Economics and Psychology One-Day Conference

The fifth annual one day conference on Economics and Psychology will be held on November 30th. The purpose of these sessions is to develop the link between Economics, Psychology and cognate disciplines in Ireland. A special theme of these events is the implications of behavioural economics for public policy though we welcome submissions across all areas of intersection of Economics and Psychology. We welcome submissions from PhD students as well as faculty and also welcome suggestions for sessions on policy and industry relevance of behavioural economics.  Abstracts (200-500 words) should be submitted before September 30th. Suggestions or questions please send to Liam.Delaney@stir.ac.uk and/or Pete.Lunn@esri.ie

43 replies on “Economics and Psychology One-Day Conference”

I hear a rumour that Blind Biddy might be working on an interdisciplinary working paper. tbc

@Liam Delaney

I thought we all had rational expectations, and priced financial assets efficiently at all times so that we could use a single representative consumer as a foundation of our macro models? Surely you’re not suggesting that “micro-founded” macro models are a thing of the past?

Has much work been done on silo-isation and its effects in large organisations (particularly Financial sector and Government)?

Another related topic area which interests me is how people deal with complex problems through heuristics and outsourcing and the effect of the resulting knowledge gaps and the means by which these can be eliminated through leadership/management. This is slightly different from siloisation insofar as people know they have to deal with various areas (as opposed to being in a silo just dealing with their own problem) but do so by means of broad brush understanding.

Similarly, I am concerned as to people’s awareness of problems in one specialist area (typically technological, financial or regulatory) which can have a huge effect on an organisation or economy. For instance, were the Ulster Bank IT staff aware of the existence of the risk of failure in their systems? If so could they be aware of the consequences of such failure for the organisation and accordingly how that risk should be managed? Were management aware that such a risk might exist or how to go about ascertaining where such risks might lie?

@KevinDenny
Speaking truth to the powerless? 🙂

@zhou_enlai Expert judgment certainly a good one including herding, overconfidence and so on. Pete Lunn argued through some of these regarding the banking crisis http://bit.ly/LU75K0 Testing these types of effects in fully worked out macro-models not easy obviously.

@Liam Delaney

Thanks for link to that paper – looks fascinating based on abstract.

I can imagine they are very hard things to test. They also must vary hugely according to organisation siza and structure.

Another area which I wonder about is principles based regulation and risk management -v- rules and checklists.

It seems to me that the more boxes people have to tick and the more standard form reports they have to complete, the more divorced they become from the principles which they are supposed to be observing and the substance of the risks and wrongs they are trying to avoid. People become conscious of the time the checks are taking and seek to minimise it.

Obviously some checks are useful and improve risk management and auditability, but is there an optimal balance (at a level of lower bureaucracy) beyond at which additional formal reporting and checks no longer reduce risk but but rather increase it?

Much more so than five years ago, people are thinking about things like financial simplification, autoenrolment, consumer inertia, tax complexity and so on. The “Nudge” book has really stimulated interest in the area worldwide but there is a lot of debate about how good a concept it is. Again, Pete Lunn’s paper from last year’s session (http://bit.ly/OCiPkh) gives a good overview of this in the Irish context. A big theme of this year’s session will be what we can learn from the experience in the UK with the development of the behavioural insights team. http://bit.ly/Ifurg0

For people interested in critiques of libertarian paternalist type arguments, below is from a previous post. Point of these sessions is not to promote a particular view of how psychology and economics should influence policy but rather to recognise that we are learning a lot about human behaviour in economic environments and it is important to work through implications of these findings.

(link – http://bit.ly/IKRvhq )

I promised to send various people some readings on behavioural economics and policy. The usual caveat about not having sufficient time to do this justice applies but I think the readings will be helpful (thanks to Clare for suggestions). Will add to this post when I get time. There is a lot of discussion needed on: the different approaches to intervention; the extent of overlap between “nudge” and traditional health psychology approaches; the appropriate mix of hard and soft interventions; the link between the development of behavioural economics and the development of the political philosophy of libertarian paternalism; and so on.

(i) The book Nudge by Thaler and Sunstein outlines a strong view of how behavioural economics might influence the shaping of policy. (blog with link to the book here). A recent UK paper outlines the Cabinet Office approach developed with many UK academics (MINDSPACE paper). Work of Olivier Ouiller and others at Centre d’analyse stratégique another good example of development of behavioural economics in areas such as environmental policy (see, for example, Green Nudges document).

(ii) Some of the papers on libertarian paternalism are very useful in understanding from a more formal perspective the link between behavioural economics and government policy. (key paper here).

(iii) The well-known UK scholar Robert Sugden has written a number of articles critical of the idea that failures in self-control and information processing are sufficient rationales for paternalistic policy.

(iv) Mark White teaches at the intersection of Law Philosophy and Economics and has written a number of critiques:

– Paper called ‘We’ve been nudged-the effects of the downturn on dignity and responsibility’
– Another called “Behavioural Law and Economics: The Assault on on Consent, Will and Dignity’

(v) Kyle Whyte has written a lot on the ethics of “nudging”.

– “What counts as a nudge?’
-“Nudge, Nudge or Shove, Shove—The Right Way for Nudges to Increase the Supply of Donated Cadaver Organs”
-“Nudging cannot solve complex policy problems”

(vi) Gilles St. Paul’s recent PUP book “The Tyranny of Utility” takes the argument below./

“The general assumption that social policy should be utilitarian–that society should be organized to yield the greatest level of welfare–leads inexorably to increased government interventions. Historically, however, the science of economics has advocated limits to these interventions for utilitarian reasons and because of the assumption that people know what is best for themselves. But more recently, behavioral economics has focused on biases and inconsistencies in individual behavior. Based on these developments, governments now prescribe the foods we eat, the apartments we rent, and the composition of our financial portfolios. The Tyranny of Utility takes on this rise of paternalism and its dangers for individual freedoms, and examines how developments in economics and the social sciences are leading to greater government intrusion in our private lives.

“Gilles Saint-Paul posits that the utilitarian foundations of individual freedom promoted by traditional economics are fundamentally flawed. When combined with developments in social science that view the individual as incapable of making rational and responsible choices, utilitarianism seems to logically call for greater governmental intervention in our lives. Arguing that this cannot be defended on purely instrumental grounds, Saint-Paul calls for individual liberty to be restored as a central value in our society.Exploring how behavioral economics is contributing to the excessive rise of paternalistic interventions, The Tyranny of Utility presents a controversial challenge to the prevailing currents in economic and political discourse”

Lite_readin:

05/25/2012
SPIEGEL Interview with Daniel Kahneman

Debunking the Myth of Intuition
Can doctors and investment advisers be trusted? And do we live more for experiences or memories? In a SPIEGEL interview, Nobel Prize-winning psychologist Daniel Kahneman discusses the innate weakness of human thought, deceptive memories and the misleading power of intuition.
http://www.spiegel.de/international/zeitgeist/interview-with-daniel-kahneman-on-the-pitfalls-of-intuition-and-memory-a-834407.html

Daniel Kahneman, 78, is an Israeli-American psychologist specializing in the psychology of judgment and decision-making as well as behavioral economics. He is currently a senior scholar and emeritus professor at Princeton University. In 2002, Kahneman was awarded the Nobel prize in economics for his work on prospect theory, which helps explain the role biases play in decision-making. In 2011, he published a summary of much of his research in “Thinking, Fast and Slow,” which became a best-seller. This interview took place on the occasion of the publication in May 2012 of the German translation of that book. The magazine Foreign Policy also included him in its list of the top global thinkers in 2011.

@Liam Delaney

The clash between behavioural economics and personal freedom can also be viewed as just another step towards the domination of the individual by technology. Economics and particularly behavioural economics are both technologies. Personally, I was profoundly affected by Jacques Ellul’s book “The Technological Society” which deals with this issue.

It would be interesting to read about group-think in self-regulating industries/professions. The deregulation of the finance industry was supposedly due to an expectation of self-regulation. What happened seems more like the group self-regulated itself into running faster and faster towards a cliff and ultimately over the edge…

Should there be self-regulation in industries which are seen as vital where the participants are prone to group-think and herd behaviour?

Will an expectation of a bail-out change the behaviour of market participants?

@david thanks. “Thinking Fast and Slow” describes work that is a strong contender for the most important set of research projects in the history of social sciences. It was number 2 on the bestseller list when I was in Hodges Figgis the other day. Couldn’t recommend it highly enough. The work of a genius.

@zhou my own take on the personal freedom angle, for what its worth, is that much of the work of people like Thaler is about simplifying and shaping market mechanisms so that people are making “real” decisions that reflect their preferences rather than simply being led into suboptimal behaviour. The work Thaler is promoting on Smart Disclosure is a case in point. The SmartData paper that the Cabinet Office put out on this is one of the most innovative policy documents of this kind that I have read. http://bit.ly/LelNKt Press release on it below. One of the academic papers it draws from is here ( http://bit.ly/NqlVKe )

Better Choices: Better Deals

A strategy document, Better Choices: Better Deals, has been published by the Department for Business Innovation and Skills and the Cabinet Office’s Behavioural Insights Team.

The Strategy draws on insights from the behavioural sciences and puts in place a new approach to supporting consumers. It has two aims:

To put consumers in charge so that they are better able to get the best deals for themselves individually and collectively as well as looking at ways to empower the most vulnerable who may not otherwise benefit from these exciting developments.
To contribute to our broader growth agenda, supporting a strong private sector recovery and helping to raise underlying long-term growth rates.
It sets out a wide range of new initiatives introduced by the Behavioural Insights Team and Department for Business in partnership with businesses, charities and consumer bodies. These include:

A radical new programme of work – ‘mydata’ – which will enable consumers to access, control and use data currently held about them by businesses;
A range of new ways of ensuring that consumers are given richer, more relevant information about the goods and services they buy (including clearer information on Credit Card Statements);
A drive to encourage collective purchasing and collaborative consumption, which enable people to come together to buy or use goods;
The development of a self-regulatory quality mark for web and comparison sites, and the publication by Government of complaints and performance data held about businesses
Richard Thaler, co-author of Nudge: Improving Decisions About Health, Wealth, and Happiness, said:

This approach will give honest, high quality firms an edge in their battle with competitors who use obfuscation as their chief marketing strategy. Simple electronic disclosure is not costly for large firms to provide, and can provide enormous benefits to consumers. Eventually, this approach has the potential for replacing much more intrusive and burdensome regulations that firms inevitably find ways to evade.

Have made various stabs at a much longer post on links between behavioural economics and macroeconomics and on the list for this month but in the meantime, Akerlof’s famous paper on the subject should give people some sense how to join those dots http://bit.ly/JlQFX2

We need some discussion on this area in Ireland, in terms of how core economic quantities are affected by non-standard “psychological” mechanisms. Many in labour economists have already grappled with the puzzle of nominal wage rigidity and what drives it. But, more work needed on the effect of political attitudes in constraining adjustment in currency areas, inflation aversion, job search, herding in financial markets (as discussed above).

We also need a debate about how we teach economics. I find it harder and harder to accept that core micro classes are a neccesary foundation to learning more advanced material and then bringing in behavioural aspects. It’s perfectly possible to teach students that the intermediate micro class is teaching them tools of thought and models rather than attempting to convince them that this is how people actually behave. Some people believe that we do behave as rationally as is claimed (give or take some noise). But, at very least, the standard model taught in class is at variance with a growing body of both non-mainstream and mainstream economic thought. Figuring out how to introduce this earlier in Economics degrees would be a good thing.

The money supply or lack of it dictates behavior – behaviour does not dictate the money supply.
Behaviour does however dictate the debt supply…. the behaviour of the few.

libertyrevival.wordpress.com
This blog post is typical of a sort Greenback position although perhaps a slightly more atypical Georgist position ………maybe America is getting back to its revolutionary libertarian roots…..maybe not.

The Mantra of the blog is..
Rejecting Marx, Keynes, AND Mises; Reviving Classical Liberalism, Biblical Economics, and Georgism; Untaxing Toil; Overturning the Tables of Usury; Reclaiming the Profit of God’s Earth for All.

In his opening Y2010 June 22 piece
Honest and Sound Criticism of Zarlenga’s American Monetary Act

He states
“Warning: This article is not recommended for those who consume William Volker Fund and Rockefeller Foundation propaganda on a daily basis from the Ludwig von Mises Institute. It is recommended you see a doctor for a prescription of anti-psychotics and a 90-day detox at minimum from the propaganda you consume on a daily basis. After that is done, you should look up the definition of the word “fiat” and consider staying away from Ludwig von Mises Institute and related propaganda for a minimum of 2 years. I spent 5 years to detox from the Ludwig von Mises Institute and all political propaganda.”

This is the typical trajectory of many Libertarians these past 10 years or so,

Anyway the fact there is so little debate (withen the offical media) about money as a unit of accounts (debt) and money as a means of exchange conveys the impression (which I am afraid is true) that we are indeed living in a Orwellian nightmare.
The Gold money crowd wish to push people into a right corner of their own making and the MMT crowd wish to push people into a left corner of their own making.
Both Crowds are aristocrats wishing to hold onto power.
The debt money crowd (all of the tribes) need one of these 2 systems to get themselves out of this mess and thus make their power base more sustainable in the long run.

They will never never accept that the Bill is as good as the Bond.
That will require another War.

Hi Liam,

I’ll leave the behavioural bit aside for the moment (I would approach it from the viewpoints of ‘organizational psychology’ (Argyris and Schon) and the ideas of political Realism). The issue is quintessentially a political economy one.

The ‘teaching’ bit intrigues me. Having been a teacher for some time and having delved into the mechanics of undergrad learning (chemistry) I would have more that a few suggestions for the teaching of economics at undergrad level. Your initial musings on the matter are on the right track.

@Liam Delaney

Get them started on the Philosophy of Science – otherwise most of them end up ontologically challenged and on the editorial board of the american economic review or believing that reality is fully capable of being mathematically modelled. I could fill the pond in UCD with them.

BTW Blind Biddy would like to appoint you to a Professorship of Intellectual Thought at a Uni of your selection after the coup! €5 million research grant – full freedom of utilization. Simply sort out the HSE – A behavioural economist’s nightmare or noble dream.

Some topics coming in so far:

Wider social and economic context of neuroscience research

Mental health and Economics.

Markets for Organs.

Students academic preferences.

Dopamine and how it impacts how we see the world , including the financial markets.

http://www.postcarbon.org/article/331819-the-psychological-roots-of-resource-over-consumption

http://www.truthdig.com/report/page2/how_to_think_20120709/

“Human societies see what they want to see. They create national myths of identity out of a composite of historical events and fantasy. They ignore unpleasant facts that intrude on self-glorification. They trust naively in the notion of linear progress and in assured national dominance. This is what nationalism is about—lies. And if a culture loses its ability for thought and expression, if it effectively silences dissident voices, if it retreats into what Sigmund Freud called “screen memories,” those reassuring mixtures of fact and fiction, it dies. It surrenders its internal mechanism for puncturing self-delusion. It makes war on beauty and truth. It abolishes the sacred. It turns education into vocational training. It leaves us blind. And this is what has occurred. We are lost at sea in a great tempest. We do not know where we are. We do not know where we are going. And we do not know what is about to happen to us. The psychoanalyst John Steiner calls this phenomenon “turning a blind eye.” He notes that often we have access to adequate knowledge but because it is unpleasant and disconcerting we choose unconsciously, and sometimes consciously, to ignore it.”

@Zhou

“Another area which I wonder about is principles based regulation and risk management -v- rules and checklists.”

“Politics is peopled by individuals who have never done anything else other than read PPE [philosophy, politics and economics], become a researcher, and then an MP.” He points to a paradox: “They feel they have to be micro-managing everything, while they have had less experience of management than ever before. I just cannot see how anyone who has gone through that career plan can hope to run hospitals, schools, broadcasting. It feels weird.”

Because there is no money for grands projets, he says, there is a kind of bathos in the compulsion to legislate in ever-finer detail. “It becomes very specific: instead of building 150 new schools, you say children have to be able to read to this standard, by this age. But that level of specificity requires experience. Which is what they don’t have.”

http://www.ft.com/cms/s/2/65876d80-ba0f-11e1-937b-00144feabdc0.html#ixzz20VXxcfe2

@Liam D

Market psychology may be currently about as popular in general economic discussion, particularly in Ireland, as is likely to get. Every reasonable observer should now have realised you cannot just crunch a load of economic data……

Several emails on the issue of health policy, paternalism and behavioural economics. Really would welcome more discussion, submissions on this. Big drive in US and UK policy to develop soft-paternalist policies based on behavioural research. The drive to reduce obesity, cigarette consumption, alcohol problems and so on is clearly many-faceted.

With regard behavioural macro, one of the most impressive talks in the four years of running this was David Laibson’s keynote in UCD a few years back, where he presented a version of the paper below

http://bit.ly/Sifb2K

“How does an economy behave if (1) fundamentals are truly hump-shaped, exhibiting momentum in the short run and partial mean reversion in the long run, and (2) agents do not know that fundamentals are hump-shaped and base their beliefs on parsimonious models that they fit to the available data? A class of parsimonious models leads to qualitatively similar biases and generates empirically observed patterns in asset prices and macroeconomic dynamics. First, parsimonious models will robustly pick up the short-term momentum in fundamentals but will generally fail to fully capture the long-run mean reversion. Beliefs will therefore be characterized by endogenous extrapolation bias and pro-cyclical excess optimism. Second, asset prices will be highly volatile and exhibit partial mean reversion—i.e., overreaction. Excess returns will be negatively predicted by lagged excess returns, P/E ratios, and consumption growth. Third, real economic activity will have amplified cycles. For example, consumption growth will be negatively auto-correlated in the medium run. Fourth, the equity premium will be large. Agents will perceive that equities are very risky when in fact long-run equity returns will co-vary only weakly with long-run consumption growth. If agents had rational expectations, the equity premium would be close to zero. Fifth, sophisticated agents—i.e., those who are assumed to know the true model—will hold far more equity than investors who use parsimonious models. Moreover, sophisticated agents will follow a counter-cyclical asset allocation policy. These predicted effects are qualitatively confirmed in U.S. data.”

@John Maynard Keynes
You jest with a cartoonish depiction of macro. Maybe you’re just joking and that’s fair enough, but these critiques seem to be commonly held so I’m going to reply to your points.

I thought we all had rational expectations

A lot of behavioural economics uses the basic ideas of rational expectations. Hyperbolic discounting, one of the most famous ideas of behavioural economics, is essentially just a rational expectations model with a quirky time preference.

and priced financial assets efficiently at all times

Nobody (sensible) says this is true. Shiller’s 1981 AER paper on share price movements must be one of the most cited papers ever. The Efficient Market Hypothesis doesn’t say all assets are priced efficiently at all times. You can have “rational bubbles”, etc. It just says that if the market could confidently predict that shares are going to change a lot tomorrow, they shouldn’t wait around and they should change right now. As a result, price changes are very unpredictable. This logic is entirely consistent with the empirical evidence that most stock brokers can only achieve returns around what the overall market achieves.

so that we could use a single representative consumer as a foundation of our macro models?

Aggregation of preferences doesn’t require efficient pricing of the kind of rational expectations that you’re implying. The easiest way (aka not fully correct way) of explaining of what’s needed for a representative agent model to “work” is that labour decisions don’t affect consumption decisions. That is if you work twice as long, this only affects your consumption in that you have twice the income. That’s not true so using representative agents is pushing it, but it’s much less a restriction than you’re implying.

The official report on the Fukushima nuclear meltdown said: “Its fundamental causes are to be found in the ingrained conventions of Japanese culture: our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with the program’; our groupism and our insularity.”

(90% of the staff at the nuclear plant were temporary workers – – i.e. people desperate for work; so the report relates to the 10%).

Over familiarity maybe more a problem in Ireland but pervasive spin has a malign influence on public policy. There is deference to politicians and there’s no point hiding behind a door, most academics before and after the crash have been timid lambs.

It’s striking that after the retirement of TK Whitaker, no senior civil servant has had the courage to say anything of substance in public.

Despite the crash, the current team in charge of enterprise policy are like clones of their predecessors.

The same mist of vacuous superlatives on innovation and trade is deployed and it would not have sustainability without a quiescent mainstream media.

Every time I encounter a press release waxing eloquent about 30 new jobs over 3 nor 5 years, I do wonder about the invisible people who lose their jobs with just basic redundancy, no pension and no interest from officialdom.

There was a ministerial press release issued today on exports, which means that there was something to brag about.

Now, keep in mind, that despite a SURGE in exports, there has been no net growth in job numbers since 1999. Don’t listen to fools claiming productivity rises!

Richard Bruton highlights an 11% rise in services exports but this results from bogus exports. In effect the tax strategies of 5 American companies in particular, are boosting Irish exports. Remember all those economists bragging about ‘moving up the value chain.’ Why are there NO jobs?

Bruton conveniently conflates the FDI and indigenous sectors but in most FDI firms, local staff have no control of the destination of their output.

Irish exports to India are a decimal point so a rise of 17% means little.

The Minister for Jobs, Enterprise and Innovation,  Richard Bruton TD, today (Friday) welcomed the latest goods trade figures published by the Central Statistics Office, which showed that exports increased by €518million (7%) month-on-month in May, on a seasonally adjusted basis.

The statistics also showed that: 

Exports of Chemical Products increased by 4.4% in May 2012 compared to May 2011, this included Organic Chemicals which increased by 8.5% and medical and pharmaceutical products which increased by 5%.

Exports to key target countries of Great Britain (18%) Germany (10%) India (17%) and Russia (6%) rose in the first 5 months of 2012 compared to the same period in 2011

Today’s news on goods exports follows the figures on services exports published by the CSO yesterday, which showed that services exports for Q1 2012 were running 11% ahead of Q1 2011.

Minister Bruton said: “As I have said before, a strong export performance will be crucial to delivering the economic and jobs recovery we are all working so hard to achieve. Conditions in the markets into which we export have been difficult over recent months, and today’s statistics do show some real challenges, but the signs of continued strength are very welcome. When taken alongside the recent figures from the CSO showing that economic growth was 1.4% in 2011 and not 0.7% as had previously been estimated, these figures show that there are signs of real strength in the Irish economy.

“The challenge now is to build on these signs of strength. Through the Action Plan for Jobs we are delivering important measures aimed at making it easier for Irish companies to export more, including the establishment of a Potential Exporters Division in Enterprise Ireland and a number of tax changes to make it easier for companies to locate staff in overseas markets. Major challenges remain but I am convinced that with continued strong implementation we can help create the conditions for the export-led jobs recovery we need”.

Strict disciplinarians in 2009

“Emergency treatment and strong medicines are sometimes necessary. But, if their use is prolonged, they can lead to dependence and even addiction,” ECB president Jean-Claude Trichet told a conference in Nov 2009.

“Eventually, the administration of painkillers must be stopped if patients are to get back on their own two feet,” he said, also warning that the ECB would have to whip away support “promptly and unequivocally,” if inflation flared.

Bundesbank president Axel Weber said regulators must be resolute about pressing ahead with reform and reject criticism for perceived over-regulation as markets start recovering.

“We don’t give a damn what anyone says, because we will just implement it,” he told the same conference. “It is very important for us not to fall prey to influences on the way up or down.”

“We have to turn very stubborn … and make the system more resilient,” said Weber.

@ Liam Delaney

Okay I’ve a question re libertarian paternalism, it might not make much sense but bear with me!

This short article argues from a political science perspective that the social science research doesn’t back up the claims made by those pushing paternalistic libertarian policies. They use markets for organs as an example:

http://www.newscientist.com/article/mg21228376.500-nudge-policies-are-another-name-for-coercion.html

“However natural, though, this won’t work because libertarian paternalists are often wrong on the underlying social science. For example, Thaler and Sunstein’s claims about the benefits of opt-out schemes are belied by little evidence it increases donations. According to Kieran Healy, a sociologist at Duke University, North Carolina, differences in donation rates are better explained by differences in organisational effectiveness than differences in opt-in/opt-out. It is not clear that opt-out would increase donations; unsexy but crucial reforms to regional schemes would almost certainly work better.”

It continues by arguing that “There is no reason to think technocrats know better, especially since Thaler and Sunstein offer no means for ordinary people to comment on, let alone correct, the technocrats’ prescriptions” which “leaves the technocrats with no systematic way of detecting their own errors, correcting them, or learning from them.”

So it ends up suggesting “democratic arrangements, which foster diversity, are better at solving problems than technocratic ones…..democracy is far better than even the best-intentioned technocracy at discovering people’s real interests and how to advance them”, and argues that institutional reform is a better alternative.

I’m sure this isn’t new to you, but as a short critique, how does it hold up? Is it a fair representation of Thaler and Sunstein’s arguments?
(Also Is there an academic article you could recommend on this subject to begin with – the less maths/models and jargon the better!)
Thanks

@rf

The organ donation example has definitely been overplayed in popular accounts of behavioural economics and often (and I am not blaming Nudge) the results showing enrolment rates by default setting are confused with what actually happens in terms of final donation rates. As pointed out by Healy and others, the nature of the consent system for organ donation is just one factor of many that affects donation rates and there are all sorts of correlations between types of consent system and other institutional features. In the Irish case, the family always have a veto in any case. In fact, we dont even have a register so the opt-in/opt-out distinction becomes even more muted. If we did establish a register and made it opt-out then its not clear at all that it would increase donation rates though it might have an advantage of making the decision more active for people. The organ case is certainly a good example of where we could go wrong by imagining a complex problem has a very simple solution. Healy’s well-cited paper on this is below and it certainly offers a cautionary tale about focusing too much on the default option.

http://bit.ly/Nr19tV

It doesn’t invalidate the idea that many large policy problems have features such as inertia underlying them. For example, there are now a number of studies showing that default effects matter for a wide range of important behaviours including pensions. In the pension case, we are changing pension systems in both Ireland and the UK on the back of behavioural autoenrolment findings. It is really important to look at what happens as these are being rolled out, including potential for unintended consequences such as anchoring people to too low a level. There are many things that can happen when policy experiments are scaled up. But to ignore the evidence on inertia when making policy would be a silly thing to do.

@rf

http://www.brookings.edu/research/books/2011/policyandchoice

“Traditional public finance provides a powerful framework for policy analysis, but it relies on a model of human behavior that the new science of behavioral economics increasingly calls into question. In Policy and Choice economists William Congdon, Jeffrey Kling, and Sendhil Mullainathan argue that public finance not only can incorporate many lessons of behavioral economics but also can serve as a solid foundation from which to apply insights from psychology to questions of economic policy.

The authors revisit the core questions of public finance, armed with a richer perspective on human behavior. They do not merely apply findings from psychology to specific economic problems; instead, they explore how psychological factors actually reshape core concepts in public finance such as moral hazard, deadweight loss, and incentives.

Part one sets the stage for integrating behavioral economics into public finance by interpreting the evidence from psychology and developing a framework for applying it to questions in public finance. In part two, the authors apply that framework to specific topics in public finance, including social insurance, externalities and public goods, income support and redistribution, and taxation.

In doing so, the authors build a unified analytical approach that encompasses both traditional policy levers, such as taxes and subsidies, and more psychologically informed instruments. The net result of this innovative approach is a fully behavioral public finance, an integration of psychology and the economics of the public sector that is explicit, systematic, rigorous, and realistic.”

Last year’s session below. Some of the papers will be out in special ESR policy issue in November.

November 25th Economics and Psychology Event Geary Institute

9.00: REGISTRATION

9.15: Organ Donation and Individual Consent- The role of Family Consent in Donation Systems.
Clare Delargy- UCD Geary Institute

9.45: Credit Cards: Friend or Foe.
Yvonne McCarthy – Central Bank of Ireland.

10.15: Understanding Taxpayer Behaviour – New Opportunities for Tax Administration.
Keith Walsh- Revenue Commissioners

10.45: BREAK

11.30: The Role of Economic Psychology in Students’ Term-Time Employment and Academic Achievement.
Martin Ryan- UCD Geary Institute

12.00: LUNCH

13.00: Corruption and Well-Being
Rob Gillanders – University College Dublin

13.30: Subcultures in Household Financial Decision-Making: An Exploratory Study of Risky Asset Ownership in the Netherlands.
Michael Dowling- DCU

14.00:BREAK

14.15: Political Determinants of Participation in a Recycling Programme
Marie Brugligio- University of Malta

14.45: Behavioural Economics and Policymaking: Learning from the Early Adopters.
Pete Lunn, ESRI

15.15: BREAK

15.30: Behavioural Economics and the Irish Pension System
Liam Delaney- Stirling University and Geary Institute

16.00: Is the health impact of socioeconomic status explained by objective financial resources or subjective social status?
Michael Daly – Manchester and Aberdeen.

16.30: Panel Discussion

Thanks for the responses Enda H and Liam, very interesting. I’m going to start reading through those links, very helpful thanks

@Liam d

“A class of parsimonious models leads to qualitatively similar biases and generates empirically observed patterns in asset prices and macroeconomic dynamics. First, parsimonious models will robustly pick up the short-term momentum in fundamentals but will generally fail to fully capture the long-run mean reversion. Beliefs will therefore be characterized by endogenous extrapolation bias and pro-cyclical excess optimism. Second, asset prices will be highly volatile and exhibit partial mean reversion—i.e., overreaction.”

It is interesting to speculate whether, for all the supposed sophistication, the industries that are macro-economic and financial analysis, and the financial media, effectively perform the function of parsimonious models. The idea being that the necessity to have ‘a view’ and ‘something to say’ at all times, forces over-use of data from whatever part of the hump these analysts and their customers are both interested in – that being whatever is the newest information.

I think it might be interesting to study the “Whale” model recently revealed at J P Morgan London and the interaction of economics and psychology in decisions which have so far cost 5.7billion dollars and likely to cost a lot more.

Good point that BE often associated with irrationality in consumer decision making when much of the research that developed the field was equally as concerned with gaps in expert judgment.

Popular book by Ariely summarising some of the lying and cheating research – http://n.pr/LiWxkT

“Chances are, you’re a liar. Maybe not a big liar — but a liar nonetheless. That’s the finding of Dan Ariely, a professor of psychology and behavioral economics at Duke University. He’s run experiments with some 30,000 people and found that very few people lie a lot, but almost everyone lies a little.

Ariely describes these experiments and the results in a new book, The (Honest) Truth About Dishonesty: How We Lie To Everyone — Especially Ourselves. He talks with NPR’s Robert Siegel about how society’s troubles aren’t always caused by the really bad apples; they’re caused by the scores of slightly rotting apples who are cheating just a little bit.”

1: We are not as clever as we like to think we are.
2: Every society invents a virtue to justify its social order. The Victorians used morality – we use intelligence – both false.
3: The markets and the masses are easily manipulated because people listen to people with money.

“Economics and Psychology One-Day Conference”

How about the economics and psychology of pet peeves?

In much of the ‘free’ world smoking tobacco is illegal, using bogus arguments about the cost of health insurance. The arguments do not count the savings on pension payments. These laws are mostly propelled by people who use the power of the state to address their own pet peeves.

In the US state of California a reasonable compromise on marijuana smoking was achieved by licensing consumers, as opposed to sellers. Even though the businesses called medical marijuana dispensaries operated with high standards of accounting and other business practices they are treated like narco traffickers and subject to armed police raids using pretexts like operating near schools (which is not a problem for pharmacies that prescribe opiates and amphetamines to children). While the production of marijuana need not be labor intensive, the laws in California make it labor intensive require expensive skilled workers.

Raw milk is another curious example. While it is obvious that people can injure themselves by using raw milk, it turns out that for most of human history people drank raw milk with no example of a large scale epidemic. It would seem that with today’s information, communications, and biological technology it should be possible to guarantee the safety of raw milk, yet somewhere in the establishment there is a pet peeve against it (possibly by people who are phobic about germs: bacillophobia). Raw milk in particular is an extremely labor intensive and well paid business (as the ordinary worker has substantial responsibilities and needs to be skilled).

In all these rants I am pointing that a psychological behavioral quirk by a government authority is imposed on an entire population and is destroying a more less harmless industry. In the case of raw milk there are arguments that it is actually superior to pasteurized milk.

But back in Ireland bacillophobia is destroying a potentially huge business.

The Campaign for Raw Milk in Ireland wants to stop to the Government’s proposed ban on the sale of Raw Milk

http://www.rawmilkireland.com/

Raw milk could be a tremendous opportunity for Ireland. If Ireland was the first and only place to give complete government support to raw milk, Ireland could achieve ‘first mover’ advantage and become the raw milk technology and business capital of the world. If that seems unlikely to you, Dalton Georgia, USA has maintained itself as the carpet capital of America (and in some sense the world) by getting on the tufted carpet bandwagon early and running with it.

Oh, and if the thought of drinking bacteria infested raw milk really bothered you, I am sure a shot of whiskey would take care of the little buggers and enhance the flavor of the beverage (think about the potential add on sales).

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