Economics

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Read: Game Theory - A Very Short Introduction

Very recently I came across Oxford University Press’ Very Short Introduction series. The series comprises now of almost 300 titles ranging from Archaeology and Art to Medicine and Social Sciences. Of course, there are also some titles dealing with economics and other more quantitative topics; Game Theory is one of them. There could not be a more obvious and substantial difference to popular science books covering Game Theory (in a good sense).

Binmore covers a broad range of topics, from conflict and cooperation to conventions, bargaining and auctions. Most important he links the theory to observed behavior and evolutionary dynamics that may explain deviations from some of the normative predictions of standard Game Theory (under assumptions of perfect rationality and opportunistic preferences). It is these discussions of evolutionary dynamics that made the small book (less than 200 pages) worthwhile for me.

For the most part Binmore’s writing style is crystal clear. However, I had, of course, substantial training in Game Theory and need to apply it quite often. Even though Binmore explanations and definitions are easy to follow I fear that there is still too much jargon, too few definitions and a lack explanations of some of the essential concepts of Game Theory that would be needed for a real introduction.

Read: Rock, Paper, Scissors -- Game Theory in Everyday Life

Len Fisher provides an entertaining glimpse at Game Theory, or at least a part of it. Rock, Paper, Scissors focuses on coordination problems, social dilemmas and possible solutions. The book is very non-technical. Indeed, the reader may not learn any new game theoretic concepts – given that those who will pick up a book with Game Theory in its title are likely to know already the most basic ingredients of Game Theory.

Nevertheless, the book adds some value. The everyday examples of applied Games are as instructive as they the writing is witty. The focus on social dilemmas facilitates attracting some attention. And research results – not his own; he gives, for instance, a recount of Axelrod’s The Evolution of Cooperation – are presented in an easy to understand way. You may hold against Fisher that the favored solution to these dilemmas is presented as something seemingly simple even though it is actually hard to implement: Change the game.

Read: The Age of Aging

Here is another popular science book that is related to my official professional interests: demographic change and age specific behavior in economic and political contexts. George Magnus did a nice job in collection data from various sources and present them in a way that non-scientist can see what is going on. Unfortunately this is about the only positive thing I can say about this book.

Most of its content really boils down to the results of some opinion polls that are linked to population projections and aim at picturing a dire future. I have to admit that Magnus does not aim at creating a dooms day panic, nevertheless he mostly wants to raise concern, to make you worry. Little room is dedicated to where actual chances of demographic change may be hidden.

I am a bit concerned about the links of current behavior of certain demographic groups and the resulting projections due to their different growth dynamics. First, the assumption of stable behavior of certain groups, i. e. stable preferences and stable opportunity sets within these groups, is too simplistic. And second, a simple multiplication of current types of behavior with projected (given the stability of behavior) population frequencies neglects any evolutionary dynamic that may alter the behavior. The quality of these projections is rather questionable. On the up-side, Magnus acknowledges these possible shortcomings on the very last pages of his book. Though by then, the reader may already be convinced of the imminent demise of his favorite way of living.

Read: Identity Economics

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.

Read: The Ascent of Money

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…

Read: Sway - The irresistible pull of irrational behavior

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.

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