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Rebuilding macroeconomics

Spending today and tomorrow attending the Rebuilding Macroeconomics conference at the Treasury.

The programme looks very interesting - highlights include:


Ekaterina Svetlova's opening talk on "Imagining the Future", which I think will be quite relevant to System 3 and an idea I have been working on, prospective expectations: the concept that actors based their decisions not on a Nash equilibrium (rational expectations) or on a simple extrapolation of the past (adaptive expectations), but on the future they are best able to imagine.Sam Johnson on "The cognitive and affective processes that give rise to emergent economic order", which sounds right up my street.David Laibson on "Using model free data to predict future outcomes" - more in this case for the speaker than the topic."Markets as a function of language: microfoundations of narrative economics" by Douglas Holmes - a topic that has been studied both by Robert Shiller and by Tuckett and …

Neuroscience, psychology and economics: the evidence for System 3 (long)

In my last post I outlined the concept of System 3, what it is and why it matters. In short, System 3 is the mental ability to imagine the future and evaluate how happy you will be in it – based on how pleasurable the process of imagining itself is.

A lot of different research strands have come together to result in the identification of System 3 as a distinct mental process. I summarise the key steps here:
The fundamental building block of System 3 is the stimulus-response relationship. It has been known for a long time that people easily learn stimulus-response relationships when they are rewarded for the response. The classic examples come from Pavlov (who rewarded dogs with food and discovered that they would start to get excited when they saw the experimenter’s white coat – as any pet owner will recognise), and Skinner (who trained pigeons to learn that pressing a lever was associated with getting fed). Although these original experiments were done on animals, there is plenty of …

Introducing System 3: How we use our imagination to make choices

In recent years we’ve become used to thinking about decisions as “system 1” or “system 2”. System 1 choices are automatic decisions, made without thinking, based on an immediate emotional or sensory reaction. System 2 is used to stop and rationally calculate the consequences of our choices, and determine the best cost-benefit tradeoff.

But these two processes don’t capture every decision. Indeed they might only encompass a minority of our daily choices.

Recent work in neuroscience and psychology has discovered another way of making choices: with the imagination. Customers imagine their possible futures: the outcomes they would experience after a choice, and how those outcomes will make them feel. The future that makes them feel happiest will be the one they choose. These choices use different parts of the brain than System 1 and 2. They are called System 3 choices.

Think about how you might buy a car. System 1 would suggest that you see a colour, or shape, or brand of car, immed…

Book review: The Choice Factory by Richard Shotton

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There are few truly universal books on behavioural science: like most of the others, this one has a particular reader in mind. Richard's reader works in advertising, and it must be a rare advertising executive who still hasn't heard of behavioural economics. Richard therefore heads straight into the meat of the book with little beating around the rational-agent bush. A couple of connected anecdotes start us off and we quickly get to the first of 25 chapters, each on a single bias, that make up the body of the text.

The book is very readable, and even if you already know what the fundamental attribution error, the pratfall effect and Veblen goods are, you'll probably still enjoy the stories and quotes that illustrate them. I hadn't heard of some of the experiments and anecdotes that Rich discusses - and he and his colleagues have carried out many of their own original tests - so even as a professional in the field there is much here that's worthwhile.

Structuring …

A program for cognitive economics

I’m visiting the American Economics Association conference in Philadelphia this weekend and looking forward to catching up with the latest in theoretical and empirical research. Behavioural economics has received another endorsement this year with Richard Thaler’s receipt of the Nobel Prize. The behavioural field still has only a small minority of the conference’s papers, but many more than a few years ago. It finally feels like an accepted part of the broader field.
Echoes of a new discipline have started to emerge. Miles Kimball published a detailed NBER working paper in 2015 that defined cognitive economics as “the economics of what is in people’s minds”. Before that, a book and conference in 2004 discussed the topic, and a few others (including Marco Novarese and myself, here and here) have discussed it in the meantime. It seems that the term has been invented more than once in parallel - the term is after all a natural counterpart to "behavioural" economics.
The field i…

The amoeba and the squirrel

[An essay written for the Internet Review, a one-off maybe-to-become-annual publication documenting (and celebrating?) Internet trends]

Every human has two minds: one like an amoeba and one like a squirrel. The amoeba mind is reactive, emotional, intuitive. It decides immediately, without planning or consideration. It is Freud’s “id”, or the System One of behavioral economics: the amoeba is your unconscious. Your squirrel mind plans, trades off immediate pleasures for future gain, is capable of abstract reasoning and cooperation – the superego.

Being an amoeba is often more fun – maybe even more authentic – but the squirrel makes things happen in the long run.

Society also has amoeba and squirrel modes. The amoeba is the local interaction: follow your senses and do what’s in your direct interest, consequences be damned. Squirrel mode requires bigger institutions, and trust: in other people’s knowledge, a shared logical picture of the world, forgoing today’s profit for society’s long-…

The gender pay gap on Euristica: an imaginary island

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I recently gave a talk at TEDxCoventGardenWomen about an economic agent-based modelling system I have built (readers of Thomas Schelling may see some influence). In the talk I use this system to analyse ideas around privilege, prejudice and systemic inequality - and to test some policies that might help to solve the persistent gender and racial pay gaps that we still see in most societies.

The video is below - your thoughts would be very welcome.