers", professors are scared of losing their jobs for not keeping up with students/customer satisfaction, and to do so, exams have to be made easy, or that the test/exam scores have to be made appealing. How I miss the bygone days when schools were supposed to be hard, to push us (students) harder to learn, and the satisfaction should come from eventual mastery of the subject, not by trickery to make some low score look suddenly better than it really is.
3
It sounded to me like he was making the test harder than it needed to be so that very few students, no matter how hard they studied, would be able to get an A.
Bearing out once again that libertarian economics are the public-policy expression of Asperger's.
4
Here's the problem, see. Conomists can't tell the difference between relevant and irrelevant. In fact, they find the relevant, irrelevant, and the irrelevant, relevant.
"The authors attribute only 1 percent of the saving done in the Danish plans to the tax breaks. The other 99 percent comes from the automatic features."
Then:
"Notice that the irrelevant design features that do all the work are essentially free, whereas a tax break is quite expensive."
How can the tax breaks be so expensive if 99% of savings is driven by authomatic features? I bet if you took away the tax breaks, the automatic features would no longer matter.
Then:
"Notice that the irrelevant design features that do all the work are essentially free, whereas a tax break is quite expensive."
How can the tax breaks be so expensive if 99% of savings is driven by authomatic features? I bet if you took away the tax breaks, the automatic features would no longer matter.
1
interesting bit on the anchoring of numbers in the imagination - students were not happy with 72 but delighted with 96 ?
Guess the social effect - we don't care about the number as much as the relativity - being able to tell people you got 96 in a test (while not saying it was out of 137) might feel sweet - whereas telling parents you got 72 might raise recriminations from parents pushing for high achievement.
Reminds me of an article about how Gap everyday low pricing strategy had failed - 'people don't care about low prices - they want a DEAL !' - in other words they want to feel special, and a mark of 72 just doesn't cut it.
Guess the social effect - we don't care about the number as much as the relativity - being able to tell people you got 96 in a test (while not saying it was out of 137) might feel sweet - whereas telling parents you got 72 might raise recriminations from parents pushing for high achievement.
Reminds me of an article about how Gap everyday low pricing strategy had failed - 'people don't care about low prices - they want a DEAL !' - in other words they want to feel special, and a mark of 72 just doesn't cut it.
4
Of course Dr. Thaler's students weren't good in Math. If they were they would have been in Pre-Med, Science, or Math Classes.
Big question of the day:
Is this article the start of Dr. Thaler's attempt to have a best seller/make a lot of money or............
The start of a campaign to win The Nobel Prize in Economics?
Instead of learning new math I have learned a new acronym: SIF
Big question of the day:
Is this article the start of Dr. Thaler's attempt to have a best seller/make a lot of money or............
The start of a campaign to win The Nobel Prize in Economics?
Instead of learning new math I have learned a new acronym: SIF
2
adara614 - You've been fooled by ignoring the point of the story. The students would most likely have been very good at math, as the only reason they'd be sitting in Thaler's classroom would be to take a course in economics. The reason they'd be there would be because, rather than pre-med or science, they'd want to use their smarts to get a job in economics or finance (you know...where the money is). And no econ student wants to wind up with a bad grad and risk an interview with a top employer! Thaler may very well desire to have a best seller (who wouldn't), but by making your assumption, you've overlooked the relevance of the irrelevant part of his story.
Back in my day, and Dr. Thaler's (mid 1960s), what I wrote was 100% true. In todays world there is probably greater math ability in an Econ class.......but Dr. Thaler's work emphasizes the non math aspects of Econ.
Are you in Econ at U. of CHI.?
I don't understand your last sentence.
I enjoyed your response. This what makes this part of the NYTimes interesting.
Are you in Econ at U. of CHI.?
I don't understand your last sentence.
I enjoyed your response. This what makes this part of the NYTimes interesting.
Adara - I took some classes in the Econ dept at of U of Chicago (and sat in on Dr. Thaler's course on Behavioral Economics) as well as several Booth Business courses on Judgement and Decision Making but, alas, only have an M.A. in the Social Sciences.
There was a good article a few years ago about how many think Thaler should be short listed for the Nobel (http://articles.chicagotribune.com/2012-04-30/business/ct-biz-0430-execu....
My last sentence was merely to point out that your focus on Thaler's desire for fortune/fame comes at the cost of ignoring the (irrelevant) obvious fact that humans aren't rational. If Thaler only sought fortune/fame for himself he would have written a very different type of book and (potentially) focussed on a very different area of economics. Instead, he's taken a risk to be on the fringe of the field, trying to convince colleagues and policy makers of the benefit and need to incorporate the non math aspects of Econ. Perhaps it was too strained of a point. Regardless, yes, this is indeed what makes any type of discussion interesting
There was a good article a few years ago about how many think Thaler should be short listed for the Nobel (http://articles.chicagotribune.com/2012-04-30/business/ct-biz-0430-execu....
My last sentence was merely to point out that your focus on Thaler's desire for fortune/fame comes at the cost of ignoring the (irrelevant) obvious fact that humans aren't rational. If Thaler only sought fortune/fame for himself he would have written a very different type of book and (potentially) focussed on a very different area of economics. Instead, he's taken a risk to be on the fringe of the field, trying to convince colleagues and policy makers of the benefit and need to incorporate the non math aspects of Econ. Perhaps it was too strained of a point. Regardless, yes, this is indeed what makes any type of discussion interesting
The notion that people actually operate by rational economic expectations when interacting with markets is long past its "used-by" date. Markets fail all the time. Politicians, policy makers, and economists (both academic and professional) have designed a system of rules and incentives that presumes a model of human behavior that fundamentally does not match up with reality. Until they change the assumptions in their model, and acknowledge how human beings actually behave (using the work of Thaler and the behavioral scientists) society will continue to be plagued by the ills caused by the useless and harmful notion that people are Econs.
5
I am a fan of behavioral finance, but concluding that governments should use its findings to adjust individual behavior is dangerous--it presumes governments have accumulated wisdom that they do not; and it fails to take into consideration the particulars of the individual on the ground. In the investing world, that's called failing to "Know Your Client" and is a significant error. Sorry, folks, but the dream-like world in which we all make smart financial decisions is a falsely utopic vision of how humans operate.
Frederic - Government's don't need to know everything about an individual to conclude that choice architecture (Thaler's topic in "Nudge") can be used to greatly improve people's lives. Defaulting into savings accounts, organ donations, or a number of beneficial programs does not cause any harm for individuals and, given the inertia to do nothing, significantly advantages them and society at large while still allowing for individual choice (i.e. to opt out of such programs). That is not dangerous. On the contrary - it is in keeping with Government's primary function.
2
Irony!! Frederic's comment is another example of imputing supposedly rational behavior int a world where data clearly show it does not exist: our governments ALREADY use findings to adjust individuals' behavior.
1
This was an interesting article and no doubt part of a great book. I suspect that Econs with 75% of the wealth (top 10% of U.S. population) behave differently then Econs with 1% (poorer 50% of the population). Human econ behavior has something to do with rewards and punishments and intermittent schedules of reinforcement.
"Economists open to new ways of thinking" may understand the brilliance of setting the raw test grade to 100. It might be similar to setting the 401k limit to $500,000 - a high savings average for the middle class and paltry retirement supplement for the well to do. The $62 billion in annual tax breaks should help people reach an amount able to double Social Security benefits in retirement and not wasted on those who have already been able to save that much on their own.
Now consider a 2% net wealth tax that has a $500,000 exemption for tax free retirement-health-education-home down payment savings. This type of wealth tax and savings plan would provide a 2% tax perk on top of the tax free contribution from employers. It would encourage people to save early in their work-life and have financial resources reserved for essential purposes (at further savings to the government well beyond $62 billion).
Next consider that the revenue from a 2% wealth would enable both an elimination of the job killing payroll taxes and a flat 8% income tax. Even low wage workers who could count on 92% of their earnings could save.
"Economists open to new ways of thinking" may understand the brilliance of setting the raw test grade to 100. It might be similar to setting the 401k limit to $500,000 - a high savings average for the middle class and paltry retirement supplement for the well to do. The $62 billion in annual tax breaks should help people reach an amount able to double Social Security benefits in retirement and not wasted on those who have already been able to save that much on their own.
Now consider a 2% net wealth tax that has a $500,000 exemption for tax free retirement-health-education-home down payment savings. This type of wealth tax and savings plan would provide a 2% tax perk on top of the tax free contribution from employers. It would encourage people to save early in their work-life and have financial resources reserved for essential purposes (at further savings to the government well beyond $62 billion).
Next consider that the revenue from a 2% wealth would enable both an elimination of the job killing payroll taxes and a flat 8% income tax. Even low wage workers who could count on 92% of their earnings could save.
1
Over-simplifying assumptions are not strictly speaking the product of economists generally but of a peculiar sub-species working in the field of economics, the mathematician. Mathematicians regularly make simplifying assumptions solely for mathematical convenience that lack any empirical justification in whichever discipline they happen to be modelling.
This is a consequence of the fact that mathematicians usually have only a superficial grasp of the discipline in which they work, be it economics, finance, climate change, physics etc. The expertise of mathematicians lies only within the realm of mathematics. When they are mistakenly identified as experts in other fields a chaos of misunderstnding ensues.
The quants who migrated from physics into finance in the early 2000's were dismayed in 2007-2008 to discover that their employers expected their risk models to make predictions that conformed to real world results. Convenient assumptions had led to inconvenient results with costly consequences.
Similarly, climate models have had a poor predictive track record for many years now. This does not mean that the earth isn't warming but it does mean that our climate modeerls cannot be said to fully understand the system they are modelling and therefore their predictions are suspect.
In physics mathematicians have produced standard models populated by a myth-like bestiary of particles, forces and events that are not found in observational reality.
Mathematicians are a problem.
This is a consequence of the fact that mathematicians usually have only a superficial grasp of the discipline in which they work, be it economics, finance, climate change, physics etc. The expertise of mathematicians lies only within the realm of mathematics. When they are mistakenly identified as experts in other fields a chaos of misunderstnding ensues.
The quants who migrated from physics into finance in the early 2000's were dismayed in 2007-2008 to discover that their employers expected their risk models to make predictions that conformed to real world results. Convenient assumptions had led to inconvenient results with costly consequences.
Similarly, climate models have had a poor predictive track record for many years now. This does not mean that the earth isn't warming but it does mean that our climate modeerls cannot be said to fully understand the system they are modelling and therefore their predictions are suspect.
In physics mathematicians have produced standard models populated by a myth-like bestiary of particles, forces and events that are not found in observational reality.
Mathematicians are a problem.
5
Ah, but long before '07/08, Long Term Capital had already shown the fallacy of their modeling.
1
True.
It is a characteristic of the model-centric mathematician's behavior that failures don't count against the model since ad hoc adjustments can always be made to compensate for past failures. The newly adjusted model can then properly 'predict' the previous failure. And so they trundle along from failure to failure, patching as they go but never, ever reconsidering their model's fundamental structure and assumptions which are treated as wisdom received from the gods.
Mathematicians are a problem.
It is a characteristic of the model-centric mathematician's behavior that failures don't count against the model since ad hoc adjustments can always be made to compensate for past failures. The newly adjusted model can then properly 'predict' the previous failure. And so they trundle along from failure to failure, patching as they go but never, ever reconsidering their model's fundamental structure and assumptions which are treated as wisdom received from the gods.
Mathematicians are a problem.
Empirical Warrior you nailed the problem. Economics is so involved in making the data fit their elegant but highly simplistic predetermined mathematical formulas that they have lost touch with the real world. The irony is economists do not want to leave their desks and go out and figure out how people really make decisions. It is messy. I used to be in the consulting business. I think we had the right number of consultants about 3 days a year. The rest of the time we had too many or too few consultants. Hence our exorbitant billing rates. We almost never hit equilibrium. Economics has a similar problem, we need a economics profession based on better understanding the norm, booms and busts, driven by emotion and imperfect information.
Economics is one field that impacts maximum the quality of life in a country and least understood based on the culture of the country. Look to the dynamics of interest rate and savings rate across the cultures and you will understand how the tools used by the Central Banks for economic policy are nothing but black magic. The assumptions of rational choice and invisible market hand are laughable, yet politicians and economists regularly use them to make their points. We have one political party - Republican Party, the whole national policy is defined by invisible market hand.
The cloud computing and Big data can help our economists to understand their assumptions better - SIFs matter in economic policy. Let us hope, this field of study finally come out of black magic and establish itself on solid scientific footing.
The cloud computing and Big data can help our economists to understand their assumptions better - SIFs matter in economic policy. Let us hope, this field of study finally come out of black magic and establish itself on solid scientific footing.
1
Grading on a curve is a whole topic in itself; but the point is made. People don't get the point... If you add neuroeconomic research to the analysis -- there is convincing evidence that most of our "decisions" are not really the results of assessing facts and reasoning. We see something, a certain perception occurs "under the radar" of the conscious mind, and we react. Or most people do. Not Dr Spock or Sheldon from the Big Bang - and a number of others who manage to apply rational measures - at least in some situations.
I like the SIFs acronym - An accompaniment to CW - conventional wisdom.
I like the SIFs acronym - An accompaniment to CW - conventional wisdom.
The idea that individual humans make rational economic choices and the logical follow on that the collective choice of a society of humans is rational is laughable on its face. It became a bedrock of economics because of the need to have an anchor principle around which political economics could be made more scientific and thereby raise the profile and incomes of economists. If you want proof that neither individuals nor societies of individuals make rational choices go to WalMart and look around, or even more proof can be found in walking around the halls of Congress.
7
I'm not so sure Thaler learned the correct lesson from his students. I suspect the students objected more to the curve than to numerical grades. My law school used the curve, by which I mean (and I assume Thaler means) a "normal" (or bell-shaped) distribution of grades. For students who were accustomed to making all As (which was a prerequisite for admission to law school), suddenly finding themselves some place else on the curve came as something of a shock. My law school took the opposite approach: rather than using a numerical scale starting above 100 (as Thaler did), my school used a numerical scale starting below 100, the effect of which was to make the numerical score meaningless. The students may have required some adjustment period to acceptance of the curve, but attitudes about the curve could change radically if the grades did not conform to a normal distribution. I recall a finance class in which one student's numerical score was well above everyone else, resulting in a grade distribution that was anything but "normal". The students protested and the professor revised the grades to conform to a normal distribution, and peace (if not logic) was restored.
2
I think you need to reread the description of his curve. Not all curves are normally distributed.
He could have used "mastery learning" where students meet criterion through re-teaching, re-learning and re-testing....this is cooperative criterion learning made possible by new methods such as computer assisted instruction and practice with Kahn academy (MOOKS) rather than the competitive old time game he still uses with his "hourlies" and his "revised" normal curve....I'm surprised that this "economist" seems unaware of the "game" he is playing.
2
Thanks for a terrific well written article on the complexity of our behaviour and the profound impact it has on economy. There is, of course, significant justification in treating economy in a systemic and mostly mathematical way. But our lives are novels not equations. Therefore especially if we are predicting future economic outcomes, we have to anticipate emotional, situational and irrational behaviour if we are ever to chart a semblance of what is coming. While government decisions are often influenced by the equations, our decisions arise from a mess of inner and outer forces that often lead us to make economic choices which defy the best laid plans of economists but calm our fears and comfort us in the short term.
2
Some believe that free markets are the solution to everything. They believe that free markets are controlled by god and any control of markets are therefore in gods way or against his will. Magic is in the eye of the believer. Spock does not believe in magic, nor is he fully human. Alas, we are human and often irrational. We see patterns in random things, and project consciousness on things that do not have consciousness. The author has alluded to the interaction of markets and human happiness. The SIFs are about trying to enhance our happiness as we interact with markets.
3
Doesn't really address the best argument: actors aren't rational (wildly not!), but in aggregate markets perform *as if* they were.
Answer: that would (maybe) be true if actors were uniformly, randomly irrational. Everything comes out the wash. But if they're systematically irrational, and that in a variety of (mutually interacting) ways, all bets are off. WAY off.
Answer: that would (maybe) be true if actors were uniformly, randomly irrational. Everything comes out the wash. But if they're systematically irrational, and that in a variety of (mutually interacting) ways, all bets are off. WAY off.
8
What is the basis for your assertion? I don't think it can be stated in a rigorous way and survive analysis. Please share.
Some bets are off. Many are off by such a small margin it doesn't matter.
This all boils down to a theory which imputes its own analysis and thought process to other free people and then interprets their actions based on that unsupportable premise. Did you ask your students about their interpretation of your new grading schemes? Maybe they're one step ahead of you.
1
This is the horrible SUPERIOR SPECIES theory -- the notion that economists are so superior, they should trick the rest of us to do what they think best.
In retirement/investment, for 20 years economists have run off the track of the basic duty to INFORM us. Instead of $ and years, they give us numbers with labels of deception, such as "expected return" for a return that is not expected. They mislead us to make choices based on analyses that omit $, years, compounding along the way -- and call it Nobel Prize winning theory.
Knock off the nudges and get economists to just INFORM us correctly. We'll make decisions much better than they have been doing their job.
Dick Purcell
In retirement/investment, for 20 years economists have run off the track of the basic duty to INFORM us. Instead of $ and years, they give us numbers with labels of deception, such as "expected return" for a return that is not expected. They mislead us to make choices based on analyses that omit $, years, compounding along the way -- and call it Nobel Prize winning theory.
Knock off the nudges and get economists to just INFORM us correctly. We'll make decisions much better than they have been doing their job.
Dick Purcell
2
If I frivously spend my paycheck, I contribute to the economy, but if I am frugal and save I am hurting it? Why should I care about this so called economy?
3
I studied under Richard Thaler. He is a brilliant man and a brilliant teacher. O fall the classes I took in business school that is the one that has been the most useful and memorable.
This is a great article and frankly we need more of it from an education standpoint and a public policy standpoint. In places like california they are beginning to incorporate behavioral economics in their water conservation efforts as a way to boost compliance.
Marketers are deep into behavioral and neuroeconomics. Frankly it is not a fair fight. Most people are defenseless against these biases even when firms are not trying to intentionally manipulate them.
The first target should be in insurace and healthcare. It is a space that is rife with manipulation given the complexity of the billing and the often life and death issues we all face at one point or another.
This is a great article and frankly we need more of it from an education standpoint and a public policy standpoint. In places like california they are beginning to incorporate behavioral economics in their water conservation efforts as a way to boost compliance.
Marketers are deep into behavioral and neuroeconomics. Frankly it is not a fair fight. Most people are defenseless against these biases even when firms are not trying to intentionally manipulate them.
The first target should be in insurace and healthcare. It is a space that is rife with manipulation given the complexity of the billing and the often life and death issues we all face at one point or another.
12
Great article. I am a big fan of the behavioral economists: Thaler, Kahneman, Shiller, etc.
When I was at Wharton suffering through one economics course after another I often thought that the field was riddled with 'hard science envy'. As someone with an engineering degree I found the dressing up of human economic behavior with a lot of equations and mathematical models to be mis-guided at best and pretentious nonsense at worst. (The same criticism can be made of some branches of modern finance: CAPM, anyone?)
Looks like the behaviorists are reintroducing some common sense to the field. Economics isn't physics. They call it a 'social science' for a reason. Embrace reality, academics: there is no shame in it.
When I was at Wharton suffering through one economics course after another I often thought that the field was riddled with 'hard science envy'. As someone with an engineering degree I found the dressing up of human economic behavior with a lot of equations and mathematical models to be mis-guided at best and pretentious nonsense at worst. (The same criticism can be made of some branches of modern finance: CAPM, anyone?)
Looks like the behaviorists are reintroducing some common sense to the field. Economics isn't physics. They call it a 'social science' for a reason. Embrace reality, academics: there is no shame in it.
20
I was a wide-eyed first-year, living in a space in the air that's since been demolished and converted into Dr. Thaler's Booth School, when I first threw an economics textbook across the room for its insultingly reductionist characterization of human behavior.
Yet most claims of the "softer" social sciences were vague to the point of meaninglessness. Economics was sold as the best (albeit bad) predictive model for much human behavior.
I see behavioral economics as an attempt at compromise. But what remains to be seen if whether B-Econ has any real legs in terms of predictive power writ-large, or at least maintaining a predicitivity level while even slightly expanding to a portrait of humans that could pass a Turing test. Otherwise it will go down as a rhetorical fad, temporarily successful for its "even-mindedness."
One thing is certain... Those automatons I studied ad nauseam as an undergrad will need more than subtle tweaks to resemble the folks I know and love.
Yet most claims of the "softer" social sciences were vague to the point of meaninglessness. Economics was sold as the best (albeit bad) predictive model for much human behavior.
I see behavioral economics as an attempt at compromise. But what remains to be seen if whether B-Econ has any real legs in terms of predictive power writ-large, or at least maintaining a predicitivity level while even slightly expanding to a portrait of humans that could pass a Turing test. Otherwise it will go down as a rhetorical fad, temporarily successful for its "even-mindedness."
One thing is certain... Those automatons I studied ad nauseam as an undergrad will need more than subtle tweaks to resemble the folks I know and love.
3
I challenge Dr. Thaler to find an economist open to new ways of thinking about finance theory. Certainly there are none at Booth, my alma mater. Black-Scholes solves the problem of modeling the demand for risk by taking it out of Case Sprenkle's equation. Solves it mathematically but not in real world terms.
If our contingent price models were so great that we can even apply them to credit risk via Robert Merton, how come we had a Crisis?
There are ways to nudge traders with idiosyncratic risk appetites to become rational, but none of these ways lie in a solution that disregards the existence of the risk. No change will be accepted until finance theorists are nudged (by open-minded economists, for example) are willing to accept that they are scoring 97 but the denominator is--not 137--but trillions of dollars wasted.
If our contingent price models were so great that we can even apply them to credit risk via Robert Merton, how come we had a Crisis?
There are ways to nudge traders with idiosyncratic risk appetites to become rational, but none of these ways lie in a solution that disregards the existence of the risk. No change will be accepted until finance theorists are nudged (by open-minded economists, for example) are willing to accept that they are scoring 97 but the denominator is--not 137--but trillions of dollars wasted.
1
"If our contingent price models were so great that we can even apply them to credit risk via Robert Merton, how come we had a Crisis?"
Have you ever heard of moral hazard?
Have you ever heard of moral hazard?
"Fortunately, economists open to new ways of thinking are finding novel ways to use supposedly irrelevant factors to make the world a better place."
Unfortunately, marketing departments, advertising companies, and politicians open to new ways of thinking are finding novel ways to use supposedly irrelevant factors to make money for their employers.
Unfortunately, marketing departments, advertising companies, and politicians open to new ways of thinking are finding novel ways to use supposedly irrelevant factors to make money for their employers.
9
Aside from the fact that behavioral economics has been around for a long time in the form also known as psychology, these are interesting insights. Economists have long studied irrelevancies in their attempt to screen them out, assuming the Rational Man. Adding psychology increases predictive value, and therefore understanding.
Did it strike anyone else as odd that the curve used in the opening example was centered on a B+? If you are going to curve, then you curve to the real middle of your arbitrary distribution (presumably a C). There are arguments against curves (one of those being the debatable fairness of forcing a normal curve on a distribution that may not actually be normal just to get a range of grades), but this looks like grade inflation in action. Why not set a criterion and grade accordingly, without needing to resort to a curve at all? Do some minor psychometrics to throw out bad questions if that is your concern, but why assume the average is a B+?
Did it strike anyone else as odd that the curve used in the opening example was centered on a B+? If you are going to curve, then you curve to the real middle of your arbitrary distribution (presumably a C). There are arguments against curves (one of those being the debatable fairness of forcing a normal curve on a distribution that may not actually be normal just to get a range of grades), but this looks like grade inflation in action. Why not set a criterion and grade accordingly, without needing to resort to a curve at all? Do some minor psychometrics to throw out bad questions if that is your concern, but why assume the average is a B+?
3
How is this different than needing appropriate control groups and variables for experiments?
"Markets are thought to have magical powers"
Ha! Markets do have magical powers. The noise of our biases tend to cancel each other out leaving the market determination -- price -- to be an incredibly accurate amalgam of all publicly available information.
Can we find market failures at times? Sure. The exceptions sometimes make the rule. However, the fact that a rational market can evolve in a world of often irrational people is not one of those exceptions.
Ha! Markets do have magical powers. The noise of our biases tend to cancel each other out leaving the market determination -- price -- to be an incredibly accurate amalgam of all publicly available information.
Can we find market failures at times? Sure. The exceptions sometimes make the rule. However, the fact that a rational market can evolve in a world of often irrational people is not one of those exceptions.
What continues to be puzzling is why this is called behavioral economics. These so-called new insights come largely from psychology and sociology. In the same vein, economists claim that random assignment experiments, where one group is treated and the other not, is economics when the experiment has nothing to do with economics. The reason: it's done by economists.
Consider the Moving to Opportunity program where some families where given vouchers to live in better neighborhoods and others were not given anything. At issue was something called neighborhood effects, an idea that sociologists had been developing for years. Economists were, of course, tapped to design the program, since they seem to have magical properties like the market. As a result, all the attention went to economists and their studies, even though a neighborhood effect cannot exist in a standard economics model. It can't exist because it concerns a social and not individual process. Also, neighborhood effects have nothing to do with financial incentives, which is what economics is about. In any case, a recent study by Harvard economists (of course) showed that sociologists had been right all along -- moving to better neighborhoods produced big gains for those who moved.
Don't hold your breathe waiting for them to thank sociologists or even recognize it confirms a sociological theory.
Consider the Moving to Opportunity program where some families where given vouchers to live in better neighborhoods and others were not given anything. At issue was something called neighborhood effects, an idea that sociologists had been developing for years. Economists were, of course, tapped to design the program, since they seem to have magical properties like the market. As a result, all the attention went to economists and their studies, even though a neighborhood effect cannot exist in a standard economics model. It can't exist because it concerns a social and not individual process. Also, neighborhood effects have nothing to do with financial incentives, which is what economics is about. In any case, a recent study by Harvard economists (of course) showed that sociologists had been right all along -- moving to better neighborhoods produced big gains for those who moved.
Don't hold your breathe waiting for them to thank sociologists or even recognize it confirms a sociological theory.
14
My (very large corporation) employer does not offer opt-out only 401(k) (you must opt-in), or automatic contribution increases of 1% each year (though you can select this if you want), and there is no default choice (probably a money market fund; you have to put it somewhere. I self-elected all of these (the target date fund, not money market) because I recognize that if I don't get around to rebalancing every year, things will be OK.
But I absolutely am motivate by the tax break. It enables me to save more than I otherwise would. Accounting for behavior is fine, but you need to account for a variety of behaviors.
But I absolutely am motivate by the tax break. It enables me to save more than I otherwise would. Accounting for behavior is fine, but you need to account for a variety of behaviors.
1
Also consider that when the 401(k) began the gold standard for pensions plans was the employer provided defined benefit pension, that did not have a large employee contribution.
Employees accepted the new 401(k) because it was portable, an important quality in a work world where people didn't stay with the same employer for 30 years. Making contributions tax-free addressed a fairness issue between employees who weren't contributing much to their defined benefit plans and employees who would end up contributing most of their defined contribution plans.
Employees accepted the new 401(k) because it was portable, an important quality in a work world where people didn't stay with the same employer for 30 years. Making contributions tax-free addressed a fairness issue between employees who weren't contributing much to their defined benefit plans and employees who would end up contributing most of their defined contribution plans.
2
Hooray for the behavioral economists! They may be among the few economists who have bothered to notice that the statistical data underlying most economic theory says very little about the way most people live their lives.
I have long suspected that most economists don't have a clue as to how most people make choices; particularly those people who aren't white, male, and middle class. This may be partly due to the fact that most economists ARE white, male, and middle class.
I have long suspected that most economists don't have a clue as to how most people make choices; particularly those people who aren't white, male, and middle class. This may be partly due to the fact that most economists ARE white, male, and middle class.
8
The data speak. Most large corporations employ econometricians or statisticians to build statistical choice models known as discrete choice models. In fact, markets are won and lost on models like these. Clueless? No, I think not. These models have been employed for a long time and work pretty well on all demographic groups.
1
@Al: And those econometricians, economists and statisticians who designed the collatoralized debt obligations (CDOs) and who told their employers is was like printing money right before AIG was wiped out? And Greenspan as chair of the Fed saying that markets know best about how to manage risks? And Nobel-prize winning economist Eugene Fama (Chicago of course) claiming there is no such thing as a bubble in asset prices after housing and stock prices crashed form unsustainable levels? Saying these models "work pretty well" is like Bush saying "heckuva job, Brownie".
2
There is not necessarily anything nothing wrong with ignoring SIFs, depending on what the economist's goal is. If he just wants to create a simple model, then no problem. If he wants to represent reality as accurately as possible, then obviously he'd need to account for the SIFs.
My point is that we should not simply discount clasical economic theory, as Thaler seems to want to do. Idealized models are absolutely fine as long as we recognize that they are a useful tool and not necessarily an entirely accurate representation of actual human behavior.
My point is that we should not simply discount clasical economic theory, as Thaler seems to want to do. Idealized models are absolutely fine as long as we recognize that they are a useful tool and not necessarily an entirely accurate representation of actual human behavior.
1
This comment begs the question: if a model doesn't represent reality... then what is it useful for? What useful insight can be derived from a model that posits relationships that don't hold in the real world?
1
I think a more fundamental question regarding influencing student behavior is, "Why grade on a curve?" If you wanted to shape positive behavior why not give every student the same opportunity to earn an "A" rather than arbitrarily forcing some students into lower grades?
Curves tend to give students better, not worse grades. The reason for doing it is so that students have to compete with other schools when they want to go to graduate school and professors have to compete for good reviews from their students. Both pressures tend to lead to grade inflation and curving test scores is a way for teachers to do that without substantially dumbing down tests.
2
As he explained in the article, his goal was not to "shape positive behavior" but to sort out "the stars, the average Joes, and the duds." A curve is a good way to do that.
3
There is normative economics and there is positive economics. The normative tells us how a rational economic actor would behave; the positive tells us how they do behave.
Nobody ever said that people are always rational in their economic behavior. We all know that is not so. But economics tells us how we should behave to maximize certain functions such as profits, etc. The fact that some firms post suboptimal profits does not mean the rules for profit-maximization are flawed, as one example.
My own economic research indicates that people are influenced by price endings of prices, such as $139 versus $140 versus $137.46. Rational? No. Are people "unduly" influenced by price endings? Yes. Should they rationally be? No. Normative versus positive. Do empirical economists recognize that this "irrational" phenomenon could take place? Yes. In fact, other econometricians have studied the impact of threshold effects of odometer mileage readings on used car sales (e.g., 49,986 miles versus 50,056 miles).
People react to number magnitudes differently, and behavioral economists recognize this.
Nobody ever said that people are always rational in their economic behavior. We all know that is not so. But economics tells us how we should behave to maximize certain functions such as profits, etc. The fact that some firms post suboptimal profits does not mean the rules for profit-maximization are flawed, as one example.
My own economic research indicates that people are influenced by price endings of prices, such as $139 versus $140 versus $137.46. Rational? No. Are people "unduly" influenced by price endings? Yes. Should they rationally be? No. Normative versus positive. Do empirical economists recognize that this "irrational" phenomenon could take place? Yes. In fact, other econometricians have studied the impact of threshold effects of odometer mileage readings on used car sales (e.g., 49,986 miles versus 50,056 miles).
People react to number magnitudes differently, and behavioral economists recognize this.
1
This is very disappointing. Imperfect though current economic theory may be, it is based on analytic models of the interactions of agents' decisions. There's undoubtedly plenty of room for refinement of its treatment of uncertainty, strategic factors, and expectations. But to abandon that analysis in the name of subjectivity and conjecture as to psychology -- a field even less mature and developed than economics, is not going to advance our understanding or policy decisions.
1
Dr. Thaler and Readers: In the example cited, of a $1200 temporary tax cut, don't most conservative economists currently argue that it is longer term income and the related expectations regarding this income that are important? So, this $1200 tax cut would be saved, and only the permanent interest earned each year would be spent by the tax cut recipient. With the very low interest rates prevailing over more recent past years, wouldn't very little of such a one-time tax cut be spent, severely diluting its impact as an economic stimulus? I think this line of reasoning would be in accord with much current conservative economic doctrine. So, to really stimulate the economy, an actual cut in tax rates would supply a longer term boost to the economy. In this case, the expectations accompanying a tax rate cut and its accompanying longer term stream of future income flows unleashed, would result in a more effective stimulus, according to this theory. Thus, government tax revenues will be permanently cut and the Fed's current problem may arise in fiscal policy, too. The Fed is out of ammo in re rate cuts. It now needs to raise rates partially to resupply its rate cutting ammo for an emergency. Similarly, tax rate cuts starve the government of revenue, a goal of some conservatives, which longer term, can impair its ability to provide vital public services. But, in fiscal policy, there is a limited amount of rate cutting ammo, too. [{JJL}; Sun., May 10, 2015, 2:50 p.m.; Greenville, NC]
I like this article, except for the example about saving for retirement. Even Mr. Spock would have trouble with that one.
1
Excellent article.
But it's not only Homo Economus whose bonafides are thrown into suspicion by this acknowledgement that human interactions are not so easily reducible to theoretical constructs. Game theory has been a dominant force in economics, as well as political science and fields in several other disciplines, in the last half-century or so. I've always been a thorough skeptic of such irreducium absurdis notions that things are just that simple, which are likewise often accompanied by a lot of hand-waving of course.
Enough of a skeptic that it resulted in my only sub-A- grade as an undergrad from a U of Chicago-trained poly sci professor. We were talking two different languages and she didn't appreciate my inherent critiques of what she was trying to present as absolute truths (another, more generic academic problem.) I knew she had to teach it, but it didn't mean I''d have to buy it.
Of course, if you want to discuss a more complex and diverse range of human behavior that becomes difficult to reduce to a handy algorithm, suddenly the humanities take on more importance -- and don't we all know, according to Mr. Econ, that is so 20th century? So be it.
But it's not only Homo Economus whose bonafides are thrown into suspicion by this acknowledgement that human interactions are not so easily reducible to theoretical constructs. Game theory has been a dominant force in economics, as well as political science and fields in several other disciplines, in the last half-century or so. I've always been a thorough skeptic of such irreducium absurdis notions that things are just that simple, which are likewise often accompanied by a lot of hand-waving of course.
Enough of a skeptic that it resulted in my only sub-A- grade as an undergrad from a U of Chicago-trained poly sci professor. We were talking two different languages and she didn't appreciate my inherent critiques of what she was trying to present as absolute truths (another, more generic academic problem.) I knew she had to teach it, but it didn't mean I''d have to buy it.
Of course, if you want to discuss a more complex and diverse range of human behavior that becomes difficult to reduce to a handy algorithm, suddenly the humanities take on more importance -- and don't we all know, according to Mr. Econ, that is so 20th century? So be it.
3
I worked for a quite a while with economists, many of whom were from the University of Chicago, and they quite proudly spoke and wrote about the power of "rational choice theory." I was also so glad they used the word "theory" because, in the end, that's all it's ever been. My boss and I, both of us right-brainers on the administrative side of the enterprise, would often just look at each other and shake our heads when one of them would produce yet another masterpiece on how THIS -- the use of rational choice -- was the key to advancing our society and creating a quite splendid world. We never figured out where these folks lived, how they lived or if they'd ever lived. Life just ain't that simple. Never was and never will be.
Wow! Sure sorry I missed your course in which the "average grade" was B+, just below the grade which is typically taken as indicative of "Outstanding performance in mastering of the subject. Achievement of superior quality.". Even more extraordinary is that this judgment of achievement and performance is made prior to the actual assessment of achievement and performance. And professors like me get to suffer from students' truly irrational expectations of how their performances should be evaluated.
4
A B+ is not " just below" an A grade. At most schools it worth a 3.3 vs a 4 for an A and a 3.7 for an A-. It's instead much closer to a B (3)
Another way to look at this is in terms of cognitive framing and context and heuristics. Price may very well be a good heuristic for determining value but someone with more knowledge may be able to see past price. And how can we be rational decision makers when the crucial knowledge is intrinsically unknowable or knowable only in hindsight?
I learned this long ago at Interactive Data in seeing how "rational" economists glommed onto the Black-Scholes numbers we provided as if they were crystal balls that predicted the future as opposed to interesting guesses.
I learned this long ago at Interactive Data in seeing how "rational" economists glommed onto the Black-Scholes numbers we provided as if they were crystal balls that predicted the future as opposed to interesting guesses.
2
I think the only thing the writer has proven is that his students are not good in math. Maybe they were students taught in U.S. schools were undeserved self-esteem was the most important thing? Or maybe just not enough Asians in the class. There actually are numerous methods - taught in any decent east Asian elementary school class - to mentally divide a number by 137 to approximate its percentile. Try it; it really is not difficult.
2
I have a question for this expert on utility:
What is the utility of utility?
After all, one day the worms will win, no matter what you do.
For example, are gifts truly irrational? After all, they seek to increase happiness.
Isn't that actually more rational, than trying to maximize a utility that must be irrelevant in the end?
In a way, all economists are insane, the way the old egyptian pharaohs were insane. They act, as if leaving behind a big pyramid on earth matters a lot. When in fact, it matters not at all.
What is the utility of utility?
After all, one day the worms will win, no matter what you do.
For example, are gifts truly irrational? After all, they seek to increase happiness.
Isn't that actually more rational, than trying to maximize a utility that must be irrelevant in the end?
In a way, all economists are insane, the way the old egyptian pharaohs were insane. They act, as if leaving behind a big pyramid on earth matters a lot. When in fact, it matters not at all.
11
I think you're still missing it. The problem with economic theory isn't that, at one point, Economists thought human beings were perfectly rational. It's that they *ever*, for *one moment*, could have *imagined* a world in which human beings were perfectly rational. In other words, that humans don't behave this way is blindingly obvious. What is wrong with economics that it could have ever made this mistake for more than a fleeting moment?
3
Right! Adobe increased the price of Lightroom, arguably the most important photo app on the planet, from $130 once to $9.95 per month. That is $720 over 6 years. They are hoping nobody will notice, and they might be right.
3
Well, another closet tax raiser. Let me see, if the capital gains in my 401K are tax-deferred, Thaler says this "costs the government".
So, according to this economist teacher, the capital gains belonged to the government in first place, not me.
This article is baloney. I can assure the author that people who actively invest in Roth IRAs, IRAs, SEP-IRAs, tax-efficient funds, index funds are VERY aware of the effects of deferral of capital gains taxes.
Thaler doesn't understand our savings that we invest for our future needs belong to us.
Tip: All NYTimes readers should buy a Roth IRA which has tax free growth before you retire, and is not taxed when you spend your money.
Boy I bet Thaler hates those, some "rich people' may have them.
I remember they created a new tax on variable annuities during Clinton times, and they said "well, only rich people buy annuities anyway."
Class warfare is alive and well in Thaler's mind evidently.
So, according to this economist teacher, the capital gains belonged to the government in first place, not me.
This article is baloney. I can assure the author that people who actively invest in Roth IRAs, IRAs, SEP-IRAs, tax-efficient funds, index funds are VERY aware of the effects of deferral of capital gains taxes.
Thaler doesn't understand our savings that we invest for our future needs belong to us.
Tip: All NYTimes readers should buy a Roth IRA which has tax free growth before you retire, and is not taxed when you spend your money.
Boy I bet Thaler hates those, some "rich people' may have them.
I remember they created a new tax on variable annuities during Clinton times, and they said "well, only rich people buy annuities anyway."
Class warfare is alive and well in Thaler's mind evidently.
Here Professor Thaler discusses the importance of SIF - Supposedly Irrelevant Facts - in economics. Previously on these pages, Professor Uwe Reinhardt also discussed SIF in economics - Structure Information Felicitously.
Reinhardt's 12 page paper for his Econ 100 students - "The Art of Siffing Among Seasoned Adults" - combined with Thaler's comments go a long way toward helping us understand behavioral and normative economics. Understand? - perhaps rather explaining why we do not understand how others can misuse economics to advocate for policies that are so far removed from our own ideals.
NYT - Reinhardt, Can Economists Be Trusted":
http://economix.blogs.nytimes.com/2009/01/16/can-economists-be-trusted/
Reinhardt, Econ 100 - "The Art of Siffing Among Seasoned Adults":
http://www.princeton.edu/~reinhard/pdfs/EC%20100%20SIFFING.pdf
Reinhardt's 12 page paper for his Econ 100 students - "The Art of Siffing Among Seasoned Adults" - combined with Thaler's comments go a long way toward helping us understand behavioral and normative economics. Understand? - perhaps rather explaining why we do not understand how others can misuse economics to advocate for policies that are so far removed from our own ideals.
NYT - Reinhardt, Can Economists Be Trusted":
http://economix.blogs.nytimes.com/2009/01/16/can-economists-be-trusted/
Reinhardt, Econ 100 - "The Art of Siffing Among Seasoned Adults":
http://www.princeton.edu/~reinhard/pdfs/EC%20100%20SIFFING.pdf
"... middle-class taxpayers ... if given a lump sum are more likely to save some of it ... to stimulate spending, I believe the administration made a wise choice in choosing to spread it out."
Economically yes, but politically, maybe not. You may recall that when the G.W.Bush administration cut taxes similarly in 2001, they DID make a partial lump sum payment. The consequence was that the vast majority of Americans KNEW that Bush had cut their taxes. A majority of Americans did NOT know that Obama had. (This is partly due to the powerful right-wing lie machine in operation in the US.) This is one reason for the Democratic Party's losses in 2010.
By not playing the popular propaganda game as skillfully as the Republicans, Obama allowed those who were against further stimulus to gain sufficient power in Washington that he was later (when he finally caught on to the need) unable to increase governmental spending, allowing the economic slump to continue.
So, oddly enough, when you include the political factor, the choice to eschew a lump sum payment may have REDUCED spending over the following few years. Such political factors should be "irrelevant", but they are not. Not at all.
Economically yes, but politically, maybe not. You may recall that when the G.W.Bush administration cut taxes similarly in 2001, they DID make a partial lump sum payment. The consequence was that the vast majority of Americans KNEW that Bush had cut their taxes. A majority of Americans did NOT know that Obama had. (This is partly due to the powerful right-wing lie machine in operation in the US.) This is one reason for the Democratic Party's losses in 2010.
By not playing the popular propaganda game as skillfully as the Republicans, Obama allowed those who were against further stimulus to gain sufficient power in Washington that he was later (when he finally caught on to the need) unable to increase governmental spending, allowing the economic slump to continue.
So, oddly enough, when you include the political factor, the choice to eschew a lump sum payment may have REDUCED spending over the following few years. Such political factors should be "irrelevant", but they are not. Not at all.
2
It's only going to get worse, given the increasing numbers of college graduates who believe all the world is a database.
1
If what you argue is valid I sincerely hope you all hurry up to enlighten our legislators who, in general, still believe in magic to make democracy and in the super rich but not in the power of many, many small donors, er, voters.
2
I enjoyed the article. But, the (grade) inflation made me choke on my coffee. If B+ is the class average on a curve, what is a C?
2
At many schools a C is the minimum grade you need to have the class count for a prerequisite for the next level class. In the olden days where universities thought nothing of flunking out a third of the class freshman year a C could be average. Of course they also hadn't spent 60,000 dollars to attend one year of college. And a future employer wouldn't have rejected a student with a B+ average ( which is a 3.3 ) the way many will now.
40 years ago, I was taking an undergraduate physics class. The professor gave 200 point tests, that were extremely difficult, and he graded 'on the curve". The average score on those tests was usually around 100, which back then was a C, not a B-. I can assure you that none of the students, thought getting a 90 on that test was a "good grade".
I remember an episode of the TV series "The Paper Chase", Professor Kingsfield had the first year laws students assigned a scavenger hunt. It was an impossible task for anyone or group to acquire all the answers to the questions they were dealt. The students finally entered into "contracts" with one another to gather all the answers between all the student groups. The exercise reminded the students they were studying contract law and they witnessed first hand how contract help the parties involved with common interests. The tests here reminded of that. Sometimes it's not just the study but the experience!
Prof. Thaler,
I cannot remember a better article written by a professional economist. I teach political economy. I don't emphasize microeconomics, because the assumptions of classic liberalism are mostly false. We are not free, autonomous individuals. We are products of our society, and, if we want a decent society, we must abide by rules. We are not self-made. We are products of our communities. We are not ideally created by a god. We are products of evolution. Hopefully, some day, we will have a better understanding of ourselves and use that knowledge to create better societies. Your perspective is welcome.
Jesse
I cannot remember a better article written by a professional economist. I teach political economy. I don't emphasize microeconomics, because the assumptions of classic liberalism are mostly false. We are not free, autonomous individuals. We are products of our society, and, if we want a decent society, we must abide by rules. We are not self-made. We are products of our communities. We are not ideally created by a god. We are products of evolution. Hopefully, some day, we will have a better understanding of ourselves and use that knowledge to create better societies. Your perspective is welcome.
Jesse
72
Economics, of course is a social science and changes with the wind. Microeconomics has a lot of theories that haven't been applied, for instance, controlling inflation by raising taxes. Pols really like to cut taxes to increase money into the economy, but will absolutely not raise taxes to control inflation. No one knows if it would work, but self preservation is more important than making a tough decision. Another example of people getting into the way of a theory that holds some potential.
2
wallasongs,
Good point. Plutocrats use theory selectively to benefit themselves. For example, Adam Smith and the phrase "free" markets are used to justify extreme wealth. However, if you read Smith, his primary concern was the use of government by the wealthy to serve their own interests. Smith actually favored regulations that would improve the conditions of workers. Smith also opposed private inheritance. So, Smith would favor a high death tax. Republicans don't mention these points when they misrepresent Smith.
Jesse
Good point. Plutocrats use theory selectively to benefit themselves. For example, Adam Smith and the phrase "free" markets are used to justify extreme wealth. However, if you read Smith, his primary concern was the use of government by the wealthy to serve their own interests. Smith actually favored regulations that would improve the conditions of workers. Smith also opposed private inheritance. So, Smith would favor a high death tax. Republicans don't mention these points when they misrepresent Smith.
Jesse
2
Perhaps handing out B-plusses for C-minus performance in economics classes explains why there are so few econs in our world. Of course, that reflects a rational judgment by the econ professor since happy students equal high student ratings equal raises for the econ professor in academia today.
11
Because of course, by "raising the bar", the students will respond with renewed vigor to attain the desired grade once they understand the requirements better. Thus, we will have more econs in the world.
Or maybe you should read the material again.
Or maybe you should read the material again.
Best article on economics in the NYT in ages.
22
Great article. My students also respond irrationally to exam grade distributions in just the way Prof. Thaler described (and in many other, conceptually similar ways).
It is interesting however that his solution was to essentially manipulate his students. While not quite dishonest, and apparently well-intentioned, I am not sure I would consider Thaler's approach ethical. Furthermore, as an economics professor (or in my case as a mathematics professor), is it not our duty to try to teach our students to have better math and critical thinking skills? And isn't the manipulation of changing the total exam score from 100 to 137 a way of neglecting that duty by exploiting the students' irrationality rather than helping to correct it? Would it not be ultimately more helpful to the students to keep the maximal midterm exam grade at 100 but also devote, say, 10-15 minutes of lecture time to discuss the exam grade distribution and encourage the students to think about whether it makes sense to be upset about a grade of, say, 75?
It is interesting however that his solution was to essentially manipulate his students. While not quite dishonest, and apparently well-intentioned, I am not sure I would consider Thaler's approach ethical. Furthermore, as an economics professor (or in my case as a mathematics professor), is it not our duty to try to teach our students to have better math and critical thinking skills? And isn't the manipulation of changing the total exam score from 100 to 137 a way of neglecting that duty by exploiting the students' irrationality rather than helping to correct it? Would it not be ultimately more helpful to the students to keep the maximal midterm exam grade at 100 but also devote, say, 10-15 minutes of lecture time to discuss the exam grade distribution and encourage the students to think about whether it makes sense to be upset about a grade of, say, 75?
11
Don't worry, this is the first in a series. We will be covering the symptoms of Asperger's Syndrome and OCD in later lessons.
1
Exactly my thoughts, and wouldn't this help mitigate the SIFs that the author claims are so rampant? At the very least it would meet head-on the irrationality of the students and teach them a far more valuable life lesson instead by illustrating how easily they are manipulated.
"Never give a sucker an even break or smarten up a chump"
- WC Fields.
- WC Fields.
I don't see the irrationality at all. The students have been taught that 100 is a good score and 72 average. These are arbitrary numbers in terms of their relationship to "good" or "average" -- who says getting only 72 points on an exam isn't "super-difficult and praiseworthy"? So by the time they get to your university, they believe these things. Their experience shows them that grading is arbitrary, and it would be irrational of them to invest more confidence in what you say than in their life's experience.
8
Agree, Howard. The author is apparently a highly-skilled and pragmatic member of that group collectively known as teachers. I have a suspicion that his students actually learn the coursework in greater depth and with greater appreciation than their grades would suggest. Ssshhh, don't tell the econs. It will drive them mad.
Agreed. They may also have done, as I did while reading, the marketing calculation that "96" looks better than "72" to whoever needs to see it.
They're not irrational; they only care about how their grade looks, because that's all that matters and they know it.
They're not irrational; they only care about how their grade looks, because that's all that matters and they know it.
"...but when the students got their results they were in an uproar. Their principal complaint was that the average score was only 72 points out of 100."
I'll bet those students were not in math or science classes. I've been happy with a 42 (class average = 37) and upset about a 98 (class average = 96). A numerate person would calculate the percentage based on the grading average (or in your case, on the B+ awarded the average) and accept the results, no matter how high or low the score.
And when you say "An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. What difference do these arbitrary dates make?" aren't you forgetting that even an Econ would have observed that other creatures do celebrate those days, and even give cards and gifts on them? That would imply that purely logical Econs would know that they should do the same, since following a customary ritual in the culture in which the Econ lives makes perfect sense. Logical doesn't mean stupid.
I'll bet those students were not in math or science classes. I've been happy with a 42 (class average = 37) and upset about a 98 (class average = 96). A numerate person would calculate the percentage based on the grading average (or in your case, on the B+ awarded the average) and accept the results, no matter how high or low the score.
And when you say "An Econ would not expect a gift on the day of the year in which she happened to get married, or be born. What difference do these arbitrary dates make?" aren't you forgetting that even an Econ would have observed that other creatures do celebrate those days, and even give cards and gifts on them? That would imply that purely logical Econs would know that they should do the same, since following a customary ritual in the culture in which the Econ lives makes perfect sense. Logical doesn't mean stupid.
24
Good point. Econs observe that conformity is culturally advantageous, whereas other types give gifts merely because it please them to please others. I'll bet the smartest econs have also learned to keep their bizarre theories about personal self-worth to themselves. Most of the time.
I laughed out loud at the ruse of using 137 points as a perfect score. I once gave a midterm that was too long to finish, giving students opportunities to show what they KNEW; there was a published grade policy that took that into account. They were very unhappy, even though I told them of the plan beforehand. They hated not finishing an exam!
In another advanced graduate class (at that level all are more than competent and I also had a bunch of highly competitive students from a nearby industry), I assigned reviews of current research papers as a mechanism to stuff more information into the class content, heh. That was OK, and each one only counted for 10 points, not enough cumulatively to influence a student's overall grade. But to achieve a 10 I explained that a review had to show a real insight into the problem with notions about how the research might proceed, or with appropriate criticisms, etc. Students used to acing everything who did not get 10s were very unhappy too.
I sometimes included a last exam question that read: "Write a good question about the material that you can answer well, and do so. You will be evaluated on the quality of your question and your answer." I never got negative feedback, because it was seen as an escape valve for some students.
Students are not flexible or imaginative when it comes to their evaluations. Anxiety, ego, who knows? All of these students did fine at the end, of course, but I was disappointed in their responses.
In another advanced graduate class (at that level all are more than competent and I also had a bunch of highly competitive students from a nearby industry), I assigned reviews of current research papers as a mechanism to stuff more information into the class content, heh. That was OK, and each one only counted for 10 points, not enough cumulatively to influence a student's overall grade. But to achieve a 10 I explained that a review had to show a real insight into the problem with notions about how the research might proceed, or with appropriate criticisms, etc. Students used to acing everything who did not get 10s were very unhappy too.
I sometimes included a last exam question that read: "Write a good question about the material that you can answer well, and do so. You will be evaluated on the quality of your question and your answer." I never got negative feedback, because it was seen as an escape valve for some students.
Students are not flexible or imaginative when it comes to their evaluations. Anxiety, ego, who knows? All of these students did fine at the end, of course, but I was disappointed in their responses.
15
Because working slowly is undoubtedly an indicator of ignorance, as every behavioral psychologist knows.
Good have knocked those arrogant graduate students down a notch. Heh.
They're fun to play with, but they can be disappointing.
Good have knocked those arrogant graduate students down a notch. Heh.
They're fun to play with, but they can be disappointing.
Pray explain how the ECON would manage his saved $$ so as to have sufficient funds for say retirement? Is this really a free-market economy? Money supply is highly regulated ( no shocks for Wall St. where stocks are apparently selling at 20 times earnings!) All of this verbiage is to continue to justify taxes on things like gasoline (not income or cap gains), use of federal mortgages for homes costing up to????. Lower prices for seniors are on the basis of age not income.
Student loans cannot be discharged in bankruptcy but other losses can be.
Frankly, there is little logic here in terms of retirement saving.. and I doubt that the econ could do much better given the peculiarities of the system. In other words, the system in fact does victimize the person in many, many cases... Suzie Ormond on PBS answering some but never all of her audiences' question no withstanding.
How about letting the author of this article discuss the fact that savings (safe) have for many years now basically earned no interest? (Here's one for the experts to study -- Columbia U's Dental School raised the price of implants nearly 50% from 500$ to 725$ between 2013 and 2015. Granted Obamacare does not pay for dental procedures -- so this action can be considered an example of a supply/demand response? or other? Obviously, it has nothing to do with inflation. Pray explain this? (because we can?)
when is the next recession??
Student loans cannot be discharged in bankruptcy but other losses can be.
Frankly, there is little logic here in terms of retirement saving.. and I doubt that the econ could do much better given the peculiarities of the system. In other words, the system in fact does victimize the person in many, many cases... Suzie Ormond on PBS answering some but never all of her audiences' question no withstanding.
How about letting the author of this article discuss the fact that savings (safe) have for many years now basically earned no interest? (Here's one for the experts to study -- Columbia U's Dental School raised the price of implants nearly 50% from 500$ to 725$ between 2013 and 2015. Granted Obamacare does not pay for dental procedures -- so this action can be considered an example of a supply/demand response? or other? Obviously, it has nothing to do with inflation. Pray explain this? (because we can?)
when is the next recession??
5
The point of deferred taxes on retirement plans is to help those who will be relying on them to sustain themselves in the future save more efficiently. I was disappointed but not surprised to see this article devolve into yet another tax the those pesky rich argument. It may be come as a surprise to the professor and other Times commenters but some people actually try to save some of their own money for retirement.The great majority of them are "middle class". There are already limits on how much can be contributed annually to a tax deferred account. Also, many people are not able to contribute a significant amount until later in life when they (hopefully) are earning a higher income. With a shortened time line they need all the help they can get. The professor considers tax deferred retirement savings expensive. What about supporting impoverished seniors?
6
The point of the Danish study was that you can achieve the same result without the expense just by using a few SIFs. The professor knows and pointed out that if you do not save for retirement ECONS will not save you. He is not trying to take away your retirement grandpa. He simply wants to use an enhanced economics to achieve that goal. Brilliant!
7
I thought the point about tax savings not being an important motivator for savings was extremely interesting. Remember which administration first introduced IRAs and launched the idea of tax free retirement savings? It was good old Ronald Reagan and his supply side pals. Back then, I actually bought into that idea. After reading this column, I realize the idea was just plain old right wing orthodoxy - making "common sense" assertions that are not supported by any facts and easily disproved. The whole purpose of the exercise was to downsize the federal government by depriving it of tax revenue.
20
The difference in growth overtime between taxable and tax sheltered savings is easily quantified. My point is that contributing pre-tax dollars and earning a tax deferred return both contribute significantly to the amount of savings you will accumulate. Perhaps you can get people signed up for retirement accounts by auto enrolling them but they will earn less over time minus the tax advantage. Clearly no Econs in this group.
1
It is not necessary to turn economics into an emotion driven mush. There is a field that deals with all these externalizes, it's called psychology, or marketing etc. Having economic models let's you compare these psychological effects to what the models would predict, which is useful.
Actually, Marketing exacerbates the problem. Now you don't know anything about why people act.
2
No, you start with the idealized ball rolling down the frictionless inclined plane. The complications are overwhelming unless grasped through the general theory. But it turns out that in economics the classical theory is wanting as well because the human element is like the quantum particle. We need an enhanced quantum theory of economics.
10
It's not necessary to turn economics into emotional mush - a la psychology - because it's already pseudo-mathematical mush.
4
danish study tax subsidys retirement plans
the ideas that tax subsidies were put in as an incentive is the political form of homo economus
obviously, clearly, patently, they are part of the make the rich richer campaign waged by dems and repubs alike
the ideas that tax subsidies were put in as an incentive is the political form of homo economus
obviously, clearly, patently, they are part of the make the rich richer campaign waged by dems and repubs alike
3
Prof Thaler, not that I doubt you, but I'm having a really hard time believing tht economist really (really) think that people are as rational as you describe
Is this really true ? Do economists really think the avg person can figure out a 401K ?
(I had friend who worked for a major univerisity; the 1st year of his 401k, or whatever it is called in education land, he got a packet 4 inches thick, with 1inch thick packets from fidelity, schwab and two other vendors
the plan let him pick any combination of funds from any of the 4 vendors
naturally, my friend was paralyzed by all the choice
Is this really true ? Do economists really think the avg person can figure out a 401K ?
(I had friend who worked for a major univerisity; the 1st year of his 401k, or whatever it is called in education land, he got a packet 4 inches thick, with 1inch thick packets from fidelity, schwab and two other vendors
the plan let him pick any combination of funds from any of the 4 vendors
naturally, my friend was paralyzed by all the choice
6
In the book "Nudge" by Thaler and Sunstein they pointed out the folly of presenting people with too many options. Fewer well-chosen ones help people make good decisions. The financial people at that major university failed at this principle.
In the past 60 years the population profile of the financial markets has changed. In the 50's-60's it was a limited group of professional investors. The 80's and 90's added a large group of individual untrained investors.
Post 2000, over half of daily volume on the stock exchanges is through HFT's which don't hold assets (as stock) after the market close.You have three very different sub-populations with very different reactions to changes in the market.
When the market drops the retail investors stampede to the exits. The large investors buy up stocks at huge discounts, and HFT's make money off the volatility. Eventually the retail investors buy back in at inflated prices paid to the large investors, and the HFT's skim off their percentage.
Seems to me that the financial industry has a vested interest in individual investors remaining ignorant.
Post 2000, over half of daily volume on the stock exchanges is through HFT's which don't hold assets (as stock) after the market close.You have three very different sub-populations with very different reactions to changes in the market.
When the market drops the retail investors stampede to the exits. The large investors buy up stocks at huge discounts, and HFT's make money off the volatility. Eventually the retail investors buy back in at inflated prices paid to the large investors, and the HFT's skim off their percentage.
Seems to me that the financial industry has a vested interest in individual investors remaining ignorant.
46
Dear Mr. Thaler, you have proved a very important point, and I will state it as succinctly as possible. People are stupid.
10
I don't agree with that at all. People are not stupid. But, they try to maximize (let's say 'optimize') multiple dimensions in their life, not just money. For example, giving a gift is a way of telling your spouse that you love her; she appreciates it. Buying a certain piece of clothing (albeit 'irrational' economically) is a way of saying that you belong to a certain 'sub-group' of the population; it's identity. People do all kinds of things that are not economic. But, they have a purpose. That's been a failure of economics to recognize those other dimensions which are not just irrelevant but essential for our humanity.
26
Marc:
Stupidity is not the key... it's La Dolce Vite... there's more to life then maximizing the allocation of resources. It's maximizing your enjoyment of life, not assets.
Stupidity is not the key... it's La Dolce Vite... there's more to life then maximizing the allocation of resources. It's maximizing your enjoyment of life, not assets.
1
I would agree that all people are not stupid. However, I would agree that anyone who thinks getting 100 points on a 137 point test is a better score than getting 72 points on a 100 point test, is definitely stupid.
I wonder if these same people apply that same logic to sports statistics? Does a baseball player who gets a hit 100 times out of 137 at bats have a 1000 average?
I wonder if these same people apply that same logic to sports statistics? Does a baseball player who gets a hit 100 times out of 137 at bats have a 1000 average?
1
I am an economist. For years I debated with a close relative, also a professor like myself, but not an economist, whether the utility maximization hypothesis that is the basis of the rational man framework in Economics, was empty or not -- specifically, a tautology. I never really had a convincing reply to his taunts, at least not convincing to him.
At the time, I was looking for an accessible statement of the basic ideas of neoclassical micro theory to give to my intermediate micro theory students, as the text, really all texts, really said little. I happened upon a nice little essay by the mathematical economist Roy Weintraub, He was also associate editor of History of Political Economy at Duke.
He published it in an encyclopedia, but now it is has been moved to http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html. It gave me a eureka moment, and so I got ready for the next time my relative raised the topic, which was shortly thereafter.
I said to him "tell me, when you make decisions, do you try to do the best you can under the circumstances?" He immediately became silent – he is not one to say that I was right – and has never raised the issue again. That statement is just a restatement of maximizing utility subject to a constraint.
And indeed, I have never met anyone who denies that they try to make the best decisons they can.
At the time, I was looking for an accessible statement of the basic ideas of neoclassical micro theory to give to my intermediate micro theory students, as the text, really all texts, really said little. I happened upon a nice little essay by the mathematical economist Roy Weintraub, He was also associate editor of History of Political Economy at Duke.
He published it in an encyclopedia, but now it is has been moved to http://www.econlib.org/library/Enc1/NeoclassicalEconomics.html. It gave me a eureka moment, and so I got ready for the next time my relative raised the topic, which was shortly thereafter.
I said to him "tell me, when you make decisions, do you try to do the best you can under the circumstances?" He immediately became silent – he is not one to say that I was right – and has never raised the issue again. That statement is just a restatement of maximizing utility subject to a constraint.
And indeed, I have never met anyone who denies that they try to make the best decisons they can.
17
His reply should have started, "Ceteris paribus, I make the best decisions I can with teh information I have. Unfortunately, Ceteris is never paribus."
2
Then the question becomes how they define 'best' decision. The decision an individual determines to be the 'best' for them still may not be the 'rational' decision classical economists claim they would make.
6
Nobody is questioning whether people try to do the best they can. The debate is whether people do the best in material terms--that is classical economics. Once you open up the utility function to parameters to catch all "the other stuff", you have created an empty model--captures everything by explaining nothing. Classical economics presumes there can be noise, but it is random and therefore doesn't matter on average. This is a simplify assumption that make things easier. Behavioral economics acknowledge there are SYSTEMATIC DEVIATIONS from rational choice theory, and they seek to incorporate these predictable biases to improve theory and policy.
14
I think that there used to be a lot more econs in America, back when the personal savings rate was 10%-12% in the 1960s compared to 0%-4% in the 2000s. This in spite of 27% lower real household incomes back then. Maybe it was the more recent memory of the Depression or fewer generations of separation from our agrarian past. It was surely not a time to be celebrated, with widespread and overt racial, ethnic and gender discrimination and harsh social conformity. But it is a reference point for how much our behavior has been driven by consumer marketing since.
Ford introduced the Focus Station Wagon around 2002, as the ultimate driving value machine. It offered 50% more cargo space than a Subaru Outback, 35 MPG and you could buy two for the price of a typical mini-van. It had a self purging air filter and other low maintenance features. It should have been a hit with families of modest incomes but was taken off the market after a few years of paltry sales.
Dealers used it as a price leader to attract traffic, which they could then upsell to SUVs and pickups. They carried very little inventory.
The number of econs in the population is shrinking even as the economic situation declines for many households, thanks to the relentless pressure of consumer marketing.
Ford introduced the Focus Station Wagon around 2002, as the ultimate driving value machine. It offered 50% more cargo space than a Subaru Outback, 35 MPG and you could buy two for the price of a typical mini-van. It had a self purging air filter and other low maintenance features. It should have been a hit with families of modest incomes but was taken off the market after a few years of paltry sales.
Dealers used it as a price leader to attract traffic, which they could then upsell to SUVs and pickups. They carried very little inventory.
The number of econs in the population is shrinking even as the economic situation declines for many households, thanks to the relentless pressure of consumer marketing.
8
Ford never attained the reliability or concomitant resale value of the Subaru. This example reinforces a prior comment that "ceteris is never paribus."
2
Good choice in denominator! 137 is ~one over the fine structure constant which is critical to understanding special relativity and quantum mechanics and electrmagnetism. It is the course number used for quantum mechanics at Berkeley. Nice way to add some physics elegance to the wonderful mess of human behavior economists are trying to measure and predict!
6
Very nice number selection indeed.
A University of Chicago economist suggests that people in general, consumers in particular, and markets as extensions of people, are not rational. Glory be. Who would have thunk it?
I'm going to sell everything, climb to the top of my hill, and face the eastern sky. Something is bound to happen.
I'm going to sell everything, climb to the top of my hill, and face the eastern sky. Something is bound to happen.
13
I always urge my economist friends to consider "spite theory," because few take into account the lengths humans will go to achieve something out of spite (or love, or generosity, or for the sake of humor). The market might influence one's decision to execute a very elaborate act of spite due to cost, but the waste of effort for an objectively worthless end rarely seems to be part of that calculus.
12
The Econ department at my University was full of Econs that when pressed
always claimed it was not their fault politicians paid attention to their math puzzles. The story of Chivas Regal drove me away from Econ. This rather lousy Scotch that was cheap redesigned their bottle and packaging and tripled their price to see their lousy Scotch take off so demand exceeded supply. Nothing other than advertising . People drinking Scotch wanted to pay more against all Econ theory.
always claimed it was not their fault politicians paid attention to their math puzzles. The story of Chivas Regal drove me away from Econ. This rather lousy Scotch that was cheap redesigned their bottle and packaging and tripled their price to see their lousy Scotch take off so demand exceeded supply. Nothing other than advertising . People drinking Scotch wanted to pay more against all Econ theory.
2
I had to raise the rent of an apartment, then reduce it later to get decent tenants. People would not look at a really cheap apt. Yes i did reduce it back to what I originally wanted.
5
And Vodka!
My understanding of the law is that vodka must be odorless, tasteless and colorless, or it cannot be called vodka. Grey Goose or Rotgut, same rules.
My understanding of the law is that vodka must be odorless, tasteless and colorless, or it cannot be called vodka. Grey Goose or Rotgut, same rules.
1
yep - once we tried selling hand-made solid silver jewellery from Nepal in a market in Munich - laid out the wares, offered for 60% of the price of the 'professional' table not far away.
After a while we noticed he was making regular sales while we sold none - finally he came over to us and told us 'you need to raise your prices - you're selling too cheap - they think it's rubbish !'
took me a while to get my head around that one - but it became an important lesson for me - in the anchoring of price in consumer minds - or as one friend once told me - he assumed that higher price automatically meant better quality (I felt that was like wearing a sucker flag, but anyway) - I know that's not true, but he felt it so he believed it.
After a while we noticed he was making regular sales while we sold none - finally he came over to us and told us 'you need to raise your prices - you're selling too cheap - they think it's rubbish !'
took me a while to get my head around that one - but it became an important lesson for me - in the anchoring of price in consumer minds - or as one friend once told me - he assumed that higher price automatically meant better quality (I felt that was like wearing a sucker flag, but anyway) - I know that's not true, but he felt it so he believed it.
A few days ago, Brad DeLong wrote a blog post about the NYT review of Professor Thaler's new book, Misbehaving. I've been following developments in behavioral economics so this inspired me to compile a list of some of the anomalies from research by Kahneman and Tversky, Booth-Sweeney and Sterman and even going way back to one of my all time favorites, Daniel Ellsberg's Paradox of risk and ambiguity.
I've now posted three blog entries on the topic as I keep thinking about this matter and what is bothering me is that the behavioral economists attribute the non-Econ "errors" to individuals. In an very immediate sense this may be true. But there is another sense in which the frame in which the individuals are making these errors is one created by the institutions that economists in which economists have been so influential -- just as students expectation that a numerical score near 100 is an artificial construct they have learned from their interaction with schools. I would like to quote a very relevant pair of quotes from an 1981 article on "Cognitive Psychology as Ideology" but I know the space is limited on these comments to 1500 characters, so instead I will link to the third of my blog posts that presents the quote: http://econospeak.blogspot.com/2015/05/fudge-false-consciousness-rationa...
I've now posted three blog entries on the topic as I keep thinking about this matter and what is bothering me is that the behavioral economists attribute the non-Econ "errors" to individuals. In an very immediate sense this may be true. But there is another sense in which the frame in which the individuals are making these errors is one created by the institutions that economists in which economists have been so influential -- just as students expectation that a numerical score near 100 is an artificial construct they have learned from their interaction with schools. I would like to quote a very relevant pair of quotes from an 1981 article on "Cognitive Psychology as Ideology" but I know the space is limited on these comments to 1500 characters, so instead I will link to the third of my blog posts that presents the quote: http://econospeak.blogspot.com/2015/05/fudge-false-consciousness-rationa...
4
And as a professional engineer who has studied some advanced physics, I realize that quantum effects can influence my design of a support beam.
I just choose to ignore them.
I am assuming that Prof Thaler would not.
I just choose to ignore them.
I am assuming that Prof Thaler would not.
1
I found this interesting: "In the early years of the Obama administration, Congress passed a law giving taxpayers a temporary tax cut and the administration had to decide how to carry it out. Should taxpayers be given a lump sum check, or should the extra money be spread out over the year via regular paychecks?" I would have preferred the lump sum, because my monthly budget wouldn't notice the $100 increase each month. A lump sum, though, is not anticipated in my budget. So if I happen to get one, I treat it as a bonus and put the money towards savings/investments/bills (expenses). I don't treat them as an excuse to engage in a spending spree, because I have always seen myself as an "Econs" type.
Politically it was stupid because most thought their taxes had gone up ( because Fox News told them so) and railed about it. If they had actually been capable of being Economic Man even about their paychecks this would not have happened. It is why W spent so much money advertising his payroll tax cut. Pretty much like '100 miles to South of the Border' or Study Butte or whatever. Burma shave.
3
Clarification: (1) Economists have never believed that their assumptions about "rationalism" and "money-seeking" described real people--only that their models derived from such assumptions could predict behavior (at least in many specified situations) with a helpful (utilitarian) degree of accuracy. By focusing on the "unreality" of the model assumptions, critics miss the salient point of emphases: how well do economic models predict? When and under what circumstances? Or perhaps, more significantly, should people think of economists as forecasters (foremost, i.e., as portrayed in the media)?
(2) Behavioral economics does not represent a relatively new field of study--it's only new to the math modelers. Cato the Elder wrote on the subject 2500 years ago. The book from the 1960s, "Bears, Bulls, and Dr. Freud still sits on my book shelve. And, McClellan (1958) "The Achieving Society", explained economic growth and prosperity of nations far better than the economic growth models (then or since) created by Nobel-awarded, growth theorist economists whose work was published during that era. David McClelland was a Harvard social psychologist.
(2) Although "behavioral
(2) Behavioral economics does not represent a relatively new field of study--it's only new to the math modelers. Cato the Elder wrote on the subject 2500 years ago. The book from the 1960s, "Bears, Bulls, and Dr. Freud still sits on my book shelve. And, McClellan (1958) "The Achieving Society", explained economic growth and prosperity of nations far better than the economic growth models (then or since) created by Nobel-awarded, growth theorist economists whose work was published during that era. David McClelland was a Harvard social psychologist.
(2) Although "behavioral
4
If economists excuse their unrealistic assumptions by saying, "Well, the model predicts OK," then of course people are going to think of economists just as forecasters. If economists want to make policy recommendations and be taken seriously, they have to connect their ideas to 1) realistic theories of human behavior, and 2) awareness of the values and objectives that the policy should serve, i.e., things people care about beyond "economic efficiency." Yes, behavioral economics has been around in different forms for a long time, but because it is not a deterministic mathematical system like theoretical physics, the economics profession has not taken it seriously enough. And economists don't have such a great record on predictions. How many predicted the financial crisis of 2008?
9
A lot but they were crackpots. Schiller at Yale was the only reputable predictor I know of.
I took a Behavioral Economics undergraduate course last year because I saw it as a huge shift in Economic thought.
My overall impression with my economics undergraduate education has been a strange one. I hoped to better understand real world market activity and policy implications etc etc. I may have gained some insight in this regard, however, economics as a discipline assumes too much.
Many of the models are highly mathmaticized (not a word?) to attempt to give quantitative measure to interpret the economics of a situation. The problem is that these models assume rational agency, assume perfect competition, or other equally rare conditions. So how do these models actually help us, when they are "assuming" things that simply arent true (Behavioral Economics attempts to address this)?
Economics as a discipline yearns to be more precise and more respected as a science (the rise of econometrics), but if they want to do that, they must begin to observe REALITY, like a scientist would, and then use that EVIDENCE to propose a theory....
Economics as a whole needs a reinvention...that's what I've learned so far in my undergraduate career.
My overall impression with my economics undergraduate education has been a strange one. I hoped to better understand real world market activity and policy implications etc etc. I may have gained some insight in this regard, however, economics as a discipline assumes too much.
Many of the models are highly mathmaticized (not a word?) to attempt to give quantitative measure to interpret the economics of a situation. The problem is that these models assume rational agency, assume perfect competition, or other equally rare conditions. So how do these models actually help us, when they are "assuming" things that simply arent true (Behavioral Economics attempts to address this)?
Economics as a discipline yearns to be more precise and more respected as a science (the rise of econometrics), but if they want to do that, they must begin to observe REALITY, like a scientist would, and then use that EVIDENCE to propose a theory....
Economics as a whole needs a reinvention...that's what I've learned so far in my undergraduate career.
46
What you are really suggesting is sociology, the study of society the way it is organized not the way it should be according to an "Econ".
The fundament short coming of economics is that it assumes that people are motivated by money only.
They are not.
It goes much deeper than the cash for wedding anniversary example.
Pat Tilman left a career playing professional football at the Arizona Cardinals and signed up and signed up for the Rangers . He was killed in Afghanistan..
Tillman majored in marketing and graduated in three and a half years with a 3.85 GPA , so he did understand the economic implication of his action.
i am perpetually baffled that economist - including acNobel prize winners fond of writing that people vote against their "own best interests" - do not understand that people are moved by values,
Money IS important, but it is not everything,
They are not.
It goes much deeper than the cash for wedding anniversary example.
Pat Tilman left a career playing professional football at the Arizona Cardinals and signed up and signed up for the Rangers . He was killed in Afghanistan..
Tillman majored in marketing and graduated in three and a half years with a 3.85 GPA , so he did understand the economic implication of his action.
i am perpetually baffled that economist - including acNobel prize winners fond of writing that people vote against their "own best interests" - do not understand that people are moved by values,
Money IS important, but it is not everything,
76
u r so right
today on brad delongs blog, he has a long extract from Keynes that supports your view that money is not that important in motivating people
but of course, when you and i say it, no one listens
maybe we should get together and see how much we have to pay an economist to say that money is not always a prime motivator, duh
today on brad delongs blog, he has a long extract from Keynes that supports your view that money is not that important in motivating people
but of course, when you and i say it, no one listens
maybe we should get together and see how much we have to pay an economist to say that money is not always a prime motivator, duh
2
You can sell anything to marketers. Whoever this guy was, he drank the Koolaid & paid for it.
That is fundamentally incorrect. The most basic assumption in Economics is that agents gain utility from certain actions/goods/experiences and make rational decisions to maximize this utility. It is one the of first concepts taught in most economics classes
Maybe economists assume we are Econs because the math is easier. For example, although it does not accord with experience, risk was/(is?) calculated using the Gaussian distribution because the integrals come out so nicely .
7
I have long believed that people are generally sensible, occasionally reasonable and virtually never rational.
69
You believe that people are sensible?
4
I studied economics both as an undergrad at Loyola with Marcia Stigum and at the University of Chicago MBA program with several Nobel prize winners, but I found the subject maddening. The way that I explain my frustration with economists to others is "Economists assume away the real world and then put forth their theories." I'm looking forward to reading Dr. Thaler's book and am happy that a professor from my alma mater has taken aim at the unrealistic basis for much of the economic "truth" put forth by his colleagues.
37
For a scathing view of the harm wrought in South American by the Chicago School (freshwater) economists -- read Naomi Klein's "Shock Doctrine."
BTW when did B+ become average?? And why is a distinguished professor kowtowing to his students who already know everything. ( Does Prof. Thayler NOT know the famous joke about the kid who went to college and came home to realize that his parents had learned an awful lot in four years?? Perhaps it's time for a course in adolescent psychology?)
We will just end up with lots of exit exams to find out what students actually do know., and I for one don't think that's such a terrible idea. AKA the same page...
BTW when did B+ become average?? And why is a distinguished professor kowtowing to his students who already know everything. ( Does Prof. Thayler NOT know the famous joke about the kid who went to college and came home to realize that his parents had learned an awful lot in four years?? Perhaps it's time for a course in adolescent psychology?)
We will just end up with lots of exit exams to find out what students actually do know., and I for one don't think that's such a terrible idea. AKA the same page...
2
Great article. Ecological validity is as important to social sciences as any other type of validity. To ignore that is simply bad science.
5
As an Econ (by your definition) married to an Econ, who discussed all things money and finance even before we were married over 35 years ago, I agree that the general public and most politicians are both financially and economically illiterate. It does explain why advertising and style sell products in the face of what should be utility, quality and reliability. It also explains why most people can't or won't save for retirement However, given that politicians are economic challenged, they continue to give out tax cuts and tax deductions like lollipops regardless of whether they reach their intended objectives (job growth, revenue growth, etc.) just because their voters (also economically challenged) can't tell the difference. Further, the SIF of Social Security is protecting a vast majority of the public from their own financial illiteracy and leaving them at least a pittance for retirement rather than rely on investing on their own as suggested by some politicians and pundits. On the other hand, we Econ's are happily slipping into a comfortable retirement by ignoring the hand wavers, advertising, and politicians preferring instead saving and research before purchasing. As to gifts, we are econs from a family of econs. Gifts are for children under 18 at Christmas. After that, we neither expect or receive gifts based on some arbitrary date on the calender or anniversary.
47
I would add that my wife and I have both taught at the collegiate level and the article's explanation of grading is also an example of unnecessary, useless and unreasonable grade inflation and sounds just like a business school rather than a STEM school. If truly grading on a curve, there should be equal numbers of A's and D's (assuming a large enough sample universe). Regardless of protestations of students, the mean( or average) grade for our curves was a B- so that an A actually meant something.
2
I actually was a business school prof (now retired) and my grading was much like yours, although my average grade was more a C+, so don't go denigrating business schools for grade inflation. Quite a few of my colleagues were even tougher. It was the liberal arts where the "easy A's" existed.
I am also an "econ" who not only contributed as required to the state pension fund, but also put the maximum into a 403(b). I am now enjoying a very comfortable retirement, thank you.
I am also an "econ" who not only contributed as required to the state pension fund, but also put the maximum into a 403(b). I am now enjoying a very comfortable retirement, thank you.
2
I am replying to Tom's additional post: I feel very, very old! If a test is written so that it reflects what the students should know or be able to do to prove mastery of the material, why do the resulting grades need to be curved at all??? I am an old English major, so I think I do understand the need to be flexible, but in Math? Or in Economics? Either you know it or you don't! Even on an English essay exam, either you can understand it and write about it cogently...or you can't! I understand that you now need good "reviews" from your students, but I am hoping we will all realize that we need full proficiency and command of the material in the real world!
9