pro libertate net

In 2000, George Akerlof and Rachel Kranton published Economics and Identity in the Quarterly Journal of Economics proposing a way on how to acknowledge the influence of identity in the standard economic framework. The published paper was surprisingly non-technical, it focused rather on empirical examples that are consistent with their model than on theoretical derivations, i.e. the rigorous use of mathematics to obscure any intuition one might have. Their book Identity Economics follows in the same tradition. It is basically an accessible summary of their papers on the topic that they published so far. In a number of chapters they present first the intuition of their model and than some applications by enumerating a long list of empirical observations that are consistent with their model.

This style of presentation is both fortunate and unfortunate. It is fortunate because the book becomes consequently accessible to a non-economist audience. Though I doubt that a lay-person may actually be interested in how economists deal with the influence of identity on economic decision making and in the fact that they (the economists) did not care to do so previously. After all, identity is not really a new concept. Ask a sociologist or psychologist about this… Therefore, the general style and choice of content of the book is also unfortunate. The actual audience may rather consist of economist and researcher from fields that have acknowledged identity as an important factor long ago. This audience – and here I include myself – is certainly also interested in the underlying math. A technical appendix would have been nice. Luckily, Rachel Kranton published some material (an earlier, more technical version of their paper Identity and the Economics of Organizations) on her webpage.

In a nutshell, identity determines the optimal choice for someone belonging to a certain identity class. If the individual deviates from this “class action” her individual utility is reduced. Hence, utility is just the sum of the standard utility and an identity penalty term. The problem, of course, is then to define identity categories, to define the optimal “class action”, to assign an individual to such a category, and to determine the appropriate penalty.

All in all, the whole approach is rather interesting. I like that the individual is finally put into a (social) context. It certainly enhances the descriptive power of the standard model. Its prescriptive power is, however, rather ambiguous. There are too many unknowns. Consequently, the general reception of these ideas in economics seems rather lukewarm (as already noted in another review at whimsley worth reading). Nevertheless, others are picking up on the topic. There will be, for instance, another book on it published this winter by Cambridge University Press: Individuals and Identity in Economics authored by John B. Davis that seems rather interesting as it promises a more broader overview and also some more rigorous illustrations.

Niall Ferguson’s The Ascent of Money was aptly timed; with the financial turmoil of 2007 that we still feel and need to surmount it was bound to attract some interest. It helps, of course, to have a acompanying tv documentary.

The book is, however, not as aptly titled. “The ascent and decline of private and public debt financing” would describe the book’s content more appropriately. Though this would be less appealing to the paying costumer, wouldn’t it?

In spite of the book’s subtitle “A Financial History of the World” the book is rather slim; just about 260 pages excluding the endnotes and index. Not what you would expect from an endeavor with such a title. Yet, it does not state that the (his)story told is comprehensive. It is not. Ferguson focuses on a few historical turning points, a few historical figures in our financial past. He offers some glimpses in what was going on and why. His focus is, however, not on money – the thing we nowadays call certain printed papers – it is on debts and debt financing of private and public ventures, on risk taking and risk takers. Interesting nonetheless. Yet, I really would have loved to read something that was more focusing on the history on money: From pebbles, to coins, to printed papers, to plastic cards.

Apart from that, The Ascent of Money is quite an entertaining and instructive little book. Ferguson does not stick strictly to the timeline to advance his narrative, he rather organizes his material around some themes that follow a logical sequence. The writing is clear; my only animus are the endnotes; I would prefer footnotes that are so much easier to find…

Recent years have seen a massive surge in popular economics books for the uninitiated masses. The list ranges from books advocating standard economics and its applications to everyday phenomena – like Landsburg‘s The Armchair Economist, Cowen’s Discover Your Inner Economist, and Harford’s The Undercover Economist – to books that tell of unexpected links of standard economics and real world behavior, e.g. Levitt & Dubner’s Freakonomics, to books that present a blend of economics and psychology, questioning the standard economics’ focus on flawed assumptions on human behavior, stressing the schism between neo-classical normative (standard) economics and positive (behavioral) economics – like Ariely’s Predictably Irrational and Thaler & Sunsteins’s Nudge.

The Brafman brother’s Sway belongs to the last category. In contrast to Ariely et al. they do not present there own original research as they are not active researchers in the field of behavioral economics. Thus they follow the current standard recipe of success of other popular economics books authors, they tell a lot of more or less connected anecdotes illustrating behavior that is not conforming to standard economic theory or an intuitive definition of rational behavior.

Sway has two main topics. About two third of the book is dedicated to the sunk cost fallacy, even if the Brafmans use different labels, most notably commitment (to a lost cause). In brief, due to being loss averse people tend to commit to behavior and opinions that are not in their best interest or rational since they already invested some resources and do not want to loose their initial investment. The remaining third is then about the interdependency of social norms and preferences and explicit incentives, the crowding out of intrinsic motivation by extrinsic incentives.

All in all, Sway is rather well written, entertaining and instructive. Indeed, once you start reading you will want to go on. Given the that Sway is just under 200 pages it may well serve as a nice teaser to the field of behavioral economics and other books and maybe academic programs that can provide more depth.

I think my first “contact” with Deirdre McCloskey was when I got seriously interested in scientific writing and in particular in how to improve my writing. I read her Economical Writing at about the same time as Strunk & White’s The Element of Style. That must have been during the middle or shortly before finishing my PhD. Yes, that late. The Rhetoric of Economics followed very soon. Here I got a first glimpse at her battle against the evil p-value and the misuse of statistics. I have to admit even though I agree with her main critique I do not follow all her advice — I think that is one of the big problems she sees in empirical economists. They agree but still do otherwise. I also had the good luck to meet Gerd Gigerenzer, a psychologist and fellow warrior against the misuse of statistics, and discuss this particular topic with him during a sociable evening after a long day full of presentations at a remote conference venue of the Max Planck Society. Yes, there is something wrong with our (that is the economist’s) way of relying on, reporting, and interpreting statistics and specifically statistical significance.

How the Standard Error Costs Us Jobs, Justice, and Lives is not only the subtitle of Ziliak and McCloskey’s manifesto The Cult of Statistical Significance it is quite indicative of their (strong) rhetoric.

The book can be roughly divided in two parts that are devoted to different “themes”. The first is an updated and extended rehash of their earlier articles on the current practice of relying on statistical significance in various fields. If you have not read their articles so far read this and be shocked. You will see the author’s outrage in every paragraph. The second part and theme is a historical account that tries to shed light on how we ended up where we are. This part is rather filled with bitterness and repugnance for R. A. Fisher and compassion for the neglected Mr. Student, William Sealy Gosset.

Ziliak and McCloskey’s rhetoric is unique, yet it is not always to their benefit. Though, they certainly make their point and at least in private you have to agree with them. All in all, the book is entertaining and instructive. Even so, I would not assign this book to a class for reading I would rather recommend the 2004 special issue of the Journal of Socio-Economics on this topic. On the other hand, every empirical scientist and every policy maker relying on scientific research (shouldn’t they all?) should be aware that, first, size matters and that precision of measurement should not be the only decision criteria.

Pink’s Drive is about motivation in the workplace and yet I have a feeling that he does not know the typical workplace or the dominant type of jobs in the developed world. Or, that the book is not about motivation in the workplace after all.

He gets a lot of things right. There are two very different types of jobs. One type consists of mainly routine work, the other is of mainly creative (problem solving) nature. He correctly identifies the categories of motivation, extrinsic and intrinsic, that can be improved by different measures each and that can be linked more successfully to either the routine or the creative type of work. Further, he identifies three motivators that are particularly important for intrinsic motivation: Autonomy (People like to have control over their work), Mastery (People like to get better at what they do), and Purpose (People like to be part of something that is bigger than they are). 

Finally, he correctly points out that extrinsic incentives may have adverse effects on intrinsic motivation.

Pink, however, fails in several other important aspects.

Routine work still needs to be done. Outsourcing does not help. Somebody still has to do the work. Even if job growth is faster for creative jobs nowadays, routine work is a dominant part of work in public administration and public enterprises. Not every job can be re-designed to emphasize the creative part. Consequently, just for this reason alone relying on intrinsic motivation cannot be an universal solution. In short, I think he grossly overstated the relevance of creative jobs.

Second, extrinsic motivation is not just money. There is at least praise, promotion (ok this is money in the end), reputation and the admiration of peers. How do they interact with the different types of work and motivation? Not a single word. How do extrinsic and intrinsic motivation complement each other? Not a single word. In short, he grossly understated the relevance of extrinsic motivation.

Third, his exposition is very unbalanced and lop-sided. If he mentions studies he ignores results that do not support his point. Studies that show the success of extrinsic rewards are not mentioned. They do not support his point. If he concedes that certain extrinsic incentives can be effective he fails to explain to what extend and when this is true . His book is full of inconsistencies. Why do most “flow” experiences (this is something good) happen at work if the workplace is dominated by the horrid carrots and sticks, if-then rewards? Why are the free time for creativity programs only implemented for certain types of employees, i.e. the engineers? Inconvenient truths are sometimes alluded to, never are they discussed in detail.

In the end, Drive is more like a self-help book and about personal development and not about the workplace and how to implement more successful personnel strategies. Indeed, a major part of the book contains a toolkit for self-improvement and ancedotes and conservation starters. The book is about something that fascinated the author. It is not about enlightening the reader.

There was nothing really surprising (except the lop-sidedness) and Pink does not offer the (whole) truth. This is really a pity as Pink certainly is a skilled author and the topic is important.

At Geary Behavioural Economics Blog @LiamDelaneyUCD is looking for books on behavioral economics. Given my interest in the field, I would like to add a few books. I add a few on experimental economics, too, as both fields are close relatives.

First, let’s see what he already has on his list:

• “Judgement Under Uncertainty: Heurisics and Biases” edited by Kahnemann, Slovic, and Tverky
• “Choices, Values, and Frames” edited by Daniel Kahneman and Amos Tversky
• “Heuristics and Biases: The Psychology of Intuitive Judgement.” edited by Thomas Gilovich, Dale Griffin, and Daniel Kahneman

These three books were indeed among the first books on behavioral economics that I bought myself at the beginning of my PhD. They are good collections of a number of great papers.

Next came:

• “Advances in Behavioural Economics” edited by Camerer, Loewenstein, and Rabin
• Camerer’s “Behavioral Game Theory”
• “Exotic Preferences” by Lowenstein which really is (I have to agree) a great overview of his work on preference formation, emotion and decision making

Just before I moved to Bremen and joined Jacobs University the following two books gained a place on my book shelf

• Behavioral Economics and its Applications edited by Peter Diamond and Hannu Vartiainen. This is a great overview of some of the most recent applications of behavioral economics and a prospective research agenda.
• “An Introduction to Behavioral Economics” by Nicolas Wilkinson, a textbook that adds a historical context to the different topics it discusses. I liked it.

I have not read so far

• Frey and Stutzer’s “Economics and Psychology: A Promising New Cross-Disciplinary Field”
• Peter Lunn’s recent book “Basic Instincts: Human Nature and the New Economics”

On the pop-economics front @LiamDelaneyUCD lists

• the popular “Nudge” by Thaler and Sunstein
• and Dan Ariely’s “Predictably Irrational”

And in the comments are a number of books mentioned that I have not read so far:

• William Poundstone’s “Priceless”
• Ori and Rom Brafman, Sway: The Irresistible Pull of Irrational Behaviour
• Akerlof and Shiller, Animal Spirits

All three of them are already on my to-read-shelf.

Last but not least, everything by Herbert Simon, and in particular “Human Problem Solving” is mentioned.

Ok. What can I add to this list?

First, two collections:

• “The Construction of Preferences” edited by Lichtenstein an Slovic
• “Quasi Rational Economics” by Richard Thaler.

Both are highly recommended!

On morals, ethics and (behavioral) economics:

• “Moral Sentiment and Material Interest” by Gintis, Bowles, Boyd, and Fehr
• “Explaining Social Behavior” by Jon Elster
• “Moral Markets” edited by Paul Zak
• “Moral and Markets” by Dan Friedman

On behavioral game theory

• “Rational Decisions” by Ken Binmore
• “The Bounds of Reason” by Herb Gintis

And finally, a few essential books on experimental economics:

• “The Handbook of Experimental Economics” by Kagel and Roth
• “Handbook of Experimental Economics Results” by Plott and Smith
• “The Methodology of Experimental Economics” by Francesco Guala
• “Experimental Economics – Rethinking the Rules” by Bardsley, Cubitt, Loomes, Moffatt, Starmer, and Sudgen

 Enjoy!