The Prize in Economic Sciences 2017
nobelprize.org
nobelprize.org
From the article:
"That's the point: It's obvious to anyone who pays any attention at all to himself or his fellow human beings that we are not maximizers, or optimizers, or logical, or even all that sensible."
and
"[his professors] argued that human irrationality didn't matter, for the purpose of economic theory, because it wasn't systematic."
It is not enough to name such a factor. One must point out and quantify, firstly, what is wrong, and secondly, how to integrate and model it within the field. When you've done that you still need to campaign for it to be included in the theory and textbooks and so on.
Every science has it's known unknowns. Things that obviously matter but aren't in the theory because that's too hard, unknown, doesn't matter enough for the results or even just because important people aren't convinced it is important.
Both have useful abstractions and simplifications, but only one stops short of further investigation.
It's like people insisting physicists are ignoring wind resistance with their laws of motion. They know!
On a side note, the whole libertarian agenda is largely predicated on a caricature of free markets populated by homines economici that was not even advocated by Friedman during the heyday of the Chicago school, let alone today. A professor from the Chicago business school (where Thaler is) came to HK to give a talk (and collect money from alumni), and I asked whether they still subscribed to the Chicago school, given their current research, and she just shook her head and replied "What do you think?"
They were showing how these ideas were misunderstood not just by their opponents, but also by their fans.
That part of the political spectrum has added, for example, Ayn Rand's philosophy ("greed is good"), and arrived at a rather nihilistic place where no concept, idea, institution, or emotion that isn't exclusively a "market" is denied to even exist. That's how you get people saying "taxation is theft".
The core notions of libertarianism (humans are free rational agents voluntarily interacting, government's role necessarily involves force and should be absolutely minimal) make sense at least superficially, and follow a nice axiomatic-deductive structure that is seductive particularly to geeks/nerds.
Good old neo-classical economic thought basically models humans as such: utility maximising rational individuals interacting voluntarily, frictionless, with complete information etc. You then get nice theorems, such as
- the 2 fundamental theorems of welfare economics, which basically show that market equilibrium = pareto-optimal and vice versa,
- free trade is best (Hecksher-Ohlin trade theory),
- competition keeps businesses in check and erodes their profit to zero,
- tariffs and taxes impose dead-weight losses, thus reducing consumer and producer surplus and utility,
- managers (as agents) must maximise shareholder value and nothing else, etc.
James Kwak has a book and blogposts about this phenomenon, that naive economics seems to support libertarian or right-leaning policy positions. He calls it "Economism" [1]
Funnily enough, many of these theoretical arguments rely on hypothetical redistribution of income (e.g. free trade: some people lose, some win, but all in all there will be a surplus, and that can be used (=redistribute) to compensate the losers, so that everyone is better off (or at least not worse), i.e. a pareto improvement. Similarly: maximising shareholder value. Similarly: some tax cuts), and proponents of free-trade-agreements will cite the economic theory with some air of superiority ("everyone will be better off, comparative advantage Ricardo bla bla"), but then conveniently forget about that second part (of compensating losers).
So, I think libertarianism doesn't work in the real world and frequently leads to wrong policy decisions.
And my main point was this:
Advances in economics, among them those from behavioural economists such as Thaler, Tversky, Kahneman, but also others (asymmetric information, e.g. Arrow, Akerlof; minimum wage, e.g. Card & Krueger; etc.) undermine the libertarian fantasy and support the case for politics, with government intervention, regulation, and nudging.
I think a lot of irrational actions taken by humans is better explained by them having incomplete information. The contrived nature of these experiments occludes their structure to the participants. Using the viral disease/antidote example: If you presented each scenario to the students at the same time and then explained how they reduced to the exact same decision, then many students (but probably not all) would assign the same price to each scenario.
Instead what these experiments do is say "make a decision," then they say "make a decision on this new complicated phrasing which makes you think that the situation has changed but only I realize that it is actually the same." No surprise there when the outcome is different.
Showing how this plays out in economics is important; I don't want to downplay the significance of the work from that perspective. But it feels a little bit like giving a prize for discovering something that an entire field had known about for some time. I think it says as much, if not more, about the social dynamics of science as it does about the phenomena being studied.
I agree completely that the micro and macro level phenomena are not the same, but in this case the chasm isn't that great.
For the longest while, mainstream macroeconomics was grounded on a few insights about irrational behavior. Pre-Keynesian "naive rationality" theory thought recessions would cure themselves as falling demand made prices fall: therefore, recessions caused by "general glut" or "overproduction" would never happen; there would never be "involuntary unemployment".
Keynes and others argued that under systemic falling demand/rising unemployment people would go chicken little and reduce their consumption. That kind of thinking was very very useful and was the basis of how nearly every nation dealt with the Great Depression. To a great degree, it's still reflected in current fiscal and monetary policies.
Textbook macro 101 is actually all behavioral theory: people either consume a fraction of their income (Keynes), of their lifetime income (Modigliani) or of their "permanent income" (the one they're used to in the average and expect for the future.
But this basic Keynesian recipe of assuming consumers behave according to heuristics ran into some rough sand from the 70s on; and a few powerful ideas on the limitations of generalizing psychological insights arose of this period. I think the most powerful of these is the Lucas critique.
To simplify, the Lucas critique says that any attempt to exploit the heuristic nonrationality that economic models in general assume will cause people to change their heuristics. So either economics is fundamentally and hopelessly bogus, or any predictable behavior has to come out of a fixed-point iteration process that may lead to the wrong platonic ideal of "rationality" but leads to Brower's fixed point theorem and game theory.
Thaler comes at the other end of this arc. Has the pendulum again swung too far? World Bank economists have allegedly been misusing DSGE models, for example; but this is more of an institutional flaw that gives entire staffs these crystal balls they aren't. The Lucas critique itself says these models can never predict the future.
So let's recapitulate the pendulum: Ricardo and Malthus used to argue in the 19th century about the possibility of a persistent glut, what the Marxists call an "overproduction crisis". Mixed examples had been seen, but nothing like a developed capitalist economy existed. Then came the Great Depression and the Malthusians rose to the task and fixed the damn thing with the spit and half-baked behavioral psychology you can read in the "General Theory" by Keynes. This works until it doesn't (note that during this period people have also had increasing access to information, etc. rather than behaving as blind mole rats as they might in Ricardo's time) and psychological ad-hockeries fall out of fashion.
Now, in this great arc: Thaler, new Nobel laureate, claims that you can slightly nudge people from Lucasian fixed points. Sure, maybe. My boss is a big fan. The pendulum swings.
I think the next logical extension of neuroeconomics is neuropolitics. Viewing powerplays between Trump <--> Kim or Netanyahu <--> Putin through the lens of game theory where all actors are moving optimally toward a "win" condition provides diminishing returns. Watching leaders actions as the result of irrational biases operating with imperfect information is proving a closer model of reality.
At that level, one usually expects the actors to conform to the "rational actor" model, and in modern history, they actually do so, by and large. Kim-Jong Il and his father, for example, have been doing this for decades. And their continued survival is a testament to their skill.
It's only Trump who acts like the political equivalent of a compass that always points south. And even he is no enigma if you just picture him as the protagonist of a really campy western from the 50s.
Wait, what?! Why would the city spend money on subsidising the lunch of children with parents rich enough to send them to a public school?
[EDIT] wrong parent, right thread. Meant to reply to chrisseaton
Originally they were the only schools that educated members of the general public, rather than people just from the local village or church or things like that, so the name does make sense.
Please don't break the rules by posting snark here.
That is, they'd much rather pay $20 total with free delivery, than, for example, $15 for the goods + $3 for delivery.
It's amazing the number of non-Amazon online shops who still don't seem to know this.
It's more simple than that: most people, me included, hate to see the price change just before you press the ordering button, just because shipping fees were not included. What Amazon does well is that it tells you exactly how much you will be billed from the get go (even when you have to pay for shipping, it's not hidden.)
I've seen cart abandonment drop by 50% or more simply by including shipping price and policies on the pricing page.
People will spend $20 extra to hit the $50 minimum free shipping threshold than spend $5 on shipping for a $30 order.
(Keeping low cost, high utility items in stock and available near checkout is highly recommended. For one fashion retailer, showing a bunch of socks and undergarments under 'recommendations' for orders below the free shipping threshold dramatically increased conversion rate. Everyone needs extra socks. If you've bought a $45 pair of jeans, adding a $5 pair of socks to hit the free shipping limit is "rational" for most people)
To be fair I assume that some number of people never start shopping because they don't like the shipping policies.
That said, people have gotten conditioned with a lot of "free" shipping or free shipping over a certain amount. So when they hit final checkout and are presented with what seems to be expensive shipping, they'll often almost reflexively close the page.
>People will spend $20 extra to hit the $50 minimum free shipping threshold than spend $5 on shipping for a $30 order.
Raises hand :-) I think the shipping charge feels like throwing money away. Whereas adding the item feels like "Surely I can find some item I want at effectively a 25% discount." But, yeah, most of this isn't economically rational. It was all very eye-opening when I was first exposed to this sort of thing 30 years ago and it's been useful in a lot of contexts.
I could buy a few items from non-Prime sellers with free shipping, but then I'm going to get a bunch of different boxes spread out over a few days due to different sellers and shipping speeds. If I pay a little extra per item I know that Amazon will ship my stuff quickly and it usually comes in a single package, unless the items in my order are unusually different from each other.
It comes down to paying for the convenience of not having to "worry" about the shipping costs.
Personal example: To get to (and from) my boat during boating season I use a launch service. I can pay for the season up front, or I can pay by the ride. The season ticket gives me, let's say, 30 round-trip rides to and from my boat. 30 boat rides is a lot more that the average person actually uses the boat in a normal season.
So at the beginning of the season I can do the math (vacation, work schedule, and so on) about likely usage, then make a decision. If I think I'm going to get out 20 times, I can just say "to heck with it" and get the pass. I'm paying for the convenience of, say, not having to go to the bank every few weeks and get a bunch of bills for the ride. This is a fee I pay for that convenience, and I may end up breaking even after all, and what-not.
But when you buy that item on Amazon you don't have that situation. You're not changing your payment structure- there's no inconvenience if you pay the shipping then or up front (if you had to re-enter your cc for a separate shipping payment you could argue it was one of convenience). You're simply going through the exact same steps as before and spending less money.
Now, if you are arguing that the analysis is up front with your Amazon Prime membership payment at the beginning of the year (like my boating analysis)- estimating your likely shipping charges, then going with Prime if it looks close, then I would agree with you.
But I agree with the original argument-that the convenience of paying more for not having to worry about shipping costs is an irrational behavior, as an economist would define it, one based on emotion rather than an economic analysis.
Behavioral economics is extremely popular, especially outside economists themselves. But the problem is that it keeps repeating the same findings. We get it, people are not rational. You can read 150 year old economics books that mention these things. There is a 'behavioral economics' movement every 40 year.
The research that I find 100x more interesting is the research that actually looks at real world institutions and tries to figure out how it is possible that these things work even if you assume irrational humans. Why can you get almost anything delivered in 2 days if every single human in the chain is highly irrational.
The Nobel in 2009 was about those sort of things, but they don't get enough attention.
The traditional economic view is people act in their own self-interest. I would summarize this research by saying people act in their own perceived self-interest. Lots of times the two align, but there are cases when they don't, which I do find interesting and worthy of research.
I think the research is very valid and interesting. I just question if this is most importent, or just a whats by far the most popular economics subject in the mainstream.
Its a good PR move for the constent critics economics suffer from.
> He began with his own students, telling them to imagine that by attending his lecture, they had exposed themselves to a rare fatal disease. There was a 1 in 1,000 chance they had caught it. There was a single dose of the antidote: How much would they be willing to pay for it?
> Then he asked them the same question, in a different way: How much would they demand to be paid to attend a lecture in which there is a 1 in 1,000 chance of contracting a rare fatal disease, for which there was no antidote?
> The questions were practically identical, but the answers people gave to them were -- and are -- wildly different. People would say they would pay two grand for the antidote, for instance, but would need to be paid half a million dollars to expose themselves to the virus.
Would classical economics really predict that people would give the same answers to these two questions? The article claims the two situations are "practically identical" but to me they seem clearly different: it makes perfect sense to me that many people would pay less of their money for the antidote knowing they've been exposed vs. the amount they'd need to be paid to voluntarily expose themselves to the risk.
As a simple example, if one only has $1000 to their name, then $1000 is the max they could possibly pay for the antidote (assuming they can't get a loan), yet I'd expect that most wouldn't be willing to expose themselves to that risk just to double their money. I thought utility theory in classical economics recognized that the marginal utility of going from $1000 to $2000 is less than the marginal utility of going from $0 to $1000.
In Scenario 1, you have a choice between definitely not dying (buy the antidote) and dying with 1/1000 chance (don't buy it). They're asking how much you'd pay to switch from the second to the first.
In Scenario 2, you have a choice between definitely not dying (stay home) and dying with 1/1000 chance (go to the lecture). They're asking how much you want to be paid to switch from the first to the second.
If your utility is quasilinear in money (meaning it equals utility for dying plus final quantity of money), as in 'classical' econ, then these decisions are the same assuming you don't care about attending the lecture.
[0] https://www.nobelprize.org/nobel_prizes/economic-sciences/pr...
I'm as critical of bitcoin as one can be, mostly because I can find no group of people more obnoxious as bitcoin fans. But it is undeniably one of the most interesting experiments in economics of our time.
Also the NSA supposedly knows their identity, and I'm willing to believe that story because it seems plausible that they have exactly the data one would need (i. e. a large archive of emails written by the general public to match his style). Contrary to conspiracies, the government does actually need you to break a law to arrest you. And Satoshi hasn't broken any laws, nor are governments as paranoid of bitcoin as everyone seems to think,
Except perhaps the coffee shop discussion at the end where Steve Carrell states banks did it because they expected to get bailed out (all evidence points that they didn't expect to get bailed out a priori and that they simply did it because shareholders and managers are greedy short sighted morons).
That said, Thaler is an excellent choice
Anat Admati, Stanford econ prof, has a popular book out, The Bankers' New Clothes that makes a case for much simpler and stricter bank regulation (basically, force them to hold much more capital (i.e. equity)), which makes a lot of sense to me.
I'm personally in favor of criminal prosecution but I don't see that happening. Indeed I'm generally in favor of keeping banks large for returns to scale benefits, but the political perversion of large banks may offset that benefit
Edit: also a Thaler article from 2015 at https://news.ycombinator.com/item?id=15433053.
It’s really interesting stuff. I actually had a couple of grad courses with Thaler when he was at Cornell. I still have a draft copy of one of his earlier books in Behavioral Decision Theory somewhere.
https://en.wikipedia.org/wiki/Institutional_economics
You can do the same thing with business. They are also not purely rational but the market causes those to die who are to irrational.
>By a nudge we mean anything that influences our choices. A school cafeteria might try to nudge kids toward good diets by putting the healthiest foods at front.
Hasn't this been tried in schools, does it actually work? Also, isn't this common sense ?
Welcome to Science, dude. Its bread and butter, repeatable experimentation, is the proving ground on which common sense is either quantified or rejected. This is how we climb out of the muck of our stupid prejudices.
If you go to source page, you will see that the full name of the prize is "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"
Why? There is no Nobel prize for economics.
This was a self-congratulatory add-on instituted by bankers in an attempt to add respectability to the turbulent industry of studying abstract virtual value that is not just affected, but created by the observer. Let me repeat myself. There is no Nobel prize for economics.
The fact that the majority of people here, and worldwide, fail to notice that, is the only proof needed that economics is the ultimate science of them all.
And the sweet little Swedes had to bail out their bankers after the US fiasco. At least the bankers spend some of that taxpayer money to keep the "prize" going.
So, it's for all practical purposes the Nobel price in economics, and your unsubstantiated post doesn't really add much.
https://news.ycombinator.com/item?id=9915943
https://news.ycombinator.com/item?id=13702830
https://news.ycombinator.com/item?id=8448602
etc...
We get it, the economics prize is not a true Nobel prize. It's tiresome to hear it every time the prize is mentioned.