Economics

It really seems to become a popular exercise, writing up your research in a format suited for the mass market, writing a popular science book. While the secret to success for science journalists is to cram as many anecdotes as possible in a more or less organized way in between the covers of their book those original researchers that get noticed add a little of a personal touch, some private details to the mix. Or, if they are really successful they add a lot of personal stuff to complement their research results, to enlighten the reader with regard to their motivation and their personal process of doing research.

Sheena Iyengar of jam-sampling fame (PDF) belongs to this last group. Her The Art of Choosing is a remarkable re-telling of her research hand in hand with a telling of her story. Not only is her book, that is the chapters in her book more cast from the same mold as, for instance, Ariely’s The Upside of Irrationality, also her philosophy, her world view, and her conclusions from her research are much more appealing to me. Hence, she tells not just about the Art of Choosing, she tells about seeing choice where others may see only fate, destiny, or a pre-selected path. She writes about “freedom-to” and personal responsibility. Yet, at the same time, she also writes about (optimal) limits to choice, the need to delegate decisions in certain situations, and cultural differences in the benefits of choice.

This book is highly recommended.

The nice thing about a (large) private collection of un-read books is that you can start immediately to read more of a topic as soon as your interest is turned towards that particular niche of you bookshelves.

After having read Robbins’ A history of economic thought I now turned to Sowell’s On classical economics. What was a rather different experience.

On classical economics is a loose collection of independent essays that appear to have a common structure but actually have not. The first half of the essays deal with topics: philosophy, macroeconomics, microeconomics, and methodology of the classical economists; the second half focuses on individuals of the respective time period. Some of the essays are rather dated, the first were published in the 1970s. Though, since Sowell does not refer to (almost) any of the secondary literature on the topic – not in his older essays and not in the more recent ones that make up this collection – you just do not notice that they are from different periods. In fact, you do not notice that Sowell holds views on the topic that may differ substantially from those of the current majority of scholars (unless you already know about them). He just neglects all other research and focuses on the original works.

Consequently, opinions about the scholarly value of On classical economics may differ widely as can be seen in a number of reviews of the text (that can be found by a simple google search of the title). While, e.g., a J. Ahiakpor sees obvious deficiencies J. Ullmer and J. Berdell are much more enthusiastic about it.

I have mixed feelings. On one hand, I enjoyed reading the book (if you discount the enormous number of endnotes – I hate endnotes, I much prefer footnotes). On the other hand, the text is too driven by a single opinion and not balanced at all. Thus, you are forced to read more on the sub-topics and diverse classical authors to get the whole picture, the essence of their work and accomplishments. Further, the focus on dissenters of the classical economics of their time is rather biased and leads to a debasing of the accomplishments of classical economics.

I was not there.

I would have been five and would not have understood a single word. Still, I feel like I missed something.

Not too long ago a few colleagues of mine and I noticed that there are too few courses on economic history and history of economic thought in economics curricular today. Often, there are none. This is bad. Without the historic context we are bound to misinterpret and repeat mistakes. Without the historic context we do not know why we are where we are right now in economic science. Many approaches, assumptions, and conventions that seem obvious and natural today once were not, maybe they should not be today as they constrain our thought and handicap heterodox scholars.

Lionel Robbins must have been a great teacher. “A history of economic thought” edited by Steven Medema and Warren Samuels is a transcript of a lecture series Robbins gave at the LSE between 1979 and 1981. I am glad I have read it.

It is of course not a comprehensive history of economic thought; it is not “the” history, it is “a” history (Yes, please note this subtle modesty). It’s a history of economic thought as Robbins saw it. Although Robbins most of the times explicates the topic in an objective yet passionate way, he does not spare the occasional judgment. Always, however, he warns his audience that he is about to share an opinion and not an historic fact. Of course, the selection of focus is also a matter of personal judgment. In some cases, on the other hand, there is little room for choice. You have to cover the Scots. Nevertheless, he gives credit where credit is due. (And I have to admit that I have been negligently ignorant of some of the finer details.)

As a result of this excellent text I now feel motivated to embark upon further readings in economic history and history of economic thought – what may be a nice diversification to all the quantitative texts I read. I might even give a seminar on it…

Just looking at the title and subtitle, it is not obvious that Priceless is another popular behavioral economics book. And yes, I indeed expected something a little bit more (different) than the standard enumeration of cognitive biases, preference reversals, and priming effects that Priceless actually contains.

Though, I have to admit that Priceless also stands out. Additionally, it offers a historical perspective on behavioral decision theory. It is rather focused as it links everything to the perception of prices and choice behavior. And the more than 50 chapters are rather coherent and connected as opposed to some of the other pieced together collections of anecdotes that are currently available.

There is one thing I did not like. In the book, Poundstone makes an implicit assumption – or the original researchers made it and Poundstone just adopted it – prices have an absolute, intrinsic meaning. They have not. In a free market economy prices are just an indicator of relative value (as implied by relative scarcity).

When people are asked to attach values to different objects these values are not even (market) prices. They are just valuations. Therefore, it is absolutely no surprise when people are asked to attach values to different objects that these valuations, i.e. the absolute numbers, differ across different people. And, it is no surprise that when people have an idea about the relative scarcity of the objects that the ratios of valuations are relatively stable over different individuals. If they have no idea, or a different idea due to different environmental cues, the valuations will of course differ. This is how prices are defined, they (their ratio) describe the rate of exchange in a market, they are only unique up to a scaling factor. You need an anchor (a numeraire good) to get absolute prices in some specific units. The reported studies show exactly that. Further, there is no irrationality or cognitive deficit if individual valuations of a non-standardized good (may that be an apartment or an used car) in an experiment differ from a market price and are influenced by environmental cues.

Nonetheless, there are of course many factors that have an unduly influence on individual valuations. Many of these are discussed. What, in the end, makes Priceless a well written, instructive lesson on consumer psychology and initiation into modern price setting strategies.

Some of the material in book was also published in a (short-lived) blog. The author’s heart is, however, somewhere else. The last entry is already one year old by now. The blog thus served only as a pre-release promotion tool.

(Economic) decision making and emotions seem not to mix. Homo oeconomicus is a cold, emotionless computer of utility. Always maximizing, and when endowed with all information always finding the optimal course of action, be it which house or car to buy or what ice cream to pick at the gelato house. That is simple decisions that involve comparisons of only a few or just one characteristic of the available choice options as well as complex decision problems that involve a high dimension of interdependent characteristics all invoke the same process: Conscious optimization.

And that ain’t true.

In “How we decide” Jonah Lehrer explores the cognitive and emotional side of decision making. Following the standard recipe of popular science books Lehrer introduces the reader to a number of different case studies – or anecdotes – to show how emotions allow us to decide at all, how and under what circumstances emotions and subconscious deliberations help improving our decisions and how and when emotions impair our decision making. All the anecdotes are accompanied by brief explanations of the underlying mechanisms inside the brain, the underlying neuroscience.

Lehrer’s narrative is clear and intriguing as he – as so many others before him – understands to arrest his readers’ attention by counterintuitive advice. For instance, complex problems are solved best by not contemplating about every detail and carefully considering all dimensions of the decision problem. We tend to get our “decision weights” wrong and focus on the wrong characteristics (like the size of the house instead of the length of the daily commute). Letting the subconscious mind work on the problem and than pick what feels right will often result in a better long-term choice in such complex decision problems. Simple choices, however, can benefit from actual, conscious, optimizing behavior.

“How we decide” is a well balanced, instructive text. It might get you interested in neuroscience and its close relative neuroeconomics…

Here is another book that while discussing topics related to cognitive psychology will be attributed to the wildly popular meme behavioral economics. It is not reporting the author’s original research. Indeed, much of the observations that Hallinan illustrates with well chosen examples are pretty old. Nevertheless, the book is entertaining as well as instructive. There is a central theme, everything seems to fit well to it and the material is well arranged. Not the messy clutter of unconnected anecdotes that you will find in some other books of the same genre.

Yet, of course, there are shortcomings. Most importantly, the book does not answer to its title. The “why” is not really discussed. At least not up to the level of detail where is would get interesting. Hallinan illustrates a number of cognitive biases that will lead to sub-optimal decisions. Why we show these systematic biases is a question that remains unanswered.