Monthly Archives: November 2008

The Normative Claims of Behavioral Economics

It is often unstated, but nonetheless true, that the fundamental normative claim of behavioral economics is that people should be rational. The guiding aim of every “nudge” is to make neoclassical economics true.The behavioral economic utopia coincides with the neoclassical. Insofar as it seeks to make people better, it makes them better self-interested rational maximizers. What it doesn’t do is aim to make people more generous, compassionate, or industrious, unless, that is, those people already are driven by those values. Nudges are about means, not ends.

Of course, now that every moron on the left grasps onto the theory, they think it supports their values. Thus we arrive at buncombe like this from Andrian Kreye at the

The aim of behavioral economics is to develop mechanisms that can enable what is called “nudging”—the psychological control of the Homo economicus.

No no Herr Kreye–you see, the guiding aim is not psychological control of homo economicus, since the descriptive claim of the theory is that homo economics doesn’t exist. No no, the aim is mould a homo economicus out of homo irrationalis.


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Romanette (i) and (ii)

Eugene Volokh points to a lexicographically riveting exchange at oral argument before the Supreme Court: 

MS. SAHARSKY [of the Solicitor General’s office]: What I’m suggesting, Your Honor, is that the “that” refers to everything that is in Romanette (i) and (ii) up to the break with “committed by”…  


MS. SAHARSKY: Oh, little Roman numeral.

CHIEF JUSTICE ROBERTS: I’ve never heard that before. That’s — Romanette.

No consensus has emerged on the origins of “romanette.”  Comments suggest it may have originated in transactional law. But no one has pinpointed its provenance within that field. Eugene first hypothesized it may have come from a particular professor or from a particular law school, but if that were true, then wouldn’t we find some cross pollination? That is–law students take classes across different subject areas and a useful concept discovered in one would then easily migrate to another.  But judging from the comments, it appears the term arose in the practice of law rather than its study. 

Anyhow, I e-mailed the whole Megillah to Erin McKean, the Dictionary Evangelist. (If you haven’t been blinded by the awesomeness of her TED presentation, please watch.)  I asked her if romanette was a word. She says: 

“Oh, what a great word!…I’d say this is definitely a word (a jargon word if that makes people feel better). It’s not the OED yet, but I think it’s fantastic.”

Here’s hoping it makes the next edition of the OED!

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To What Extent Does Behavioral Economics Explain Mania in Finance?

I say very little, but I’m willing to be convinced. One very implausible, but popular line of reasoning runs along these lines: neoclassical economics assumes every agent is rational and fully informed; the euphoria inflating the real estate bubble was obviously not rational; therefore, neoclassical economics fails to explain the current crisis. Having reached this conclusion, it’s only a short step to the corollary that free markets create catastrophic social consequences.

When Alan Greenspan confessed before a congressional committee that he had revised his assumptions about economics in light of current events, people, notably those on the left, took his mea culpa as the symbolic end of a paradigm. Here at last, in public, a former disciple of Ayn Rand, the prophet in the age of turbulence, had finally announced what all those good gray burghers in coastal college towns long suspected: the science of economics is no science at all. Call off all the bets! Anything goes! In Thomas Kuhn’s notorious phrase, normal economic science is out, revolutionary, paradigm shifting economics is in.

In this vein, Niall Ferguson offers his take on the end of Wall Street:

The problem lay with the assumptions that underlie so much of mathematical finance. In order to construct their models, the quants had to postulate a planet where the inhabitants were omniscient and perfectly rational; where they instantly absorbed all new information and used it to maximize profits; where they never stopped trading; where markets were continuous, frictionless, and completely liquid. 

But this is the weakest part of Ferguson’s analysis. His greatest insight has nothing to do with rationality assumptions. Instead, his strongest arguments about mania rely on a fairly straight forward concept: old motivations coupled with poor design. Behavioral economics was not the first science to identify the vice of stupidity. And neoclassical economics doesn’t assume away incompetence. If the idealism of internet freebooters inflated the dot-com bubble, then likewise it was a version of the American Dream that inflated this one–the property owning society. As Ferguson says: 

There, in a nutshell, is one of the key concepts of the 20th century: the notion that property ownership enhances citizenship, and that therefore a property-owning democracy is more socially and politically stable than a democracy divided into an elite of landlords and a majority of property-less tenants. So deeply rooted is this idea in our political culture that it comes as a surprise to learn that it was invented just 70 years ago.

More interesting to me would be an explanation showing how this generous and confident spirit percolated not just through the financial system, but also through the the populace and their government. In the end I suspect it is less man’s behavioral fallibility that brought us to the brink, but more his good-will.

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Paulson Yells Mulligan On Bailout


Paulson yells mulligan to Congress.

Paulson yells mulligan to Congress.

The New York Times demands a two stroke penalty on TARP (The Act Rewarding Plutocrats). Gretchen Morgenson reports

While the government still declines to say exactly how it has spent your funds, or who all the beneficiaries are, Mr. Paulson conceded that his huge capital injection hasn’t persuaded banks to lend more money.

Michael Lewis has some more tips before Paulson tees off on the next round of disbursement. 

  1. Embrace rent-seeking. The main qualification for assistance is past incompetence. Instead, give the bailout money to friends, family and struggling authors. So they’re not bankers, you protest. But they haven’t yet been given a chance to prove their financial idiocy. Once they fail, they’ll then have just as much experience as current bankers. GM, Ford and Chrysler have completely mis-framed their appeal for a bailout. Who says they have to make cars? Why not turn the big three into the big lending tree? 
  2. At least give the money away to people who won’t present themselves as obstacles to innovation. Sez Lewis, “By giving money to bankers who have made many stupid loans you have made life harder for bankers who have never made stupid loans. By aiding the dumb banks you prevent the smart ones from replacing them.”

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Does Democracy Corrode Moral Character?

Yes, and I’ll offer a few points as to why. Consider it the flip side to the forum hosted by the Templeton Foundation on a different, though also important, question. They ask whether liberty corrodes moral character; I take it that they wish to know whether free markets bring out the worst in us. A host of intellectuals of diverse persuasions answer yes, no, maybe, including Michael Walzer, Tyler Cowen, and Garry Kasparov, and elsewhere, the likes of Gary Becker, Richard Posner and Will Wilkinson have all said their word.  Most of the answers are disappointing. Respondents spend a lot of time discussing the virtues and vices of business men as compared to politicians, which is an interesting game of moral hotornot, but such answers also evade the question. There are more professions than these. And what I think is more important, the forum overlooks a fundamental problem: just as most people confuse the current American health care industry with a free market in heath care, so too do our respondents confuse our current society with a completely free one.  Yes, commercial society pervades western culture, but it’s also balanced by the prevalence of democracy in politics, by which I mean representative government. Both institutions–the market and Super Tuesday–have their influence on the manners and mores of the West. So it’s patently silly to consider one without the other.

Wilkinson makes a critical point–namely, that we must distinguish moral means from moral ends. He writes: 

The moral ends worth caring about are the various constituents of human welfare–longevity, health, wealth, pleasure, happiness, a sense of purpose and self-efficacy, the realization of potential, creativity, love, friendship, etc. Moral character, or virtue, is a means to achieving moral ends. As the socioeconomic structure shifts, the means of achieving moral ends shifts.

I have no quibbles with these ends. We may allow for some pluralism,  but such an approximation will do. Now consider the influence of democratic institutions on our character as a means to these ends and ask yourself whether the behaviors cultivated by politics lend themselves to the promotion of such worthy goals. Could it be that much in democratic politics brings out the worst in us? Are the Democratic Vistas barren ones? O Templeton! O Whitman!! Let us count the vices democracy cultivates. 

  1. Fear–demagogues flourish in democratic societies and it is their professional science to whip the mob up into a mad crowd of witch-burners. Together, the herd and the herdsman hunt perfectly innocent victims. Elections become wild orgies wherein each side attempts to substitute a new and worse, though largely imaginary fear for the one that previously prevailed.
  2. Envy–the democratic man takes an unhealthy interest in the superiority of his fellow man. Demagogues and academic philosophers thrive on creating the illusion that your neighbor’s success comes at the cost of your own and that the prosperity of the country requires tearing that man down.
  3. Helplessness–once the demagogues have convinced the public to fear a minority and once they have whipped up their envy of the wealthy and superior, the skilled politician next claims that he is the only one who can save the public from these menaces. This is change you can believe in.
  4. Ignorance–largely convinced politicians will solve his problems, the democratic man doesn’t follow the far-reaching and slow-moving consequences of his ballot. Meanwhile, he is bamboozled and exploited by a small but disciplined group of rent-seekers and special interests. 
  5. A lack of integrity–first in politicians, whose overarching aim is to retain their jobs. If a politician can hold onto his office by lying, he will hold on to it by lying. Moreover, he will preach harmful policies to gullible men he knows to be idiots, provided that this will win him the election. No issue is too absurd, no principle untouched, if the votes will come around. And similarly then in the democratic man himself, we see a crack in his purity. He loses his sensitivity to dishonor. Faced with a myriad of government scandals, the democratic man becomes inured to public vice, simply shrugs, murmurs something about how they all do it, and then continues to vote for his man. Of course, if the democratic man were to consider hiring this venal buffoon, he wouldn’t even give the consideration a second of his time. 
  6.  Profligacy–yes, the government is wasteful but that’s not what I mean. I refer to the opportunity cost. Thousands of years of life and I daresay trillions of dollars have been wasted pursuing laudable goals with improper machinery. Political victories are often phyrric. There will always remain a great if…what could have been accomplished if these talents had been used somewhere other than the state house, Congress, or even law school. 
  7. Nosiness–the democratic man lusts for ways of controlling the merriment of his fellow men. He suffers knowing others, somewhere, are having fun. Thankfully, he knows no joyful behavior will go unexamined. Smoking…drinking…sex…carousing…how you drive your car…who you pay for what pleasure…who you hire for a job…it all comes within the purview of the democratic man’s moral legislation. He begins to believe it his divine right to regulate such things. 
  8. Cowardice–the institutions of democracy provide many buffers to protect the mob from confronting those they exploit. If they had to meet their victims face to face, a full nine tenths of their idiotic legislation wouldn’t stand a chance. This holds true on any issue from immigration to taxes. 
  9. A low self-worth–many decent men are converted into criminals for performing acts that are natural but deemed subversive by the demagogues and the witch-burners following them. 
  10. Nationalism and xenophobia–there are no better scapegoats than those who live outside our walls. No successful demagogue can let outsiders have a space at federally financed welfare tough. 
  11. Intolerance–the democratic man increasingly fears and loathes the followers of opposing ideologues, which is natural since every proposition is win-lose.
  12. A lack of charity–why be generous and solve problems through the institutions of civil society when we have guns to point at people to force them to cough up seven tenths of their paycheck? 

Of course, this list is not exhaustive. Nor do I believe the Templeton foundation will continue the discussion any time soon. Tho I wish they would.


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Radical Chic and Mau-Mauing The Incredible Hulk

Yes, it’s true, Tom Wolfe used to appear in Marvel comic books


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Gladwell on Capitalization Rates

Another riveting talk from Gladwell on unexploited potential.

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