Death of homo economicus, rise of behavioral economics
HOW ECONOMICS GOT IT WRONG AND WHAT TO DO ABOUT ITThe time has come for the end of the economics as we know it. It seems thatacademic economics amplified with its intellectual vanity failed to realize the humansas they truly are. Or at least they kept quiet about it and hoped“it” would go away.Recent economic crisis triggered a tsunami of critics pointed at economists, bankers,politicians and regulators as well as world‟s most prominent business schoolfor leading the same world into crisis instead of taking care of sustainability of the currentliving conditions. How did economics fail? Well, this is a simple question so I will trywith a simple answer. It all began when economic mathematicians decided to revealhuman nature and explain human behavior. The legacy they left us got materializedin certain assumptions and theories which turned out to be completely ignorant of thefact how do people really think and behave. These theories are filtered down to theeconomics education system (business schools) creating thereby very closed andrigid environment that lacks interdisciplinary and academic diversity. In this paper I‟lltry to detect origins and process of economics becomingtroublesome in today‟ssociety. Giving insight in some historical precedents and development of some newscientific disciplines, I‟ll conclude that time has come to change the way economics istaught. Great responsibility that is put on business school to create individuals withpower to create global policies needs to be (re)justified. Business schools need torethink how to shape business education for the future. A business education that willbe based on multidisciplinarity and taking a bigger picture in perspective. This doesnot exclude present body of economics knowledge but it implies incorporating some“new stuff that‟s been on the street” for some time
On the 10 August 2009, a group of distinguished UK economists – among them Geoffrey Hodgson, Paul Ormerod and Bridget Rosewell – jointly wrote an open letter to the Queen of England. With this letter, they responded to the Queen’s question of why so few economists had foreseen the current financial and economic crisis: We believe that the narrow training of economists – which concentrates on mathematical techniques and the building of empirically uncontrolled formal models – has been a major reason for this failure in our profession. This defect is enhanced by the pursuit of mathematical technique for its own sake in many leading academic journals and departments of economics. There is a species of judgment, attainable through immersion in a literature or a history that cannot be adequately expressed in formal mathematical models. It’s an essential part of a serious education in economics, but has been stripped out of most leading graduate programs in economics in the world, including in the leading economics departments in the United Kingdom. Models and techniques are important. But given the complexity of the global economy, what is needed is a broader range of models and techniques governed by a far greater respect for substance, and much more attention to historical, institutional, psychological and other highly relevant factors ... As trained economists and United Kingdom citizens we have warned of these problems that beset our profession. Unfortunately, at present, we find ourselves in a minority. We agree with the authors of this letter, that economics is perceived and executed in a much too narrow manner. It is dysfunctional because it got caught up in a particular set of models and techniques that represent the ‘wisdom’ primarily of one (Anglo-Saxon) world. This book is a call to fundamentally rethink economics by accommodating other worlds. Why do we see this need?
A book titled “Biocentrism: How Life and Consciousness Are the Keys to Understanding the Nature of the Universe“ has stirred up the Internet, because it contained a notion that life does not end when the body dies, and it can last forever. The author of this publication, scientist Dr. Rober.
Lanza is an expert in regenerative medicine and scientific director of Advanced Cell Technology Company. Before he has been known for his extensive research which dealt with stem cells, he was also famous for several successful experiments on cloning endangered animal species.
But not so long ago, the scientist became involved with physics, quantum mechanics and astrophysics. This explosive mixture has given birth to the new theory of biocentrism, which the professor has been preaching ever since. Biocentrism teaches that life and consciousness are fundamental to the universe. It is consciousness that creates the material universe, not the other way around.
Abstract: The ways in which preferences respond to the varying stress of economic environments is a key question for behavioral economics and public policy. We conducted a laboratory experiment to investigate the effects of stress on financial decision making among individuals aged 50 and older. Using the cold pressor task as a physiological stressor, and a series of intelligence tests as cognitive stressors, we find that stress increases subjective discounting rates, has no effect on the degree of risk-aversion, and substantially lowers the effort individuals make to learn about financial decisions.
Liam Delaney (firstname.lastname@example.org), Günther Fink (email@example.com) and Colm P. Harmon (firstname.lastname@example.org)
It's hard to find a place today where concepts of behavioral finance aren’t being applied to real-world situations. From London to Washington to Sydney, governments are experimenting with the psychology of decision-making and trying to “nudge” citizens toward better behaviors, whether that means saving more for retirement or signing an organ donation card. Meanwhile, businesses see opportunities for higher profits. To grab more attention and dollars from consumers, companies as far afield as banks and fitness-app makers carefully design their offerings with consumers’ decision-making quirks in mind. The article discusses some of the challenges encountered in using behavioral science in the commercial sphere which raises an important question about how much change should we expect from the application of behavioral science findings in the commercial market and the difficulty in reaching consumers with well intentioned products designed to "nudge" them into more positive behavior.
In a crowded market place, how do you get consumers to respond and engage behavioral products or is behavioral science best applied in the policy sphere?
“Our decision to do something positive can only be taken as a result of animal spirits and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities” – John Maynard Keynes
Le prossime sfide della neuroeconomia sono su due fronti: • Nucleo dell’ortodossia e dei libri di testo. Economia comportamentale non ha fatto molto effetto nei testi di base, questi rimangono ancora ancorati al concetto di razionalità assoluta e ai monelli formali. In altri settori, come la psicologia cognitiva e delle neuroscienze, i libri di testo a tutti i livelli vengono aggiornati vivacemente. Gli economisti invece sono lenti e refrattari sull’aggiornamento dei libri di base. • La Misurazione. Le frontiere teoriche della teoria economica discutono dei costi del pensiero, della scarsa attenzione nelle scelte, del forte impatto dell’incertezza macroeconomica, delle preferenze dei gruppi, dell’ansia, delle norme sociali, e così via. Tutti questi costrutti sono marcatori biologici e altro. Capire che le teorie economico sono più giuste sarà più rapido se misuriamo anche i correlati biologici di queste variabili. Altrimenti sarebbe come se in medicina, si facessero un sacco di teorie su ciò che provoca una malattia, ma ci si rifiutasse di fare delle analisi sul paziente reale o di usare un microscopio per esaminare campioni di tessuto? Ecco dove l’economia è in conflitto in relazione a singole decisioni e scelte economiche. Purtroppo, gli economisti sono molto lenti sull’adozione della tecnologia ed ad abbandonare le certezze dei loro bei modelli logici costruiti in modo slegato dalla realtà. Fortunatamente, gli studenti e i nuovi laureati sono molto sensibili alle scienze sociali.e si spera in una rapida evoluzione del quadro teorico di base.
Caltech’s Colin Camerer is a recent recipient of a MacArthur Foundation grant to continue his work as a leader of the emerging field of neuroeconomics.
Behavioral science received a nice pat on the back in September, when California Institute of Technology neuroeconomist Colin Camerer won a $625,000 no-strings-attached MacArthur Foundation “genius grant.”
Using fMRI imaging, game-theory laboratory experiments, and a variety of other empirical tools, Camerer’s work reaches across several disciplines and has been instrumental in the ongoing attempts to rewrite standard economic accounts of human decision-making so that they better map real-life behavior. As the Foundation put it, Camerer’s “innovative thinking and modeling acumen are fostering an even more nuanced analysis of individual behavior and the practical policy implications of neuroscientific insights about human decision making. Camerer recently conducted an email interview with Pacific Standardwhich touched on everything from financial regulation to the origins of brain-scan pseudoscience to the ongoing problems with economic orthodoxy. The interview has been shortened and lightly edited from its original form.
Cass R. Sunstein - For many years, I have studied human behavior, including the mistakes occasionally made by fallible people, including investors.
But a few years ago, I made a really dumb investment decision. In a single day, I hit the trifecta, committing at least three classic behavioral mistakes.
The year was 2011. The stock market was recovering well from its terrible collapse during the Great Recession, but over a short period it had a series of stumbles. I got nervous. What if it collapsed again?
In La Methode Edgar Morin reveals entropy and its analogous concept, noise, to play a more fundamental role than merely that of a factor of thermal degradation or obstacle to communication. Morin continuously weaves together the empirical concern for entropy, as an aspect of both thermal degradation and organization in systems far from equilibrium, and the epistemological concern for noise, as an aspect both of perturbation of communication and of an uncertainty constitutive of new structures of the understanding. In the light of his theory of eco-complexity, entropy and noise become almost synonymous when considered as constitutive factors of self-organization. What Morin is after in his epic journey from cosmogenesis to the evolution of the biosphere and of human culture is not, as he says, an ‘adventure novel’ of cosmic and planetarian evolution, but an understanding of the transformation of concepts and theories, invigorated by the novel understanding of the constitutive role of entropy and noise in the emergence and organization of systems with increased complexity. This article argues that the gear-shift from the empirical narrative of ontogenetic aspects of entropy to the metasystemic analysis of the organisational factor of noise raises fundamental philosophical and specifically epistemological stakes: namely that the conditions and structures of our understanding may be, like every other system, subject to transformation on the basis of noise.Keywords Morin; complexity; noise; information; entropy; epistemology; metastability
This article is based on the keynote address presented to the European Meetings on Cybernetics and Systems Research (EMCSR) in 2012, on the occasion of Edgar Morin receiving the Bertalanffy Prize in Complexity Thinking, awarded by the Bertalanffy Centre for the Study of Systems Science (BCSSS). The following theses will be elaborated on: (a) The whole is at the same time more and less than its parts; (b) We must abandon the term "object" for systems because all the objects are systems and parts of systems; (c) System and organization are the two faces of the same reality; (d) Eco-systems illustrate self-organization.
Complex Thinking for a Complex World – About Reductionism, Disjunction and Systemism Edgar Morin
Systema: connecting matter, life, culture and technology Vol 2, No 1 (2014)
Abstract This essay broadly considers gifts, giving, and gift economies, modern and pre-modern, from a mainstream (and behavioural) economics perspective. I present a selective survey of the literature focusing on six key points: 1. Commercial transactions sustained by reputation are not easily distinguishable from gift exchange economies; 2. Gift-giving allows the giver to accumulate goods that cannot be purchased commercially; 3. When the giver retains some use, experience, or control over the gift, she shares in the consumption of it; 4. Considering behavioural issues such as regret aversion, gift-giving may offer overlooked efficiencies that may balance out the deadweight losses from ‘inadequate gifts’; 5. Aggregate (anonymous) giving can be an important signal of overall group identity and character; 6. Historical modes of ‘giving under pressure’ offer insights for modern public policy and philanthropy.
"Those who travel with the current will always feel they are good swimmers; those who swim against the current may never realize they are be -
Biases often work in surreptitious ways — they sneak in through the backdoor of our conscience, our good-personhood, and our highest rational convictions, and lodge themselves between us and the world, between our imperfect humanity and our aspirational selves, between who we believe we are and how we behave. Those stealthy inner workings of bias are precisely what NPR science correspondent Shankar Vedantam explores inThe Hidden Brain: How Our Unconscious Minds Elect Presidents, Control Markets, Wage Wars, and Save Our Lives (public library) — a sweeping, eye-opening, uncomfortable yet necessary account of how our imperceptible prejudices sneak past our conscious selves and produce “subtle cognitive errors that lay beneath the rim of awareness,” making our actions stand at odds with our intentions and resulting in everything from financial errors based on misjudging risk to voter manipulation to protracted conflicts between people, nations, and groups.
In the introduction, Vedantam contextualizes why this phenomenon isn’t new but bears greater urgency than ever:
Unconscious biases have always dogged us, but multiple factors made them especially dangerous today. Globalization and technology, and the intersecting faultlines of religious extremism, economic upheaval, demographic change, and mass migration have amplified the effects of hidden biases. Our mental errors once affected only ourselves and those in our vicinity. Today, they affect people in distant lands and generations yet unborn. The flapping butterfly that caused a hurricane halfway around the world was a theoretical construct; today, subtle biases in faraway minds produce real storms in our lives.
The Environment Influences What You Do and What You Think And You Don’t Even Realize It! Diffusing a pleasant scent in a shop leads to better evaluations of the merchandise and to a (20%) sales increase.Rearranging the food on a table increases the consumption of fruit and decreases the consumption of brownies. Playing Classical Music in a wine shop leads to a sales increase in value, but not in volume. Making Things Fun (e.g. the Piano Stairs) is Not necessarily a Good way of Influencing Behavior.
In this book we build up an ‘integral’ approach to social and economic systems that we have been developing for four decades, in fact over the same time period that the neoliberal model has predominated. It enables us to jointly reframe economics in a way that accommodates nature and culture, science and enterprise, across the whole world. According to our integral approach, every social system needs to find, in order to be and stay sustainable, a dynamic balance between its four mutually reinforcing and interdependent ‘worlds’ and its ‘center’. In other words, a living social system consists of a: Center: the realm of religion and humanity -South: the realm of nature and community -East: the realm of culture and spirituality -North: the realm of science and technology -West: the realm of finance and enterprise. This integral perspective is applicable for all types of social systems, from the individual to the organization, from community to society. On an individual level, for example we are seeking a dynamic balance between heart, spirit, mind, body and soul; or, in other words between our ‘Southern’ being (heart), ‘Eastern’ becoming (spirit), ‘Northern’ thinking (mind), ‘Western’ doing (body) and the inspirational and integrating center (soul). A sustainable ‘integral’ society, to bring another example, would have found dynamic balance between its ‘Southern’ environmental or animate sector encompassing nature and community; its ‘Eastern’ civic sector encompassing culture and spirituality; its ‘Northern’ public sector encompassing governance, science and technology; its private sector encompassing finance and enterprise; and, finally, its moral center, encompassing religion and humanity. The same then applies to a sustainable approach to economics. In this book we introduce the five elements of the integral economy, and we present transformational paths that can support the renewal of society and economy. An Integral Economy comprises as well of four ‘worlds’ and a center, articulated as: - Center: Moral Economic Source, founded in religion and humanity - South: Self-sufficient Economy, founded in nature and community - East: Developmental Economy, founded in culture and spirituality - North: Social Economy, founded in science and technology - West: Living Economy, founded in finance and enterprise.
Quando dobbiamo scegliere tra più alternative (tra beni di consumo, tra forme di risparmio, tra modi di utilizzare il nostro tempo libero, ecc.) siamo spesso condizionati dall’operare di limiti che dipendono da tre principali limiti cognitivi: l’insufficiente capacità di ordinare e valutare alternative troppo complesse; l’incapacità di mantenersi coerenti nel tempo e la dipendenza dal modo in cui le alternative ci sono presentate.
La Behavioural Economics (BE) è un nuovo campo dell’economia che utilizza i risultati ottenuti dalla ricerca in altre discipline ─ la psicologia, l’antropologia, la biologia e le neuroscienze ─ per capire come questi limiti influenzino le decisioni e i comportamenti.
Uno dei principali ramo applicati della BE è il nudging, approccio che si fonda sull’idea che le istituzioni pubbliche e private possano sfruttare i limiti della natura umana per indirizzare “dolcemente” le persone verso scelte migliori. L’intervento pubblico non s’impone più coercitivamente dall’alto, ma si afferma dal basso, rendendo l’ambiente decisionale più semplice e amichevole, in modo che le persone decidano spontaneamente di adottare comportamenti virtuosi. Il progetto proposto da FBK, parallelamente al programma scientifico che prevede l’approfondimento dei temi della BE, mira a produrre ricadute pratiche anche attraverso il coinvolgimento delle istituzioni e delle imprese.
A review and update of a controversial 20-year-old theory of consciousness claims that consciousness derives from deeper level, finer scale activities inside brain neurons. The recent discovery of quantum vibrations in "microtubules" inside brain neurons corroborates this theory, according to review authors. They suggest that EEG rhythms (brain waves) also derive from deeper level microtubule vibrations, and that from a practical standpoint, treating brain microtubule vibrations could benefit a host of mental, neurological, and cognitive conditions.
Behavioral finance is a breakout star of the post-2008 economic world. A little-known academic discipline a mere decade ago, this combination of psychology and finance now serves as a catchall explanation for why we act against our own financial best interests time and time again.
In the view of many behavioral finance promoters, the fault for our many financial failures is not in our stars, or in a less-than-stable economy. It’s that we’re not rational. Even at the price of our long-term financial well-being, we simply can’t resist falling prey to anything from too-good-to-be-true housing bubbles to impulsive luxury purchases.
It’s a tempting explanation, this behavioral finance thing. Just about all of us can recall money frittered away on fripperies like frappuccinos that we could’ve, should’ve saved for that unexpected medical bill.
It's our own fault, we think. We shop too much and we fall for housing and stock market bubbles. If only we’d had an automatic savings plan that could have saved us from ourselves! We'd be rich -- or at least not in the desperate straits so many of us are in, lacking emergency funds and piling on more credit card debt than we have in savings accounts.
Il bias è una forma di distorsione della valutazione causata dal pregiudizio. La mappa mentale d'una persona presenta bias laddove è condizionata da concetti precedenti non necessariamente connessi tra loro da legami logici e validi. Il bias, contribuendo alla formazione del giudizio, può quindi influenzare un'ideologia, un'opinione, e un comportamento. È probabilmente generato in prevalenza dallecomponenti più ancestrali e istintive del cervello. Il cervello umano è capace di eseguire 10^16 (10 alla sedicesima processi al secondo), il che lo fa essere più potente di qualsiasi computer oggi esistente. Questo però non significa che i nostri cervelli non abbiano delle limitazioni. Una calcolatrice delle più economiche è migliaia di volte meglio di noi in matematica, spesso la memoria non ci assiste, e in più siamo soggetti a biasis cognitivi, quei fastidiosi difetti del nostro modo di pensare che ci fanno prendere decisioni discutibili e giungere a conclusioni errate. Qui abbiamo raccolto una dozzina dei biasis cognitivi più comuni e dannosi che è necessario conoscere (e nel caso correggere). Prima di iniziare, è importante distinguere tra biasis cognitivi e fallacie logiche. Una fallacia logica è un errore nell'argomentazione logica (Es: attacco ad hominem,fallacia del piano inclinato, degli argomenti circolari, ricorso alla forza, etc). Un biasis cognitivo, invece, è una vera carenza o un limite del nostro pensiero: un difetto nel giudizio che deriva da errori della memoria, attribuzione sociale ed errori di calcolo (ad esempio errori statistici o un falso senso di probabilità). Alcuni psicologi sociali credono che i nostri biasis cognitivi ci aiutino a elaborare le informazioni in modo più efficiente, soprattutto nelle situazioni di pericolo. Eppure, ci portano a commettere gravi errori. Magari siamo inclini a questo tipo di errori, possiamo imparare però ad esserne consapevoli. Qui ci sono alcuni tra i più importanti da tenere in mente.
Over the decades I was involved in more employee surveys than I can recall. But one thing I do recall is that the single issue that came up in literally all of them – a chronic source of employee frustration – was lack of recognition. Employees never felt they were getting enough of it.
Yesterday I was reminded yet again how big a difference small things make in management. I was speaking with a young woman in a very good mood. She’d just gotten out of work – she has a temporary position at a hotel, greeting guests who are in town for conferences – and at the end of the day her supervisor had told her she was doing a fine job and gave her a small card. The young woman showed me the card. It said:
“We appreciate your outstanding service! Thank you for being so welcoming, thoughtful and friendly to our guests. Please enjoy a slice of pizza & a Pepsi for 75 cents as our thanks.” At the bottom of the card were listed several local eateries where the card could be redeemed.
I sort of wondered why she had to pay 75 cents – why weren’t the pizza and Pepsi free? But no matter. And no matter that the card’s value (let’s assume around here in round numbers a slice of pizza costs $3 and a Pepsi $1) was around $3.25. The young woman couldn’t have been more pleased. The card was the highlight of her day.
Famous musicians like Mick Jagger, Justin Timberlake, and Kanye West seem to have no trouble attracting women. But does an interest in music give any advantage to guys who rock out in garages and basements rather than stadiums? An elegantly simple experiment done in France suggests that it does.
First, researchers recruited a good-looking young man. (To do this they showed photographs of 14 male volunteers to a number of young women and asked them to rate each man’s attractiveness on a scale of 1 to 10. The man with the highest score became their confederate in the experiment.)
Next, on a sunny afternoon in early summer, the good-looking confederate took up his place on one of the shopping streets of a small city. His contribution to science was to approach women between the ages of 18 and 22 who were walking alone and (following a set script) ask for their phone number so he could invite them to meet later for a drink. He did this in three different conditions: Holding an acoustic guitar case, holding a sports bag or a control condition of holding nothing.
The researchers hypothesized that more women would be receptive to the young man’s overtures if he was holding a guitar case. Charles Darwin believed that music played a role in human courtship and sexual selection. This idea continues to have plausibility among researchers today who hypothesize that musical interest or ability may be associated with intelligence and physical dexterity—both traits that are likely to be attractive to women.
Abstract: Armen Alchian was one of the great economists of the twentieth century, and his 1950 paper, Uncertainty, Evolution, and Economic Theory, one of the most important contributions to the economic literature. Anticipating modern behavioral economics, Alchian explains that firms most decidedly do not – cannot – actually operate as rational profit maximizers. Nevertheless, economists can make useful predictions even in a world of uncertainty and incomplete information because market environments “adopt” those firms that best fit their environments, permitting them to be modeled as if they behave rationally. This insight has important and under-appreciated implications for the debate today over the usefulness of behavioral economics. Alchian’s explanation of the role of market forces in shaping outcomes poses a serious challenge to behavioralists’ claims. While Alchian’s (and our) conclusions are born out of the same realization that uncertainty pervades economic decision making that preoccupies the behavioralists, his work suggests a very different conclusion: The evolutionary pressures identified by Alchian may have led to seemingly inefficient firms and other institutions that, in actuality, constrain the effects of bias by market participants. In other words, the very “defects” of profitable firms — from conservatism to excessive bureaucracy to agency costs — may actually support their relative efficiency and effectiveness, even if they appear problematic, costly or inefficient. In fact, their very persistence argues strongly for that conclusion. In Part I, we offer a short summary of Uncertainty, Evolution, and Economic Theory. In Part II, we explain the implications of Alchian’s paper for behavioral economics. Part III looks at some findings from experimental economics, and the banking industry in particular, to demonstrate how biases are constrained by firms and other institutions – in ways often misunderstood by behavioral economists. In Part IV, we consider what Alchian’s model means for government regulation (with special emphasis on antitrust and consumer protection regulation).
Crisis Responses and Crisis Management: what can we learn from Biological Networks? Abstract The generality of network properties allows the utilization of the ‘wisdom’ of biological systems surviving crisis events for many millions of years. Yeast protein-protein interaction network shows a decrease in community-overlap (an increase in community cohesion) in stress. Community rearrangement seems to be a cost-efficient, general crisis-management response of complex systems. Inter-community bridges, such as the highly dynamic ‘creative nodes’ emerge as crucial determinants helping crisis survival.
Here’s how your two-brain portfolio strategy works. Start by separating your assets into two parts and invest them according to two quite different sets of investment rules.
Yes, you have two brains, competing, keeping secrets, communicating back and forth. Listen to the chatter. You know what I’m talking about.It’s basic human nature, who you are, who we all are. It’s how your mind actually works. Understand it, your investing will improve a lot. And this is exactly the way most Main Street American investors do their investing: We live, work, love and invest using these two, very different, often very separate brains.
Brainwaves of positive and negative thinkers reveal important insight into positive thinking.
For some people, being told to ‘think positive’ is very hard and may even be doing them harm, according to a new study. The research examined the neural markers of both positive and negative thinking. In the study, 71 women were asked to look at distressing images and put a positive spin on them (Moser et al., 2014).
Women were used exclusively as they are more likely to suffer from high levels of depression and anxiety.
Are you a task switcher? This is the quintessential rhetorical question, because we all switch between tasks, and we do so often.
While the answer to this question is predictable, clear and almost universal — a more complex and important question is how much time do you think you lose when you engage in task switching? Like many of our daily challenges, here too there are three different factors to consider.