Wednesday, 22 June 2016

How does it feel to be part of Europe?


I had this piece drafted before the murder of Jo Cox last week. But I don’t think it changes anything I was going to say. It simply makes it more urgent to say it.

May I introduce you to my two lovely young nieces? Natasha is four months old and Rosalind four years. They live in rural Devon, and they’re just starting to discover the world and decide how to feel about it. I want to think a little about what it might feel like to be in their world.

The campaign for Britain to remain in the EU has been full of facts and utilitarian arguments. Economic projections, dispelling of myths about regulations, estimates of the economic and tax contributions made by European workers in Britain. All the kinds of things that may convince you if your inclination is to weigh up the numbers and evaluate the facts.

But there are plenty of people who don’t want to make a decision based on numbers, and I understand that. Numbers can be manipulated. We don’t all have the time or desire to read and check and compare statistics. Some decisions are always going to be made on intuition. And the deepest, most powerful intuition is our emotions.

This is the ground the Leave campaign chose, and they’ve commanded it skilfully. They identified and tapped into angers and fears held by millions of people. For some, they have amplified that anger; for others, they have offered permission to vocalise something that was smouldering under the surface. There is no point trying to combat an emotion with facts; and perhaps more importantly, we have no right to tell anyone their emotions are not valid. That feeling belongs to them and they are entitled to it.

The emotions involved are of course more subtle than plain anger. It’s a web of linked feelings and experiences, arising from a set of messages that we’ve all heard and that we all interpret in different ways. So I wonder how Rosalind and Natasha will grow up interpreting those messages, what feelings they will have about Europe and about the relationship they want to have with other countries.

Maybe Rosalind will be among the many people who now experience more competition for jobs than they would have expected twenty years ago. Maybe she will feel the stress of applying for a series of jobs with no certainty of winning any of them. Economists might try to reassure her that if someone from Italy gets a job here, the money they earn and spend will (on average) create another new job, and she can apply for that one instead. But that’s too abstract to feel like a fair exchange, and many people simply don’t believe it.

The social environment they’ll live in has changed too. They’ll hear more languages around them than their grandparents and parents did in the 1950s or the 1980s. More kinds of food are sold in their local shops and more religions are practised in their neighbourhood. The world in general will be more complex and it may be tough to work out how to navigate it confidently. There’s a real psychological reason behind this. If I have less in common with my neighbour – in culture, behaviours, values, profession, clothing – or for that matter sexuality, politics, gender or ethnicity – I will know less about how they’ll react to my choices and actions. And we are social animals. Understanding our neighbours is a necessary part of living in a modern society. Living alongside difference makes it more taxing to work out the strategies of life.

Natasha, like us all, will make instinctive judgements about who she wants to govern her. Legitimacy in government does not arise only from democratic constitutional arrangements. Natasha will want to see something of herself in her leaders. Maybe even something a little more than herself – someone she is willing to put her trust in, to make better and more informed decisions than she would. Leaders have to have enough in common with those they govern so that we feel they can understand us and represent our interests. I can understand that it is easier to see that commonality in a politician whose face we see on TV every week, who probably speaks the same language as we do, than in someone more distant – regardless of their policies and beliefs.

On top of this, imagine the two of them are faced with a profound, existential fear about what is happening to the world. Conflicts in distant countries seem to be on their doorstep suddenly. Bombs burn down cities and their millions of terrified inhabitants flee – northwards and westwards.

Would it be any wonder if Rosalind and Natasha reacted with fear, suspicion, anger, to want to close and bar the doors, to give their vote to the people they know best, who look and sound most like them?

Maybe not. And yet.

There is also another way to respond, which arises just as naturally from who we are as human beings. The same facts – and even some of the same feelings – might form a different constellation.

In many of life’s spaces, difference is not a threat but a source of happiness. Think of the diversity we enjoy in our friends, in our food, in our football players, in the beer or wine we drink, the styles of clothes we wear, the cars we drive. The phones we use, the music we listen to, the people we desire, the films we go to see. Britain can be proud of its contribution in most of these fields. At the same time, we are all better off for having access to what everyone else makes too. A kebab with your Carling, or a claret with your Cheddar – what could be better? And if Rosalind in a few years feels like changing her environment a bit more – if only for a fortnight – she can hop on a flight to Prague or Marbella or Crete to be part of someone else’s town, and see what their life is like.

It’s a short step from there to a chat with the Polish or Spanish family who live on the farm next door and work in the village shop. They chose to come here from their own home. They’re probably admirers of our culture, who want to adapt to it, not change it. We like to live in societies where not everyone is the same. Not everyone I know does the same job, supports the same team or does the same thing on a Friday night, and I wouldn’t want them to. We’d have nothing to talk about. The distance between someone I don’t understand at all, and someone who is simply different, is only a conversation.

Once I’ve spoken to my Muslim or Orthodox Jewish neighbour, or the Hungarian barista in the café, I have an idea of how they live their life and how it differs from me. It becomes much easier to live alongside them without awkwardness or mistrust. Suddenly that different culture is a source of new ideas and things to talk about, instead of a threat.

For some people, the perception that it’s harder to find a job will be correct. If Natasha can’t find work in what she is trained for, it will be tough. But at least she will have the chance to explore the rest of Europe and look there – which will be easier if she has grown up alongside French and Polish and German neighbours than not.

Those new workers are also, however, filling one of the biggest holes in the lives of our communities – they are taking care of our parents and grandparents. Availability of care workers and medical staff genuinely makes the lives of patients much better, whichever country they come from. If the modern economy doesn’t make it easy for my sister, brother and I to live with and care for our own parents, I hope there will be a dedicated and friendly person – from whatever country – who can step in and help. And while my parents fortunately don’t need care yet, they both live in rural areas where the availability of builders, electricians and pub workers from both Britain and Europe is essential to their quality of life. I know they appreciate the services those people provide, whatever their accent.

As well as listening to our neighbours I hope we can also listen to the people who help make our laws; and to recognise the dilemmas they face in balancing different interests in society. The balancing act carried out in Westminster is just as hard as the one faced in Strasbourg. Our politicians, mostly, have good intentions and try to strike the balance they think is right. We’ve heard tributes to the spirit and values of one in particular in the last week, but most other MPs, and most MEPs, and most commissioners or cabinet ministers, are like her too. We should keep holding them to account democratically, to make sure the choices they make are in line with the values we see in ourselves and want our governments to reflect. While doing this, we can sympathise with them too.

If some decisions made at European level are a compromise between our needs and those of other countries, we can speak up and make sure our opinions are heard. And we won’t mind making those compromises occasionally, because we care about what others need as well as about ourselves.

One of the toughest decisions those representatives face is what to do when two million people are suddenly homeless and in mortal danger in Syria, across a narrow sea from the (relatively) well-off, safe communities we live in. Those people have a way of life even more different from ours than the Slovenian or Greek who works along the road from you. It may be harder to empathise with them; and yet the power of our humanity is that we do it anyway. We, or at least our parents, still remember wars on our own land; refugees we sheltered; the bonds of common purpose that gave us the strength to overcome hate seventy years ago and rebuild the democracy that we are so proud of in this continent.

Our life in Europe can be based not on fear, but joy. My nieces, and my cousins a few years older, are young enough to simply have fun with Europe; to remix its different cultures, learn a few words, drink its wines and eat its foods; to bring over there the things that other Europeans love about Britain (Adele, Shakespeare, whisky, the BBC, the Rolling Stones) and swap them for the things we like about them (Daft Punk, Sophia Loren, mozzarella and BMWs). To get a Dutch boyfriend or a Croatian girlfriend, spend a year in a Spanish university, or backpack around the Balkans. I am excited by the idea that the territory I live in has every kind of landscape from desert to snow, lush valleys and hot beaches, cold seas and warm ones; that I can eat deep fried cod, fresh oranges and Dairy Milk chocolate all from the same brilliant, mixed-up continent.

I know we can still get some of this by trading with Europe from the outside, but if we leave, the basic assumptions that we live with, how we perceive our identity, will change. This choice is not really about the practicalities but about the principles our world lives by. And there are still some things we can’t have, and can’t help with, from the outside.

Our relationship with those slightly different people who live a few hundred miles away need not be one of anger. Instead, let it be one of love. We should be proud of an amazing, under-recognised gift we have been able to give to a dozen ex-communist countries: to accept them into a community that has enabled both them and us to become richer. Poland is the fastest-growing major economy in Europe and millions of people are now several times better off than they were 20 years ago. Richer in money but also in culture and friendship. It may be their turn in the next few years to pass that gift on to a few countries a little further east, or south. We may choose to help then too.

And by the time Rosalind and Natasha are my age in a few decades, that gift of love and investment will have been repaid many times. The cultural riches, the human contact, the things they will buy from us with their newly grown economies – and most importantly of all, the wars we will never know about because they didn’t happen. The peace that Britain helped bring about, that Western Europe has built with us, and that has gradually crept eastwards, will roll two thousand miles further.

If we let fear and anger give way to joy and love tomorrow, this is the future that is available. I hope this is how Natasha and Rosalind will grow up thinking about Britain and Europe, about us and the Europeans who visit us. They and their own children could grow up in a country cut off and a world that distrusts itself, or they could play a full part in a world where we and our neighbours have fun together and care about each other. If you think I’ve described a global society that you and your children might like to live in, I hope you’ll feel comfortable voting on Thursday to keep our European friends part of the family.


Monday, 28 March 2016

Discussion 2 of 3: No spooky action at a distance - a theory of reward

One of the most powerful ideas in physics is the principle of locality. This principle insists that objects can only be influenced by other objects that touch them. Two items separated by a distance cannot directly exert any force or influence on each other, but must communicate via some medium which physically transmits the force from one to the other.

Albert Einstein described this principle as "no spooky action at a distance" and it applies to his theory of gravity as well as all the other physical forces (it gets more complicated when we consider quantum mechanics, but that would take a whole other article). The Scottish physicist James Maxwell also used it in developing his theory of electromagnetism.

Instead of the magnets directly pushing or pulling each other, each magnet creates an electromagnetic field, and sends out the field into the world around it, transmitted by light waves. When another magnet passes through the field, it is affected because the field has now reached the same point where the object is. The two objects are not directly attracting each other; the force is mediated by the electromagnetic field.


A more familiar example is a chain of dominoes. The last domino doesn't fall as a result of the first one being knocked over. It falls because the second last one is knocked over. That in turn happens because of the one before it. The first and last domino can only affect each other because of all the other dominoes in between.

A different way to think about this principle is in time instead of space: the ultimate result of an event can never be a cause of how the event happens. The first domino doesn't fall down because the last one is going to; indeed, if you ever played Domino Rally as a kid, you will know that when the first one falls, it's often entirely unpredictable whether the last one will also go. Each domino only has a local field of influence: just it and the ones that can physically touch it.

What if we apply this principle of locality to economic decision-making?

We are used to talking about decisions based on "future reward" or "future returns". I don't eat the marshmallow now, so I can have two of them later; I save money now because I will receive interest next year; I exercise today so I can enjoy being healthier in later life.

But can a future event actually cause an event in the present? Can my future health cause me to exercise today? Surely not – that would be time travel.

The principle of locality says that a decision I make today can only be based on stimuli and causes right here, right now in the moment of the decision. Future events cannot influence it. (Neither for that matter can past events, or costs and benefits that will take place outside of my direct experience). My brain and the physical atoms that make it up only know about immediate, present influences. Thus, my decision can only be affected by feelings, rewards and costs that I experience at the time of making it.

In practice, however, we do regularly make decisions to defer gratification. We appear to take into account outcomes that happen later, or outside of the decision context (just as the magnets really do attract each other, even though they are not touching each other). How is this paradox resolved?
The key here is to understand how the outcomes are mediated – how those future benefits can indirectly influence the present. The future reward does not directly cause my decision today. My 65-year-old self does not reach into his past and make a pension contribution. Instead, it's my current feelings and beliefs about the future reward that matter. I can only take that future reward into account if I get some kind of immediate payoff for doing so.

That payoff might be the feeling of security that comes from knowing that my retirement is being provided for. It could be the positive feeling of going along with socially acceptable behaviour. Conversely, the guilt associated with eating a doughnut may stop me eating one. All of these are feelings experienced now, by my present self, even though they are based on what might happen in the future. Whatever it is, I need to get something now to make me act now.

Even though those feelings and beliefs are related to the future, they still cannot directly be caused by future benefits. My feeling of security isn't actually a result of my future comfortable retirement. It's a result of me imagining now what my retirement might be like. My brain has to be able to predict the future, and somehow take an action now based on imagining something good in the future.

This leads to an important conclusion. The brain must have a mechanism for forecasting future outcomes. Having made its forecast, it must be able to produce a present value for each of them – converting it into some immediate force that can influence current decisions. It makes sense to believe that whichever outcome produces the highest immediate force will be chosen by the decision maker.

So, instead of picking options based on which one brings the highest predicted reward, the brain chooses whichever makes the highest immediate impact at the time the decision is made. The size of this impact is certainly related in some way to anticipated reward, but is not the same thing. It is calculated by some mental mechanism that predicts decision outcomes. An obvious research question which follows from this is: how does this brain function translate one quantity (anticipated reward) into another (immediate influence on decisions)?

My last post suggests a possible mechanism by which this could happen. The mind contains an associative network that makes a model of the world, tests out actions and their consequences, and estimates the amount of reward that is likely to be generated. That's just one hypothesis of how this process could work; whatever the mechanism in reality, there must be some process that can estimate which of two anticipated outcomes is better.

That insight leads to a very important question. We know the mind has the ability to experience pleasure from receiving certain sensations. But does it have two separate mechanisms: one for experiencing actual pleasure, and another for weighing up anticipated pleasure in order to choose between two options? If the pleasure I gain from actually eating a doughnut is measured in (for example) micrograms of dopamine, in what units do we measure the anticipated pleasure when I imagine eating the doughnut?

Neuroscience (e.g. this 2014 paper by Linnet) and Occam's razor both suggest an answer with far-reaching consequences. The simplest explanation, and the one that requires the least neural machinery in the brain, is to assume that there is a single quantity in the decision process that does both duties: evaluating immediate sensations and evaluating anticipated outcomes. In other words, we get exactly the same kind of reward from thinking about future pleasure, as we do from experiencing pleasure right now.

This poses an interesting scenario: the question of trading off current reward versus imagined reward in a single decision (one marshmallow now versus two marshmallows in the future). In order for me to exchange the actual pleasure of a marshmallow now for a the imagined pleasure of two, the immediate reward from imagining two marshmallows must be greater than the reward from eating one. In some situations that's the case, but in others it is not.

There's a complication to this: if I get so much pleasure from imagining future marshmallows, why wouldn't I eat the marshmallow now and imagine the future ones? I could go around imagining marshmallows all the time and get unlimited pleasure from it. There are reasons, though, why this wouldn't work: to be discussed in a future post.

As a reward for getting to the end - for those who did have Domino Rally as a kid, take a look at all the add-ons we couldn't afford:



Saturday, 23 January 2016

Discussion 1 of 3: Where do goals come from?

Discussion number 1 in a series of 3: on goal-setting

Much of decision-making psychology (and by extension behavioural economics) explores the processes by which people solve a problem or achieve a goal. Usually the papers in this field contrast the rational, expected-utility way to solve these problems with the approaches people actually use in practice.

An important question they rarely address is "Why that goal?" How is it that people choose the particular problem they want to solve, the objective to work towards? In the psychology lab, the answer is easy: the person in a white coat gives it to them. In real life, that doesn't happen.

Answering this question is essential to developing a comprehensive theory to replace or challenge classical economics. Standard microeconomic theory has a clear, simple answer to this: we always have the same goal, maximising utility. Any other objective (finding the best job, working out how much money to save, picking what to eat, choosing a romantic partner, deciding whether to rob a convenience store - to pick at random from the typical subjects of economics papers) is a means to an end. According to the classical theorist, we choose between these different goals based on which we think will bring the highest marginal utility. Independent goals which don't conflict with each other are pursued more-or-less simultaneously: I seek a promotion at work during the day while trying to find the ideal spouse at night, choose the best mutual fund at lunchtime and weigh up the risk and reward of the convenience store holdup before bed.

Psychologists, while rightly challenging the claim that I can simultaneously optimise across all these different life goals, don't propose an alternative way to choose between them. My conscious problem-solving mind can only focus properly on one objective at a time, but which one?

The fast-and-frugal heuristics school gives an argument that simple heuristics are the best way to solve apparently complex problems like catching a baseball, allocating investment money or walking through a crowd, but doesn't tell me why I want to catch the baseball or invest money in the first place. The heuristics and biases approach tells me that I am anchored on a particular rate of return for my investments but not whether I will spend this afternoon trying to beat that rate or watching football.

You could easily ignore this question and assert that sooner or later I'll get round to dealing with most of the important problems in life, and that the real work of psychology should be focused on how I'll tackle them. But there are plenty of counterexamples. Many people never get around to thinking about investments or savings, or not until it's too late to do anything meaningful about them. Our success in achieving health objectives is strongly influenced by what we spend our time thinking about - unconscious eating and conscious exercise are in conflict. Status quo bias in the labour market and in consumption patterns is responsible for lots of apparently suboptimal behaviour and there's a strong argument that the cause is a (possibly rational) lack of attention to the goal.

Here is a candidate theory of how we select our goals.

I draw inspiration from a Glöckner and Betsch paper, Modeling option and strategy choices with connectionist networks. Although this paper is within the narrow paradigm I'm critiquing - how do people solve a problem that is exogenously given to them - it contains a model we can borrow to address the broader problem. They propose that the mind answers questions by collecting data and using it to populate a network of nodes representing a model of the problem it is working on. It tests how self-consistent this model is, and if it is highly consistent it is more likely to consider the problem solved. If it is not consistent (e.g. two different answers to the question can still be true within the mental model) the mind seeks out more information to try to increase consistency. As they say:
"One of the basic ideas of Gestalt psychology (e.g., Köhler, 1947) is that the cognitive system tends automatically to minimize inconsistency between given piece of information in order to make sense of the world and to form consistent mental representations"
The unconscious (automatic) mind determines that there are two or more inconsistent ideas simultaneously held, and prompts the conscious (deliberative) systems to gather more information with which to populate the model, in order to try to resolve the conflict between them. This process continues until the mental model reaches a certain level of consistency - in effect, when it stops changing and reaches a stable representation. This representation is taken as the answer to the question.

In a very different context, John Yorke writes:
"The facts change to fit the shape, hoping to capture a greater truth than the randomness of reality can provide."
I propose that the mind relies on a similar connectionist, associative network to choose which goals to focus on.

This network represents the actions that the decision maker could take, the consequences of those actions, and the reward that would accompany those outcomes. In any situation a person could take thousands of potential actions with tens of thousands of consequences, and it is unlikely the mind (even the highly parallel automatic system) can simultaneously evaluate all of them. Instead, a small subset of those potential actions and outcomes will be activated by sensory stimuli or familiarity: nodes representing regular, repeated actions are likely to remain active much of the time; nodes representing outcomes such as the satisfaction of hunger may be activated by biological need, and other less frequent actions or consequences may be activated by seeing or hearing messages which remind us of them.

Activation automatically spreads from node to node in this network. The network's connections link actions to their consequences - the action of eating food links to satisfaction of hunger; saving money is linked to a higher bank balance, which in turn links to an emotional payoff from feeling secure; smoking a cigarette links to the quieting of cravings and a feeling of relief. Thus, when an action is activated a consequence will become active; and vice versa, when an outcome is activated the actions which could lead to it will also become active. If only one action-node is activated, the decision maker will take that action. If only one outcome-node is active, the decision maker will choose to pursue that outcome. At this point a goal has been set, and the well-studied processes of decision making will take over.

If nodes representing more than one potential action or outcome have been activated, the automatic system needs to keep working, until it can resolve which one to pursue. This work includes the further spreading of activation to other nodes in the network (the food-eating node could activate nodes that represent spending money and gaining weight, the hunger-satisfaction node could activate alternative actions that lead to the same outcome) which in turn may connect back to some of the same nodes, increasing their activation further. The network might "test out" particular outcomes by activating nodes that represent their second-order consequences. The activation is diluted by this point; the earlier nodes were strongly activated; these ones are weaker.

At this point a similar kind of consistency-testing to that proposed by Glöckner and Betsch comes into play. The activated, imagined actions and outcomes are tested against sensory input and knowledge about the outside world. Are these outcomes plausible? Can I actually take these actions? Are they consistent with what I believe about how the world works? If so, the activation, and the relationship between actions and outcomes, is reinforced. If not, the activation is reduced and the network keeps looking for a consistent, stable, combination of action and outcome.

Eventually, that stable set of active nodes will emerge; or perhaps two or three combinations will continue to compete for attention and plausibility. If so, again following the template of Glöckner and Betsch, the deliberative system comes into play and selects between them. The deliberative mind applies symbolic, logical or linguistic forms of reasoning and decision making instead of the connectionist, activation-driven process of the automatic mind. These symbolic processes (and the biases that can affect them) are the stuff of most decision theory, and I defer to the accumulated body of science to tell us how they work. My claim here is only about the automatic process that selects the options between which we deliberate.

The outcome emerging from this process becomes the goal we consciously seek. It will be paired with an initial action, though that action alone may not be enough to achieve the goal, in which case a planning process of some kind has to take place - again, thoroughly explored by existing decision theory.

This model tells us something about why certain goals or actions might be preferred to others. If an action is particularly salient or easy to imagine, we are more likely to focus on the outcomes that follow naturally from it. If an outcome is particularly consistent with our mental model of the world, we are more likely to take the actions that will cause that outcome. The availability heuristic, effects related to salience and attention, and confirmation bias are all natural outcomes of this emergent-goal process. For now it is a theoretical model, but it is not too hard to imagine empirical tests for it.

Of course, the outcome you choose should not only be consistent with your view of the world, but also be a rewarding one. I agree with both the classical economist and the behaviourist that reward drives us to choose outcomes, and therefore the actions that lead to them. But we clearly do not apply probabilistic, utilitarian calculations to estimate and respond to that anticipated reward, and simple behavioural conditioning is not enough to explain the rich, complex actions and plans we make. In the next post in this series I will suggest a more plausible way to think about reward, how it motivates us to act, and what this means for how we experience life.

Tuesday, 23 June 2015

My writing elsewhere

I haven't been very active here recently, but here are some links to my writing on other sites:


  1. An article for RW Connect about the UK election polls and how behavioural methods could make polling more accurate.
  2. A journal article in the International Journal of Market Research (subscribers only, sorry) about behavioural conjoint analysis methods.
  3. An article in the proceedings of the DCAI conference, "When can cognitive agents be modeled analytically versus computationally?"
If you don't have access to either of the latter articles, drop me an email and I can send you the proof versions.

Sunday, 23 March 2014

On the identity and methods of behavioural economics

The FT has a very good article from Tim Harford today, surveying behavioural economics and asking some important questions about it. People within a field can be so immersed in their unconscious assumptions and practices that it takes an outsider to point out some of the questions they are not asking.

Tim says:
The past decade has been a triumph for behavioural economics...[which] is one of the hottest ideas in public policy....Yet, as with any success story, the backlash has begun. Critics argue that the field is overhyped, trivial, unreliable, a smokescreen for bad policy, an intellectual dead-end – or possibly all of the above. Is behavioural economics doomed to reflect the limitations of its intellectual parents, psychology and economics? Or can it build on their strengths and offer a powerful set of tools for policy makers and academics alike?

Quite. That, of course, is a journalistic question - not one intended to be answered within the article, but designed to provoke the prospect of a good ding-song. But the substantive points come soon. Note that Tim, writing for a generalist FT-reading audience, chooses to address his article to public policy so it doesn't look like an abstruse argument between academics. But actually it's about the effectiveness of BE, and economics in general, as a tool at all. Public policy, private decisions, how businesses operate - all can be informed by whatever economic theory we believe in.

...there is something unnerving about a discipline in which our discoveries about the past do not easily generalise to the future...This patchwork of sometimes-fragile psychological results hardly invalidates the whole field but complicates the business of making practical policy.

Indeed - and it divides the field, into those who believe a (more) unified theory is available, and those who believe rational choice is still the main theory available and that behavioural results are only meaningful in relation to that.

The line between behavioural economics and psychology can get a little blurred. Behavioural economics is based on the traditional “neoclassical” model of human behaviour used by economists. This essentially mathematical model says human decisions can usefully be modelled as though our choices were the outcome of solving differential equations. Add psychology into the mix – for example, Kahneman’s insight (with the late Amos Tversky) that we treat the possibility of a loss differently from the way we treat the possibility of a gain – and the task of the behavioural economist is to incorporate such ideas without losing the mathematically-solvable nature of the model.
Consider the example of, say, improving energy efficiency. A psychologist might point out that consumers are impatient, poorly-informed and easily swayed by what their neighbours are doing. It’s the job of the behavioural economist to work out how energy markets might work under such conditions, and what effects we might expect if we introduced policies such as a tax on domestic heating or a subsidy for insulation.

And the problem today is that, without a clear theory, behavioural economists can't work that out. All they can do is suggest various effects that might happen, and design an experiment to test them. Nothing wrong with that, but it's a bit ad hoc.

The most well-known critique of behavioural economics comes from a psychologist, Gerd Gigerenzer of the Max Planck Institute for Human Development. Gigerenzer argues that it is pointless to keep adding frills to a mathematical account of human behaviour that, in the end, has nothing to do with real cognitive processes.
David Laibson, a behavioural economist at Harvard...concedes that Gigerenzer has a point but adds: “Gerd’s models of heuristic decision-making are great in the specific domains for which they are designed but they are not general models of behaviour.” In other words, you’re not going to be able to use them to figure out how people should, or do, budget for Christmas or nurse their credit card limit through a spell of joblessness.

We come back again to the need for a general theory, and one of behavioural economics' regular combatants agrees:

For some economists, though, behavioural economics has already conceded too much to the patchwork of psychology. David K Levine, an economist at Washington University in St Louis, and author of Is Behavioral Economics Doomed? (2012), says: “There is a tendency to propose some new theory to explain each new fact. The world doesn’t need a thousand different theories to explain a thousand different facts. At some point there needs to be a discipline of trying to explain many facts with one theory.”
The challenge for behavioural economics is to elaborate on the neoclassical model to deliver psychological realism without collapsing into a mess of special cases...The question is, how many special cases can behavioural economics sustain before it becomes arbitrary and unwieldy? Not more than one or two at a time, says Kahneman. 
Thaler says: "...if you want one unifying theory of economic behaviour, you won’t do better than the neoclassical model, which is not particularly good"

It seems that Kahneman and Thaler actually agree with Levine in a way; all three doubt that behavioural economics can crystallise into a single theory, though only Levine thinks this is a serious problem.

George Loewenstein and Peter Ubel wrote in The New York Times that “behavioural economics is being used as a political expedient, allowing policy makers to avoid painful but more effective solutions rooted in traditional economics.”

This point is different but important: if policymakers expect behavioural economics to be a substitute for regular economics they'll be disappointed. The two are complementary, and the most important policy contribution of BE may be to tell us which economic incentives will have the biggest impact, and which will have unwanted side-effects, rather than to obviate the need for traditional incentives altogether.

Should we be trying for something more ambitious than behavioural economics? “I don’t know if we know enough yet to be more ambitious,” says Kahneman.

That's a provocative point. Yet it acknowledges that whatever field eventually manages to incorporate both traditional and behavioural economics may have to be called something different.

Laibson says behavioural economics has only just begun to extend its influence over public policy. “The glass is only five per cent full but there’s no reason to believe the glass isn’t going to completely fill up.

I and many readers of this blog will probably be with Laibson on this point. But perhaps without a new approach, behavioural policy is going to run more and more often into the wall of adhockery - the lack of general theories making us redo things from the ground up in each new situation.

Tim isn't the only person to write about this recently. For a contrary word, try Chris Dillow's comment, which makes some good challenges from his usual half-libertarian, half-Marxist point of view.

Then, here are some links and thoughts from Diane Coyle, including "Is behavioural economics the past or the future" by Chris House. Diane hones down one of Tim's questions into Kao and Velupillai's distinction between classical and modern behavioural economics: modern assumes people are (biased) optimisers, while classical assumes they are satisficers. This is the same distinction drawn by Gerd Gigerenzer, though his research looks at a broader range of decision-making heuristics, of which satisficing is just one. Diane asks, effectively: is the best mathematical approach to tweak the models of maximisation, or to try to build a new behavioural economics based on heuristics?

Chris House's post says:
...in 2007-2008 we were again told that behavioral economics would finally come into full bloom. It didn’t happen though. The wave of behavioralists never came.

While this isn't true in psychology or behavioural policy and marketing - all thriving and fast-growing fields - it is true of economics. My experience is that many new economics undergraduates or entrants to economics PhD programs are intrigued by behavioural ideas, they are often guided by supervisors into more traditional areas where it is easier to define a research question that is going to produce safe, publishable papers. Barkley Rosser, commenting on House's post, mentions the new journal Review Of Behavioural Economics, which along with other emerging initiatives may help to change this.

Otherwise, Chris raises that same point:
Behavioral economics won’t get very far if it ends up being just a pile of “quirks.” Are these anomalies merely imperfections in a system which is largely characterized by rational self-interest or is there something deeper at play? ...if behavioral is to somehow fulfill its earlier promise then there has to be some transcendent principle or insight which comes from behavioral economics that we can use to understand the world.

Then there is the David Levine paper that Tim mentions, "Is Behavioural Economics Doomed?". In this, Levine says (among many other interesting things!):
For most decisions of interest to economists these external helpers [computers, paper and pencil etc] play a critical role – and no doubt lead to a higher level of rationality in decision making than if we had to make all decisions on the fly in our heads.

What a brave claim! Do we really rule out from the realm of economically interesting decisions all consumer purchases, the consumer's intuitive feelings about how safe they feel with a certain amount of savings in the bank, and all the decisions about cars, houses and jobs that - although someone might sit and think about them for a while - still involve a big chunk of emotion?

Actually, there is no need to throw out these kinds of decisions in order to meet Levine's key challenge of "trying to explain many facts with one theory." He asserts that mainstream economics is already successful at explaining many facts. But perhaps, when he discards all those "uninteresting" decisions it isn't so hard to explain what's left. Indeed, it's those "uninteresting" decisions which classical economics does struggle with, and only behavioural economics can illuminate. Contrary to Levine, I am convinced that these decisions actually make up the majority of important economic events. But I do recognise his critique - echoed by Tim and implicitly by Velupillai and Gigerenzer: that behavioural economics does not offer a full theory to replace that of mainstream economics. However, it has given us good empirical evidence which we could build a theory on.

As well as defining away a large portion of the economy as "not interesting", Levine also co-opts some of the parts that he does consider interesting, saying they are already handled by mainstream economics: notably the subject of learning. Non-behavioural economists have considered consumers' imperfect ability to learn the preferences of other consumers, or the rules of the "game" they are playing, as a factor in non-optimal decisions. But psychologists know much more about exactly how people learn than economists do - so a successful model of learning as part of economics can only be built with an openness to psychological research. Where Levine may be right is that behavioural economics will not replace mainstream economics, but instead the two fields will merge - with the behaviour of consumers predicted by a combination of objective economic, and subjective psychological, factors.

Anyway, arguments over the boundaries of disciplines are rarely productive: I don't really mind if Levine considers a model to be behavioural or not, as long as the model advances the cause of making successful predictions.

The real questions are: does standard economics fail to address some important problems? How good is behavioural economics at addressing them instead? And does behavioural economics need a unified approach in order to address them?

Most of the people mentioned above have different answers to those questions:

  • Levine wants a unified theory - but think we have to exclude many types of "uninteresting" decision in order to get one.
  • Kahneman and Thaler want different theories for several different areas - but those incompatible theories will not be able to deal with the many boundaries where different aspects of economics interact with each other.
  • The classical economists already have a unified theory - but there are many things it can't explain.
  • Gigerenzer has a philosophy - but no overall theory. And I'm not sure if he expects or really wants a unifying theory any more than Kahneman does (this may be one of the few things they agree on).
[Update: much of this debate was anticipated in this Werner Guth paper of 2007]

My view, which I think concurs with Laibson's: a single broader theory is possible. I think we've hit a theoretical dead end with the traditional maximising agent, so it will have to be based on more psychologically realistic foundations, such as those of Velupillai, Gigerenzer or Bettman, Payne & Johnson. To achieve this, we need to carefully choose the right elements to build into our model of decision-making in a way, so that it can make useful predictions of how those elements might operate. I have a paper coming out later this year which suggests one direction towards this.

Tuesday, 31 December 2013

Catching up on 2013

I didn't intend to stop posting on here when I started my tour. But things overtook me. Here's a summary of what some of them were:

  • My book, The Psychology of Price, came out. You should buy it!
  • I started a new business, The Irrational Agency, with a business partner. We've taken the ideas of behavioural economics into the market research and marketing worlds, and tried to go a bit deeper than some of the agencies who appear to have based their behavioural services on reading the first half of Predictably Irrational. We've developed a decision process model (based on some ideas regular readers might have seen on here last year) and been lucky enough to work with some quite cool clients to apply it.
  • I developed my theory of cognitive microfoundations a bit further. It's now primarily based on information processing and attention, informed by a range of empirical decision-making work and on some theoretical work from the likes of Payne, Bettman and Johnson and the adaptive toolbox of Gigerenzer and Todd. I've taken the ideas forward at two workshops – the Summer Institute on Decision Making at the Max Planck Institute, and the EADM JDM Young Researchers' Workshop.
  • There has been some development of similar ideas by other economists too: Xavier Gabaix and Michael Woodford for example (more on their work in a post from the AEA conference soon).
  • I've presented at a few academic conferences - ICP, ICT, SJDM, SPUDM...and some other places like the Professional Pricing Society and conversionsummit
  • A few ideas on intangible products have started to emerge - first into a pricing workshop and maybe into a new book next year.
  • I've visited India, Cuba, South Africa, Canada, the US, Spain, Germany, Switzerland, Estonia, Finland and Denmark to follow all these ideas through and meet a bunch of pretty exciting people.
  • I've been doing some writing for other places: as economics editor for the InDecision blog, behavioural blogger for RWConnect, and a contributor to Research Live.

But enough about me. I'm not sure if this break from the blog counts as rational inattention, but I'll get back into the habit of posting regularly in the new year.

Thursday, 7 June 2012

The Cognitive Microfoundations Project: a behavioural economics world tour

There has been much talk about microfoundations on the economics blogs in the last few months [Noahpinion, Mark Thoma, Simon Wren-Lewis twice, Andrew Gelman twice, Karl Smith, Paul Krugman twice, Robert Waldmann, Rajiv Sethi from 2009]. The idea of microfoundations is that a model of the overall economy should be consistent with how individual people act. The aggregate behaviour of variables like GDP, government deficits and unemployment should be derived by adding up the choices of individuals, not by treating the whole population as if it were a single entity.

(A microfounded model might start off like this: "Imagine N agents, each of which has income yn, consumes cn and saves sn. Then yn = cn + sn. For each agent, sn varies with the interest rate r according to the following relation..." while a non-microfounded model is more likely to start: "Total spending in the economy is C and saving is S. C+S must sum to Y, total income. S varies with the interest rate r...")

But does the microfoundations approach really work? It seems a good idea in principle. It works well in some other fields like physics and chemistry (though less so in biology). Building things from the ground up protects us against falling into certain mathematical traps. Some concepts (like the idea of people trading different goods with each other) don't really even exist at the aggregate level, so are hard to talk about without microfoundations. The idea that we can understand things in this level of detail is an appealing one.

Unfortunately, the idea of microfoundations has come to be closely associated with rational agent theory. Most microfounded economic models are implementations of DSGE (dynamic stochastic general equilibrium), which assume a population of rational utility-maximising agents who are given certain preferences and resources and respond logically to those. Readers of this blog, or of any behavioural economics book, will be unsurprised to hear that real people do not maximise utility in the way DSGE models insist - as demonstrated in numerous psychology experiments. Economists usually respond to this objection in one of two ways, neither of them quite satisfactory.

Response one: to claim that rational utility maximisation is close enough to the truth to describe the economy reasonably well. Sure, there are exceptions: people might not always discount future earnings in a consistent way, and sometimes we buy things because they’re on sale and not because our utility from the product exceeds the price paid - but those are minor errors, they mostly cancel each other out, we learn to be more rational over time, and the limits imposed by our income force us to act fairly rationally. So, DSGE models, maybe with a couple of small tweaks, are still the best way to describe the economy and work out how to manage it. We can still make inferences about how tax rates will change the choices of individual workers, or how interest rates will affect investment and savings decisions, and draw conclusions from that about how the whole economy will evolve.

Response two: to agree that individual rational agent models are too far from the truth to be useful but then to give up. For many, the failures of economic forecasting in the leadup to the 2008 crisis prove this. There are better ways to describe individual decisions - behavioural economics gives us some hints - but these are mathematically too hard to build models with. Therefore we shouldn’t bother with microfoundations - instead, we should reason from aggregates, such as the total amount of money, production, employment and debt in the economy. It is possible to work out, for example, that if companies try to save more money (as we can see they currently are), individuals try to pay off their debts (as they are), and governments try to cut their deficits (as they say they are) something must give. The model may not tell you which one will fail, but it can tell you that something must. These models can’t describe all economic phenomena because the aggregates don’t always tell you enough, but maybe they are all we have.

The first response is wishful thinking. The second is fatalism.

What if there is another way? Maybe, by choosing the right models from cognitive psychology and behavioural economics, and aggregating them in the right way, we can develop an accurate representation of large-scale systems after all. Then perhaps we can get the benefits of a microfounded model - which lets us understand many different economic phenomena, and gives us confidence via experiments that its conclusions are sound - but with greater accuracy, predictive power and robustness than today’s DSGE models.

Such models, microfounded not on rational utility theory but on real cognitive processes, might focus on specific domains such as consumer product markets or labour markets. They might let us explore the effects of specific economic policies such as tax or interest rate decisions. Eventually, they might develop into a unified theory that can be used to investigate any aspect of the economy - the cognitively sound equivalent of Arrow-Debreu general equilibrium theory.

Can this be done? It’s too early to say for sure, but it’s one of the most important questions for the economics discipline to ask itself.

So this year I’m going on tour. I will travel to wherever I can meet researchers in different economic domains and work out with them how psychology can be incorporated into their models. Although it might be possible to work out cognitive microfoundations from first principles, I suspect it will be more practical to start asking what kind of foundations will illuminate each different economic domain.

My initial objective is to work with people in each of the following disciplines:
  • Consumer behaviour
  • Competition and market organisation
  • Labour economics
  • Trade and international economics
  • Fiscal policy
  • Development economics
  • Monetary theory
  • Industrial organisation
  • Personal finance
  • Financial markets and asset pricing
  • Environmental economics
  • Health economics

I have a few collaborations lined up already, but there’s no restriction to just one in each field. So if you work in one of those areas - or would like to propose another - get in touch and I can add your location to my itinerary.

So far I’ve been to Madrid, Barcelona, Marseille, Paris and Honolulu. From today, my immediate plans are:
  • Until 13th June: San Francisco and Berkeley.
  • 13th-19th June: Atlanta.
  • 19th-30th June: the northeastern US - DC, NYC and all points between.
  • July: the UK and South Africa.
If you’re near any of those locations why don’t we meet up? If we discover anything useful there’s a co-author credit in it for you.