Psychology

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Read: The Calculus of Selfishness

Karl Sigmund’s The Calculus of Selfishness applies basic evolutionary game theory to the analysis of cooperation in strategic interactions. Though it is published in the Princeton Series in Theoretical and Computational Biology it is rather addressed to social scientist, economist and psychologist, and in particular undergraduates.

The Calculus starts simple enough and Sigmund introduces whatever mathematics he needs without being too formal in his approach. For a text in applied math the book reads surprisingly well. However, it is still a book in applied math and I fear it is as such not really appealing to an undergraduate in the social sciences. Indeed, I do not believe there are many undergraduate economics students who would enjoy this book and not put it aside after the first few pages, the first chapter at the latest. While this may be a good example of a text in applied math it is not ”good enough” for the nascent social scientist.

On the other hand, it is an excellent introductory text on the evolutionary game theory of cooperation, direct and indirect reciprocity, fairness, reputation, and trust. I only wished Sigmund would have expanded on structured interaction and the co-evolution of subpopulations. He only hints at what results would be obtained when one would look at these things more carefully.

I also particularly appreciate that each chapter ends with a briefly annotated list of references for further, in more depth, reading on the topic and the game theoretic approach that was introduced in the respective chapter. While the terse exposition of the chapter can only serve to raise one’s interest these references are the real treasure trove of The Calculus of Selfishness.

Hence, while I would not recommend the book to any of my undergraduates in economics or social sciences I would happily point any graduate student in its direction.

Read: The Art of Choosing

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.

Read: Priceless: The Myth of Fair Value (and How to Take Advantage of 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.

Read: Why We Make Mistakes

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.

The Upside of Irrationality


A successful publication calls for a follow-up. The Upside of Irrationality is the successor to Dan Ariely’s successful Predictably Irrational, one of the best selling popular behavioral economics books of the last few years.

Despite its title, the book is not a thorough exploration of instances where irrationality leads to better decisions: As in his previous book, Dan reports here mainly on his own academic research relying on laboratory and field experiments covering topics ranging from the adverse performance effects of high powered financial incentives to the impact of empathy and emotions on decisions. More than before he interweaves his narrative with personal anecdotes that illuminate his choice of research topics; he reveals how his experience of being a burn patient in his youth shaped his future career and how normal day-to-day annoyances and more pleasant experiences led him to devise testable hypotheses about human behavior. This is perhaps also the most surprising aspect of the book. Dan’s highly personal way of sharing his thoughts and knowledge is also highly unique. This is not a dumbed-down version of academic research for the masses to make a quick buck [in case it is intended as such a thing it’s execution is brilliant]; this is something very personal. It is not only for the reader, rather, it seems to be also something important for the writer, a way of coping maybe. (And indeed, Dan does not only share his pain, he also reveals his darker side for revenge.)

I have a few quibbles. Only a few and very minor ones.

The Upside of Irrationality is divided into two parts. The first part is supposed to relate to the work domain, the second part to the non-work domain. Yet, the first part contains a chapter on revenge that would have fitted much better to the material on emotions that Dan discusses in the end of the second part.

All but one chapter are primarily based on Dan’s own research. On the topic of empathy, he did not even have an article of his own to include in the additional readings list. Though, of course, the topic may be very dear to him, this somehow interferes with the otherwise very personal exposition.

In the chapter on revenge, he mentions that he would not want people to live by the biblical rule “an eye for an eye”. Why not? This is a rule of moderated response. If you do not punish those who hurt you, you may invite further harm. This, Dan himself discusses in this chapter. If you punish in moderation, that is “not more than one eye for an eye”, you avert inefficient escalation. So, why not?

The title of the book and the subtitles of chapters promise more than Dan finally delivers. Where are the benefits, you wonder. Why do we do that? Dan demonstrates very compellingly behavior that is inconsistent with utility maximization and identifies behavioral quirks that lead to counter-intuitive recommendation for improving our overall happiness. He does not really explain why we do what we do. He does not really show benefits of irrationality. OK, the last is not entirely true. Our irrationality makes us human, he reveals at last.

In spite of the above, a great book. I would not dare to say that it is better or worse than Predictably Irrational. It is different.

Read: Experimental Economics - Rethinking the Rules

In contrast to what some economist today still say and believe, economics is an experimental science. At the latest, when the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was award to Daniel Kahemann (a psychologist) and Vernon Smith (an economist) in 2002 they should have acknowledged it.

Economic experiments have been proven useful in informing theory and testing (new) economic institutions before their implementation on a broader scale, e.g. the design of spectrum auctions that generated unprecedented revenues for the states running them. Unfortunately even within the community of experimental economist their use and purpose is not without controversy. Some, let’s call them experimental economists in a narrower sense see the main use of experiments in economics in showing that the theory works (well) and finding instances of when it works best. The other group, let’s call them behavioral economists see the economic experiment as one method to investigate the underlying assumptions of economic theory in order to inform theory building and inspire the revision of economic theories so that they may move more towards a positive than a normative model of the world.

With Experimental Economics a group of six British experimental economists now tried to critically assess the current state of the field that constitutes an invaluable tool for research in all areas of economics.

In a series of chapters they address the method and methodology of experimental economics, the domain of economic theory (where and when does it apply?) and the limits of experimental tests in terms of what can be said about the theory and the external validity of the experimental observations; and also how experiments are used as rhetorical devices, “exhibits” that reliably show some particular behavior of their participants illustrating a specific point. Two further chapters address the important issue of financial incentives in experiments (when are they needed, how should they be implemented?) and different sources of noise in the data that requires bespoke statistical treatment.

The last point, noise in the data and heterogeneity between subjects is in my opinion a very important one as this is still often a neglected topic in most experimental studies today. Of course, a well designed experiment may allow the authors to show their main point without any fancy statistics. On the other hand, in order to move to a positive theory of economic behavior the individual and not the aggregate behavior should be the focus of the analysis. This necessarily requires a more advanced statistical treatment of the data. As well as laboratory and field experiments (and happenstance data) are complements so are theory, experiments, and statistics complements.

In sum, even though I may not agree with some of the more specific points Bardsley, Cubitt, Loomes, Moffatt, Starmer, and Sugden make their book is an excellent text that will make it on the reading list for my courses in experimental economics.

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