Knowing and Making

A very strong article here (by Claire Hill, law professor at University of Minnesota) focusing on two principles: how people see the world, and how they value things. Perhaps I like the article because these two points align closely with my model of beliefs and values. The article is one of a number of contributions to Truth on the Market's behavioural economics symposium , but most of the others are entirely different in character to Hill's. The symposium is dominated by strong skepticism about behavioural economics and particularly its application by governments. It's interesting to see the strong feelings that this subject arouses. Among the various contributors there's a mix between resistance to regulation in general, dislike of the assumption of irrationality, insistence that regulators are just as irrational as citizens, and the assertion that people know their own preferences better than any well-meaning nanny-state regulator possibly could. Richard Thaler ...

Notes and some videos on what sounds like a brilliant course at Edge last year on behavioural economics, with Thaler, Kahneman and Mullainathan as speakers - and just look at the attendees! Thoughts from Felix Salmon (also click through to the more detailed Wine Economics article he references) about one of my favourite subjects: how cognitive biases influence our willingness-to-pay for wine. Useful comments from Charles Goodhart in the FT about the money multiplier - I suggest you read this as preparation for an article I'm writing on self-fulfilling expectations and the money supply. Mark Thoma's link  to  Paul de Grauwe's paper , " Top-down versus bottom-up macroeconomics " [PDF] which says some powerful things about limitations on knowledge and the consequences for rational expectations theory. And Steve Randy Waldman's Interfluidity blog has moved - updated link in the right-hand column and here .

Lots of behavioural finance conversations going on on the blogs today and yesterday. Chris Dillow of Stumbling and Mumbing replies to my proposal for governments to take into account cognitive bias while regulating. Simon Johnson of Baseline Scenario responds to a debate between Richard Thaler and Richard Posner about financial regulation. Alex Tabarrok from Marginal Revolution highlights the difficulty of fighting asset bubbles , even if you have overcome the challenge of identifying them . Kenneth Arrow (via Conor Clarke of The Atlantic) argues that behavioural economics doesn't predict anything . Update : A friend points out this letter in the FT from John Maule calling for behavioural approaches to be used more in regulation and investment decisions. I'd love to have time to engage in depth with all of these debates, but let me start with a couple of key points. Commenters on both Chris's and Simon's posts use a familiar argument to dissent from the idea of beh...

missmarketcrash kindly alerted me today to Paul B. Farrell's hilarious screed on Marketwatch: " Five reasons neuroeconomics is a big, fat hoax ". I thought this was laughable all the way through. Let me just show the highlights: Page 1: " all their books are based on junk science, anecdotes, broad conclusions from small samples ". Page 2: " Remember, 88% of our behavior is driven by the subconscious ". This spuriously precise assertion is even worse than the "Only 7% of communication takes place through words" mantra beloved of marketing consultants everywhere. Do some research, folks! Understand the scientific method! Page 1: neuroeconomics doesn't work. Page 2: Wall Street is using neuroeconomics to con us out of hundreds of billions of dollars a year. Which is it, Paul? Equilibrium economists are mostly Republicans. Behavioural economists are mostly Democrats. Therefore both of them must be wrong. Huh? " Neuroeconomics: call it w...

Eric Falkenstein has an interesting post  which highlights some of the problems in the study of behavioural economics (in this case, behavioural finance). I have to agree with his premise, though my conclusions are a bit different. I've just reread some of Nudge  and am partway through Animal Spirits . Both books cheerlead for the behavioural cause - though in each case, one author - Thaler and Shiller respectively - seem to be much more closely associated with it than the other - Sunstein and Akerlof. However both books exemplify the problem that Falkenstein identifies. The field is full of effects without explanations. You can easily list a whole string of cognitive biases which can be easily demonstrated - I show the effect directly to audiences in presentations, by running a price anchoring experiment. But the behaviourists rarely seem to propose a good underlying model of how these effects arise. Having just completed another book, The Making of an Economics, Redux , I can see...