Tag Archives: john-kay

Against Behavioural Economics and Irrationality

Prais­ing Maurice Allais as the fath­er of beha­vi­our­al eco­nom­ics rather than Kahne­man and Tver­sky,  John Kay intro­duces us to some of Allais’ ideas while sim­ul­tan­eously provid­ing one of the finest argu­ments against the simplist­ic view of beha­vi­our­al eco­nom­ics as the study of irra­tion­al­ity:

The skill of piecing togeth­er sense from frag­men­ted and inac­cur­ate inform­a­tion is a cent­ral attrib­ute of human intel­li­gence. Lit­er­al inter­pret­a­tion, and insens­it­iv­ity to con­text, are not marks of ration­al­ity but men­tal disorders. […]

The [beha­vi­our­al eco­nom­ics] exper­i­menter­’s trick is to con­struct an arti­fi­cial situ­ation in which nor­mally sens­ible beha­viour gives what he thinks is the wrong res­ult. The “mis­take” is detec­ted in a mean­ing­less prob­lem designed solely to eli­cit the “mis­take”. […]

Allais was less con­cerned to show that our beha­viour was irra­tion­al than to argue that the premises of ration­al­ity itself were irrational. […]

Allais’ most fam­ous exper­i­ment showed that we often treat very high prob­ab­il­it­ies very dif­fer­ently from cer­tain­ties, although “ration­al” indi­vidu­als would regard them as almost the same thing. But very high prob­ab­il­it­ies often are dif­fer­ent from cer­tain­ties: very high prob­ab­il­it­ies are usu­ally derived from cal­cu­la­tions whose rel­ev­ance and valid­ity are them­selves uncer­tain. […]

Irra­tion­al­ity lies not in fail­ing to con­form to some pre­con­ceived notion of how we should behave, but in per­sist­ing with a course of action that does not work. Some­times in mod­ern eco­nom­ics and polit­ic­al life, there is a big dif­fer­ence.

The example Kay uses is a bit glib but does serve its purpose.That last para­graph, how­ever, is the crux of it all. As you may have guessed, this is the Allais that designed the Allais para­dox – an exper­i­ment in beha­vi­our­al eco­nom­ics that shows the above won­der­fully.

Bonus Cultures and Ideal Banks, Schools, Hospitals

In light of the ongo­ing debate with regards to the fin­an­cial sec­tor’s so-called ‘bonus cul­ture’, eco­nom­ist John Kay looks briefly at the his­tory of the bonus and why the idea of a ‘bonus cul­ture’ is a “poor joke” (using the example of teach­er and doc­tor bonuses).

At one time, the offer and receipt of a gra­tu­ity was a state­ment of social and eco­nom­ic superi­or­ity on the part of the giver, its accept­ance a state­ment of social and eco­nom­ic inferi­or­ity on the part of the recip­i­ent. To be salar­ied – to be trus­ted to do the job for which you had been con­trac­ted and paid – was a mark of status. Con­trac­tu­ally agreed per­form­ance-related pay – com­mis­sions and piece work – was wide­spread in shops and factor­ies, but has now largely been aban­doned.

The com­mon out­come was that employ­ees came to care more about the quant­ity of the product than its qual­ity. The sys­tem polar­ised the con­flict between the interests of the organ­isa­tion and of those who worked in it. […]

Teach­ers and doc­tors strongly res­ist the intro­duc­tion of a bonus cul­ture: not just because they resent meas­ure­ment of per­form­ance and account­ab­il­ity for their activ­it­ies […] but because they oppose import­ing the cul­ture of assembly lines. They fear an envir­on­ment in which they would be encour­aged to focus on nar­rowly quan­ti­fi­able object­ives at the expense of the under­ly­ing needs of cli­ents.

Even if many teach­ers and doc­tors are incom­pet­ent and lazy, many oth­ers are ser­i­ously com­mit­ted to the organ­isa­tions for which they work, the sub­jects and spe­cial­isa­tions to which they are devoted, and to a broad­er sense of pro­fes­sion­al eth­ics: and it is only people like these who estab­lish the kinds of schools and hos­pit­als we want as par­ents or patients.

The Truth About Markets

My cur­rent read, The Truth About Mar­kets/Cul­ture and Prosper­ity (UK/US title respect­ively), is a thor­oughly enjoyable—if occa­sion­ally dense and dry—introduction to eco­nom­ic the­or­ies and applic­a­tions. Pub­lished in 2003, it’s aged fairly well.

I felt the need to share this two-para­graph excerpt from a sec­tion dis­cuss­ing “large mod­els pur­portedly descript­ive of entire eco­nom­ic sys­tems” (pp. 193–194):

The error of principle—the reas­on these mod­els will nev­er be useful—is best exposed by Jorge Luis Borges’ story of map­makers who com­peted to build the best pos­sible map. They even­tu­ally under­stood that the most accur­ate map simply rep­lic­ated the world. The search for real­ism des­troyed the pur­pose of the map. A map is valu­able pre­cisely because it sim­pli­fies and omits. Eco­nom­ic mod­els are maps for the mar­ket eco­nomy. A map can be false but nev­er true. Our cri­terion for select­ing among maps that are not false is use­ful­ness, and a map can be too detailed or not detailed enough. We seek the simplest map adap­ted to our pur­pose, and it is a dif­fer­ent map if we are walk­ing or driv­ing: not bet­ter or worse, but more fit­ted for its use. The Lon­don Under­ground map is a bril­liant design for its pur­pose but use­less to ped­es­tri­ans. The ‘little stor­ies’, or eco­nom­ic mod­els, of this book are to be judged in the same way.

I once debated the rela­tion­ship between the social sci­ences with some anthro­po­lo­gists. We adjourned to the pub, and someone bought a round of drinks: the dis­cus­sion nat­ur­ally turned to the reas­ons why. For the eco­nom­ists, the explan­a­tion was obvi­ous: the prac­tice of buy­ing rounds min­im­ized trans­ac­tion costs, redu­cing the num­ber of exchanges between the pat­rons and the bar staff. The anthro­po­lo­gists saw it as an example of ritu­al gift exchange and described the many tribes that had developed sim­il­ar cus­toms. I pro­posed a test between the com­pet­ing hypo­theses: did you feel cheated or vic­tori­ous if you bought more rounds than had been bought for you? Unfor­tu­nately, the eco­nom­ists and the anthro­po­lo­gists gave dif­fer­ent answers to that ques­tion.