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 Selfish Gene

  • Finally I took the time to read another of the classics, Richard Dawkins’ The Selfish Gene, on my to-read-bookshelf that waited there already for quite some time. Not being a biologist and having been trained in Game Theory I have to admit, I do not see the controversy this book had caused. Even when he starts to discuss implications for human society and culture, the evolution of ideas and, yes, social norms I do not feel the urge to object. But, it is the 30th anniversary edition. Things were different back in the seventies.

    I was a bit surprised, though, to find extensive references – basically a renarration – to Robert Axelrod’s The Evolution of Cooperation in one of the two chapters that were added later to this book. It is certainly instructive and somehow fits the general theme. Yet, this chapter has a different “feel”.

    Not surprising was, however, that you cannot fail to notice that Dawkins certainly is not a devout catholic. Other works of his make this more explicit. Yet, the Selfish Gene is already a good indication of his conviction about religion.

    My conclusion: The Selfish Gene is still an interesting and instructive text that should (also) be read by social scientist – right before or when they start to learn some Game Theory.

Read: The Cult of Statistical Significance

  • 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.

Read: The Drunkard's Walk - How Randomness Rules our Lives

  • While Ayre’s Super Cruncher invited to find patterns in seemingly random data (and running controlled experiments to assess differences in treatments, e.g. maximizing sales revenue by the “right” choice of book title) Mlodinow’s The Drunkard’s Walk is more a warning of seeing patterns in seemingly non-random data.

    Life is full of randomness and Mlodinow’s little book raises some awareness to the random factor in our lives. He gives a nice historical account of the concept of randomness in mathematics and other sciences as the disciplinary borders were once not as distinct as they are now. This reminded me a bit of Peter Bernstein’s Against the Gods. Though Mlodinow’s work is considerably shorter and more focused owing to the more directed topic of his book. My recollection may be wrong, yet I believe his work is also more sanguine.

    In short, he did a very good job. The Drunkard’s Walk is entertaining, balanced and instructive and covers considerably more than just the economic side of randomness: the chance element in our lives, luck and misfortune, the misperception of probabilities and causality, and psychological biases. Finally, he also cautions all those who rely a little too much on their statistics…

Read: Free Riding

  • again, to an economist, rational behavior is just behavior that is logically consistent with a person’s preferences that, in turn, need to conform to only a few innocuous axioms. (Ok, I am understating.) He argues that if an action is in some way efficacious and therefore causal for the ultimate result, it has to be rational to perform the action. He presents a rather long winded argument about negligibility that in my opinion ultimately does not necessarily support his conclusions. And it seems, this is not just my opinion

    In brief, I do not agree with Tuck. At all. And this is not because I just do not like some of his implications. Still, his book is a rather nice historical account of the notion of rationality of cooperation in public good and competitive scenarios in philosophy, political science and economics.

Read: Reason and Rationality

  • Jon Elster’s inaugural lecture at the College de France is an instructive essay on reason, emotions and their link to rationality. In contrast to most of his other books that are quite heavy tomes (in volume and content), Reason and Rationality is a nice little book that really invites the reader to open it.

    I wonder whether his presentation was as well delivered as this little book was written. Maybe I will finally dare to start reading his other contributions that are waiting on my book shelf – some already for several years.

Read: Morals and Markets - An Evolutionary Account of the Modern World

  • Dan Friedman’s Morals and Markets is a nice complement to the multidisciplinary collection Moral Markets that I read earlier. Friedman provides an historical account of the interdependence of well functioning markets and moral sentiments and thus an evolutionary perspective that is not limited to economics as he also discusses the respective impact on societal structures and vice versa.

    Friedman offers a rather balanced discussion of the benefits and perils of a moral society, when markets need morals and when markets are choked by them. Solely the joint discussion of terrorist and religious groups may seem a bit controversial.

    Morals and Markets is not an academic textbook. It tells a coherent story by a sequence of (true) anecdotes that is easily accessible to anyone. In fact, it is quite entertaining while still being instructive.

    In the end, Friedman argues convincingly that the major challenge will be to realign morals and markets such that they work together and thus help to improve our society.

Read: Moral Markets

  • Is economics an amoral science? No, though sometimes it seems so. Look at what is taught at most business schools and economics departments and you might certainly get this impression. Indeed, the focus on the rational decision maker – a rather selfish sociopath – in most curricula in business, law and economics may be a cause for the rather unscrupulous behavior that can be observed in the current business world: Greed is good.

    The world is not amoral. Even markets are not. Successful economic exchange without trust, reciprocity, honesty and some sense of fairness seems hardly possible. At least if you listen to the diverse team of authors of Moral Markets. And I tend to agree.

    Moral Markets is the result of several years of collaborative research and discussion (the list of contributors is rather impressive). It reviews the critical role of social norms in the economy from a diverse set of fields and points of view. The discussion ranges from biology, the animal world and evolutionary arguments to philosophical questions (and answers) and an analysis of our current perception of the economy to the interdependence of social norms and law and of course (economic) behavior. The main message is clear. Without a social conscience we would not be as successful as we were so far. And it is unlikely that we will keep up the pace if we forget the importance of social norms, values and virtues.

Read: Rational Decisions

  • Ken Binmore’s Rational Decisions is not quite what I expected when I first read just the title. It is, however, something you should very much expect from Ken Binmore. He is an excellent Game Theorist. And even though he eyes current experimental economics rather critically, i.e. he is just more skeptical about some of the claims your standard experimental economists (or are these rather behavioral economists?) are willing to make, his research is very much based on empirical findings, experiments and the boundedness of human capabilities and facilities.

    Rational Decisions is about Bayesian Decision Theory. It is about where it can apply and where not. Bayesian Decision Theory It is useful in Games, in situation in which everything is known up to an exactly quantified level of risk. It is utterly “ridiculous” if the decision maker instead is confronted with uncertainty as is the case in the real world where most events do not have a unique objective probability.

    Rational Decisions is, therefore, about filling the gap between Decision Making under risk and Decision Making under uncertainty. In my opinion, it is ultimately about an instance of Bounded Rationality.

    Binmore gives a comprehensive overview of the standard economic model of decision making and its limitations. He explores the foundations of this model, reviews the historical context and clarifies how Economic Theory has to be interpreted, that current Economic Theory (i.e. the concept of revealed preferences and utility) is not concerned with psychological motives at all.

    His writing is witty and opinionated, yet, succinct and clear. Though, sometimes the math made me think twice… All in all, Rational Decisions is a very enlightening experience.

Read: The Making of an Economist, Redux

  • I am not at an economics department any more. Yet, I am still interested in the profession. Maybe even more interested than a few years before. David Colander provides with The Making of an Economist, Redux a brief overview about the state of the economics curriculum and the economics student at a few of the elite US universities in the early 2000.

    I am a little bit disappointed, disillusioned and reaffirmed.

    Disappointed because I expected more from this book. The content is mostly fine as far as the topic allows. The presentation, however, could be improved considerably. All the endless tables should have been made into less messy and more clear graphical illustrations. Or at least been complemented with them. The data analysis is cursory, yes. But, I guess this serves a purpose. The data may suffer from several biases and the current analysis does not pretend any false precision or representativeness.

    Disillusioned because US economics students may be even more ignorant than I would have thought before. The system really seems to produce basically only a conforming mass of idiot savants.

    Reaffirmed because there seems to be only minor differences between the economics education in the US and Germany. In both places the history of economic thought and more broader philosophical questions are not addressed any more – at economics departments. General knowledge about economics is under-appreciated and training focuses on producing least publishable units.

    I wonder: Is there any comparable research done for Germany and / or Europe?