The Simon and Garfunkel of Behavioral Economics

I'm probably constructing an illogical metaphor here-- perhaps Amos Tversky and Daniel Kahneman are more like Sonny and Cher or Sam and Dave-- but my "representativeness" heuristic immediately latched on to Simon and Garfunkel because of the lopsided nature of the duo; the odd thing about Tversky and Kahneman's symbiotic academic relationship is that both members spent some time in the spotlight . . . both members got a turn at being Paul Simon; at the start of their astoundingly fruitful collaborations, everyone doted on Tversky and no one knew Kahneman's name, and now --ironically and tragically, because of Tversky's death from cancer in 1996-- Kahneman is the famous one (I highly recommend his book Thinking Fast and Slow) and Tversky is forgotten; if you love Moneyball and The Blind Side, then at least read the first chapter of this book-- Lewis addresses the fact that Richard Thaler, another behavioral economist, had one criticism about Moneyball: it didn't address why professional baseball overvalued sluggers . . . and Thaler suggested that for the answers, all you had to do was look back to a wacky duo of Israeli psychologists and their experiments and papers . . . the first chapter of The Undoing Project tells the story of Daryl Morey, general manager of the Houston Rockets, and how he tries to overcome the irrationality of the human mind-- loss aversion and the influence of narratives and regret over decision making-- and while there is plenty of psychology and descriptions of experimentation in the rest of the book, it's also heavily concerned with the weird, wonderful, sometimes strained and awkward relationship between these two geniuses.

If You're Going Shopping, It's Best To be Angry

In Thinking, Fast and Slow, Daniel Kahneman shares a wealth of evidence that our intuition works better when we are in a good mood-- we are more creative but also more gullible . . . and he calls this System 1, but if you're going to do something analytic, and you have to consider several positions or the pros and cons of something, then this is called System 2, and to activate System 2, it is better if you are sad or vigilant or suspicious (or perhaps all three, although you might not be much fun to be around) and Kahneman summarizes this by explaining that "a happy mood loosens the control of System 2 over performance: when in a good mood, people become more intuitive and more creative but also less vigilant and more prone to logical errors," and this explains a lot to me; as now I can see why I was in such an ugly mood when I was doing all the shopping around for a new mortgage-- playing one broker off another, crunching numbers, comparing points versus rates, etc.-- and why I'm in such a good mood when I play soccer, which is all intuition, creativity, and spontaneous reaction.

High School Kids Don't Care About This

Daniel Kahneman's new book Thinking, Fast and Slow, describes and contrasts two "systems" in our brains-- fast thinking and intuitive System 1 and deliberate, tedious, and often lazy System 2-- and he describes his comprehensive research and experimentation observing how System 1 (though brilliant at detecting emotions, recognizing objects, and jumping to fairly accurate conclusions) often screws up our System 2 thinking . . . and I found this example at the start of "Chapter 10: The Law of Small Numbers" both fascinating and indicative: Kahneman explains that the lowest incidence of kidney cancer in the United States is found in counties that are "mostly rural, sparsely populated, and located in traditionally Republican states in the Midwest, the South, and the West" and then he asks you what you make of this information . . . perhaps you speculate that people are exposed to less pollution in these places or lead healthier lifestyles or do more physical work . . . but then he reveals something paradoxical: the highest incidence of kidney cancer in the United States is found in "mostly rural, sparsely populated, traditionally Republican states in the Midwest, the South, and the West" and he asks you to make sense of this conflicting data . . . and perhaps your mind can resolve this-- maybe it has to do with poverty, or tobacco use, or access to poor medical care-- and so both these populations exist in the same regions, but the fact of the matter is that there is no causal reason why this is so-- the reason is purely statistical, and the important part of the statement is "sparsely populated"-- when you have smaller numbers there is a greater chance for statistical anomaly . . . I have a better chance of picking two students at random that both have blue eyes then I do having an entire class of thirty that all have blue eyes-- the two person sample is too small to indicate anything-- and so the only reason that the highest and lowest incidence of cancer occurs in the same type of county, demographically, is that these counties tend to have less people than other regions; this logical fallacy is common, the Gates Foundation determined that smaller schools are often more successful and invested substantial funds in creating small schools, sometimes even breaking large schools into smaller units, but what they neglected to realize is that small schools are often the most successful and they are also often the least successful . . . because their smaller populations are more likely to vary statistically; I found this idea compelling enough to explain to several of my classes, and I made a discovery of my own: high school kids DO NOT find this interesting at all . . . they don't want to guess why the incidence of kidney cancer is low, they don't want to guess why it is high, they don't want to speculate on the nature of the paradox, and they are certainly not excited to find out that there is NO causal reason for it.

Dave Should Be a Future Leader (According to Obama)

I was pleased to learn that Hillary Clinton agreed with me on the importance of Robert D. Putnam's new book Our Kids: The American Dream in Crisis, but President Obama trumps her with his reading list for future leaders . . . I've read four of the ten:

The Sixth Extinction by Elizabeth Kolbert;

Thinking Fast and Slow by Daniel Kahneman;

Behind the Beautiful Forevers by Katherine Boo;

Sapiens: A Brief History of Humankind by Yuval Noah Harari;

and these were definitely some of the best books of the past decade (read my reviews if you're in need of some hyperbole) and so Obama either really loves to read, or he reads my blog and respects my reviews, or perhaps he's got really good reading advisers-- it's probably a combination of the three-- and I realize that this is a political "signal" to release this list, as it indicates that the President values high quality non-fiction, just as Donald Trump could never admit that reading books is necessary, as it would alienate his constituency and mark him as an elitist intellectual communist, which is why he gets his information from "the shows."

Praise, Criticize . . . Who Cares?

A fun Tversky and Kahneman finding that's easy to test on your own is the "regression to the mean" fallacy-- the super-duo of behavioral economics observed this and wrote a paper about fighter pilots, but it's also a great thesis for sporting events . . . here is the logic:

when you criticize someone after they commit a boneheaded mistake, they are likely to improve in their next attempt, but if you praise someone after a brilliant maneuver, they rarely repeat their excellence on the next try-- but this does not mean you should criticize everyone all the time . . . it's not the criticism or praise that causes the shift in performance, it's the regression to the mean . . . most of the time, people perform somewhere between excellence and boneheadedness-- especially if it's something in which they are fairly skilled, such as playing a sport or flying a plane, and so after a boneheaded error, there is a statistical likelihood to be an improvement-- a regression to the mean-- caused by math, not criticism, and after a brilliant performance, people are likely to regress back to their regular old average ways, so that it seems as if praising them actually had a deleterious effect . . . the takeaway is this: yell whatever you want at your kid's soccer match-- if you want to feel consequential, then criticize him, but if you want to have a pleasant time, then praise him-- because neither action has much consequence (especially if it's soccer, because your son or daughter probably can't hear you anyway).

If You Are Invested in the Stock Market, Do Not Read This Sentence

Yikes . . . Justin Fox's book The Myth of the Rational Market, which bills itself as a "history of risk, reward, and delusion on Wall Street" is enlightening, but not fun to read -- it has plenty of history . . . chronicling a century's worth of market economic theories, and a huge cast of characters (from Roger Babson to Milton Friedman to Daniel Kahneman to Benoit Mandelbrot) and plenty of delusion . . . with market theories that attributed to swings in value to "spots on the sun" or "animal spirits" or "irrational exuberance" or -- the most popular -- an omniscient and very efficient market . . . but in the end, though the theories of dead economists resurface, and one school of thought quickly succumbs to the next (very much like the field of education) there is still no way to tell the difference between "speculative excess" and an "entirely sustainable boom" . . . in other words, no one knows how to value a stock accurately . . . but though you may lose your shirt in the market, there's still a positive moral in the last paragraph of the book: "the countries that have better-developed financial markets really do better."

Arachnids and Dramaturgy

In Philosophy class last week, I introduced my new students to the idea of a heuristic-- a quick and dirty problem-solving technique that someone employs to make it through the day-- and I contrasted this with what Bertrand Russell's calls "philosophic contemplation" . . . the latter mindset obviously takes a great deal more time and mental effort, and while we were discussing this, I was searching through my desk drawer for a paper clip and I saw a spider, which I promptly killed with my stapler-- so that I didn't have to feel the crunch-- and then we went back to the problem at hand, that with limited time it is impossible to philosophically contemplate every moment and dilemma that a typical day brings, and so we use heuristics to navigate most of our decisions (what to eat for breakfast, how fast to drive, who to sit with at lunch, whether or not to copy someone's homework, etcetera) and then I revealed to them that there was no spider-- I was acting-- but that many people use a kill-creepy-crawly heuristic instead of thinking deeply about the spider and its right to live . . . most of the students were glad that I didn't actually kill a real spider and they were impressed with my acting ability (I even picked up the nonexistent miniature carcass with a tissue . . . I learned everything I know from Master Thespian Jon Lovitz . . . acting!) but then I told them the story of the groundhog that I euthanized with a shovel and they were properly appalled; anyway, if you want to learn more about heuristics and just how screwy they are, read the new Michael Lewis book The Undoing Project . . . it's the story of two Israeli psychologists-- Daniel Kahneman and Amos Tversky-- who uncovered fundamental truths about the flaws in economics and the human mind, and there is liberal use of the word "heuristic" . . . I'm halfway through the book, and I'm hoping for an occurrence of the word "ersatz" as well.