Social sciences

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.

Very recently I came across Oxford University Press’ Very Short Introduction series. The series comprises now of almost 300 titles ranging from Archeology 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.

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.

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.

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.

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. [url=http://en.wikipedia.org/wiki/Student’s_t-distribution]Student,[/url] 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.