PraisingÂ Maurice Allais as the father of behavioural economics rather than Kahneman andÂ Tversky, Â 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.Â [â€¦]
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”. [â€¦]
Allais was less concerned to show that our behaviour was irrational than to argue that the premises of rationality itself were irrational.Â [â€¦]
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. [â€¦]
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.Â As you may have guessed, this is the Allais that designed the Allais paradox — an experiment in behavioural economics that shows the above wonderfully.
The name Eliezer Yudkowsky immediately conjours in my mind the word rationality (thanks to his addictive piece of fan fiction,Â Harry Potter and the Methods of Rationality). On a recent visit to his site, this connection has now be strengthened after I saw his excellent essay onÂ the twelve virtues of rationality:
- Curiosity: A burning itch to know is higher than a solemn vow to pursue truth.
- Relinquishment: Do not flinch from experiences that might destroy your beliefs.
- Lightness: Surrender to the truth as quickly as you can.
- Evenness: You are not a hypothesis, you are the judge. Therefore do not seek to argue for one side or another.
- Argument: In argument strive for exact honesty, for the sake of others and also yourself [â€¦]Do not think that fairness to all sides means balancing yourself evenly between positions; truth is not handed out in equal portions before the start of a debate.
- Empiricism: Always know which difference of experience you argue about.
- Simplicity: When you profess a huge belief with many details, each additional detail is another chance for the belief to be wrong.
- Humility: To be humble is to take specific actions in anticipation of your own errors.
- Perfectionism: The more errors you correct in yourself, the more you notice.
- Precision: More can be said about a single apple than about all the apples in the world. The narrowest statements slice deepest.
- Scholarship: Each field that you consume makes you larger.
- The Void
I believe that the ninth virtue, perfectionism, is the most elegant and I implore you to read the full essay if only to read that description in full (and, I guess, to discover what The Void is). However the eleventh virtue of rationality, scholarship, almost perfectly describes why I write here and may go some way to explaining my diverse reading habits:
Study many sciences and absorb their power as your own. Each field that you consume makes you larger. If you swallow enough sciences the gaps between them will diminish and your knowledge will become a unified whole. If you are gluttonous you will become vaster than mountains. It is especially important to eat math and science which impinges upon rationality: Evolutionary psychology, heuristics and biases, social psychology, probability theory, decision theory. But these cannot be the only fields you study. The Art must have a purpose other than itself, or it collapses into infinite recursion.
TheÂ First Law of Fanfiction states thatÂ every change which strengthens the protagonists requires a corresponding worsening of their challenges. [â€¦]Â stories are about conflict; a hero too strong for their conflict is no longer in tense, heart-pounding difficulty. [â€¦]
TheÂ Rationalist Fanfiction Principle states thatÂ rationality is not magic; being rational does not require magical potential or royal bloodlines or even amazing gadgets, and the principles of rationality work for understandable reasons.
That’s Eliezer Yudkowsky in an introduction to his acclaimed Harry Potter fan fiction,Â Harry Potter and the Methods of Rationality.
The piece of “serial fiction” looks at cognitive science and rationality in a Harry Potter-type world where Harry, having been raised by a scientist stepfather, is a rationalist, enteringÂ the wizarding world “armed with Enlightenment ideals and the experimental spirit.”
Currently 63 chapters long–including chapters such as A Day of Very Low Probability, The Stanford Prison Experiment, The Unknown and the Unknowable and Title Redacted, Part I–the Methods is a fantastic read.
There’s a “book-style” PDF available, ePUB and MOBI versions for those on e-readers, and a great TV Tropes entry. You can find more resources on the unofficial homepage, hpmor.com.
Although listen to Eliezer when he says “This fic is widely considered to have really hit its stride starting at around Chapter 5. If you still don’t like it after Chapter 10, give up”.
via Hacker News
The psychological principle of anchoring is most commonly discussed in terms of our irrational decision making when purchasing items. However, Jonah Lehrer stresses that anchoring is more wide-ranging than this and is in fact “a fundamental flaw of human decision making”.
As such, Lehrer believes that anchoring also effects our beliefs, such that our first reaction to an event ‘anchors’ our subsequent thoughts and decisions, even in light of more accurate evidence.
Consider the ash cloud: After the cloud began drifting south, into the crowded airspace of Western Europe, officials did the prudent thing and canceled all flights. They wanted to avoid a repeat of the near crash of a Boeing 747 in 1989. [â€¦]
Given the limited amount of information, anchoring to this previous event (and trying to avoid a worst case scenario) was the only reasonable reaction. The problems began, however, when these initial beliefs about the risk of the ash cloud proved resistant to subsequent updates. [â€¦]
My point is absolutely not that the ash cloud wasn’t dangerous, or that the aviation agencies were wrong to cancel thousands of flights, at least initially. [â€¦] Instead, I think we simply need to be more aware that our initial beliefs about a crisis – those opinions that are most shrouded in ignorance and uncertainty – will exert an irrational influence on our subsequent actions, even after we have more (and more reliable) information. The end result is a kind of epistemic stubbornness, in which we’re irrationally anchored to an outmoded assumption.
The same thing happened with the BP oil spill.
Much has been written on the (ir)rationality of purchasing lottery tickets (Eliezer Yudkowsky’s viewpoint is particularly fine), but little has been said on applications of these biases that could improve the finances of all of those who buy a ticket.
Now behavioural economists are attempting to boost the historically poor household savings rate byÂ using our lottery-like optimism as an incentive to save:
Psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called “Save to Win.” Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD* are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. [â€¦]
In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.
* CD = Certificate of Deposit (similar to a savings account).