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Bias, Blindness and How We Truly Think (Part 2): Daniel Kahneman

Bias, Blindness and How We Truly Think (Part 2): Daniel Kahneman | Writing, Research, Applied Thinking and Applied Theory: Solutions with Interesting Implications, Problem Solving, Teaching and Research driven solutions | Scoop.it
In 1738, the Swiss scientist Daniel Bernoulli argued that a gift of 10 ducats has the same utility to someone who already has 100 ducats as a gift of 20 ducats to someone whose current wealth is 200 ducats.
Sharrock's insight:

Theory-Induced Blindness and the introduction to reference points.

Economics Education and models need a face-lift.

 

excerpt: "The mystery is how a conception that is vulnerable to such obvious counterexamples survived for so long. I can explain it only by a weakness of the scholarly mind that I have often observed in myself. I call it theory-induced blindness: Once you have accepted a theory, it is extraordinarily difficult to notice its flaws. As the psychologist Daniel Gilbert has observed, disbelieving is hard work."

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'Networked minds' require fundamentally new kind of economics

'Networked minds' require fundamentally new kind of economics | Writing, Research, Applied Thinking and Applied Theory: Solutions with Interesting Implications, Problem Solving, Teaching and Research driven solutions | Scoop.it
In their computer simulations of human evolution, scientists have discovered the emergence of the “homo socialis” with “other-regarding” preferences.

Via Viktor Markowski, Ashish Umre, Michael Holder
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Viktor Markowski's curator insight, March 25, 2013 3:49 PM

Economics has a beautiful body of theory. But does it describe real markets? Doubts have come up not only in the wake of the financial crisis, since financial crashes should not occur according to the then established theories. Since ages, economic theory is based on concepts such as efficient markets and the “homo economicus”, i.e. the assumption of competitively optimizing individuals and firms. It was believed that any behavior deviating from this would create disadvantages and, hence, be eliminated by natural selection. But experimental evidence from behavioral economics show that, on average, people behave more fairness-oriented and other-regarding than expected. A new theory by scientists from ETH Zurich now explains why. 

luiy's curator insight, March 25, 2013 5:33 PM

Evolution of “friendliness”


Prof. Dirk Helbing of ETH Zurich, who coordinated the study, adds: “Compared to conventional models for the evolution of social cooperation, we have distinguished between the actual behavior – cooperation or not – and an inherited character trait, describing the degree of other-regarding preferences, which we call the friendliness.” The actual behavior considers not only the own advantage (“payoff”), but also gives a weight to the payoff of the interaction partners depending on the individual friendliness. For the “homo economicus”, the weight is zero. The friendliness spreads from one generation to the next according to natural selection. This is merely based on the own payoff, but mutations happen.

For most parameter combinations, the model predicts the evolution of a payoff-maximizing “homo economicus” with selfish preferences, as assumed by a great share of the economic literature. Very surprisingly, however, biological selection may create a “homo socialis” with other-regarding preferences, namely if offsprings tend to stay close to their parents. In such a case, clusters of friendly people, who are “conditionally cooperative”, may evolve over time.

If an unconditionally cooperative individual is born by chance, it may be exploited by everyone and not leave any offspring. However, if born in a favorable, conditionally cooperative environment, it may trigger cascade-like transitions to cooperative behavior, such that other-regarding behavior pays off. Consequently, a “homo socialis” spreads.

 

 

Networked minds create a cooperative human species


“This has fundamental implications for the way, economic theories should look like,” underlines Professor Helbing. Most of today’s economic knowledge is for the “homo economicus”, but people wonder whether that theory really applies. A comparable body of work for the “homo socialis” still needs to be written.

While the “homo economicus” optimizes its utility independently, the “homo socialis” puts himself or herself into the shoes of others to consider their interests as well,” explains Grund, and Helbing adds: “This establishes something like “networked minds”. Everyone’s decisions depend on the preferences of others.” This becomes even more important in our networked world.

 

 

A participatory kind of economy


How will this change our economy? Today, many customers doubt that they get the best service by people who are driven by their own profits and bonuses. “Our theory predicts that the level of other-regarding preferences is distributed broadly, from selfish to altruistic. Academic education in economics has largely promoted the selfish type. Perhaps, our economic thinking needs to fundamentally change, and our economy should be run by different kinds of people,” suggests Grund. “The true capitalist has other-regarding preferences,” adds Helbing, “as the “homo socialis” earns much more payoff.” This is, because the “homo socialis” manages to overcome the downwards spiral that tends to drive the “homo economicus” towards tragedies of the commons. The breakdown of trust and cooperation in the financial markets back in 2008 might be seen as good example.

“Social media will promote a new kind of participatory economy, in which competition goes hand in hand with cooperation,” believes Helbing. Indeed, the digital economy’s paradigm of the “prosumer” states that the Internet, social platforms, 3D printers and other developments will enable the co-producing consumer. “It will be hard to tell who is consumer and who is producer”, says Christian Waloszek. “You might be both at the same time, and this creates a much more cooperative perspective.”

Onearth's curator insight, March 26, 2013 4:58 AM

After homo sapiens sapiens it's time for homo sapiens socialis

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Everyone Should Have the Right To Bear Mathematical Arms

Everyone Should Have the Right To Bear Mathematical Arms | Writing, Research, Applied Thinking and Applied Theory: Solutions with Interesting Implications, Problem Solving, Teaching and Research driven solutions | Scoop.it
Imagine a world in which it is possible for an elite group of hackers to install a “backdoor” not on a personal computer but on the entire U.S. economy. Imagine that they can use it to cryptically raise taxes and slash social benefits at will.
Sharrock's insight:

"So much damage has been done in terms of the way mathematics is misunderstood by our society. It has essentially become impossible to talk to most people directly about it. With the film Rites of Love and Math, which I made four years ago with the French director Reine Graves, the idea was to penetrate some of those defenses—to talk about math indirectly by appealing to the emotional rather than to the cerebral." Edward Frankel



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Are U.S. Students Ready to Compete? : Education Next

It has been argued that the overall past success of the U.S. economy suggests that high-school math performance is not that critical for sustained growth in economic productivity. After all, U.S. students trailed their peers in the very first international survey undertaken nearly 50 years ago. That is the wrong message to take away however. Other factors contributed to the relatively high rate of growth in economic productivity during the last half of the 20th century, including the openness of the country’s markets, respect for property rights, low levels of political corruption, and limited intrusion of government into the operations of the marketplace. The United States, moreover, has always benefited from the in-migration of talent from abroad.

Sharrock's insight:

For a few days now, I've been wondering about the relationship of a nation's Nobel Prize winners to PISA scores. I finally decided to ask the question in Google. Here's one hit: "Clearly the countries with the worst PISA scores are those with the most impressive Nobel record. Equally significant, the correlation between PISA performance and GDP per capita is, as both Baker and Chang suggest, rather weak (less than 0.5)." http://www.opendemocracy.net/ourkingdom/jeremy-fox/are-pisa-scores-really-that-important.

 

But this article also presents an interesting exploration. 

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The Coase Theorem is widely cited in economics. Ronald Coase hated it.

The Coase Theorem is widely cited in economics. Ronald Coase hated it. | Writing, Research, Applied Thinking and Applied Theory: Solutions with Interesting Implications, Problem Solving, Teaching and Research driven solutions | Scoop.it
Coase argued transaction costs were essential for understanding economics. Many people claim he said the opposite.
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