Big Ideas in Social Science: An Interview With Robert J. Shiller on Behavioral Economics
There’s an argument that specialization allows people to progress further in their field and is preferable to knowing a little bit about everything.
.. There are no errors in conventional economics: it’s all rational optimization.
.. While home prices were going up and up it just seemed as if anyone who raised the observation that they might fall wasn’t making an intuitively plausible observation. Until they started falling!
.. The amazing thing is that, in the economics profession of 20 years or so ago, there were no bubbles.
.. ever since Samuelson wrote this a half-century ago, that people want to maximize their consumption. All they want to do is consume goods; they don’t care about anyone else. There’s neither benevolence nor malevolence. All they care about is eating or getting goods and they want to smooth it; they described it in terms of so-called “utility functions through their lifetime,” and that’s it. That is such an elegant, simple model, but it’s too simple.
.. If the economy were to improve, what would your employer do?
A. Nothing — why should he or she help me just because the economy goes up?
B. Well, if the economy were to improve, that would mean the market for my services would improve, so my employer would realize out of self-interest that he or she would have to raise my wage in order to keep me.
C. My employer is a nice person and he would recognize that he or she should share the benefits with employees.
.. I think that if people think that fairness is such an important thing in labor contracts then modeling the world as if it’s of total insignificance is wrong.
.. it doesn’t help to have a theory based on wrong assumptions.
A Conversation With Dan Ariely About What Shapes our Motivations
Dan Ariely on building an understanding of how humans behave from the ground up.
So what is the motivation for people who do standard economics to discount how irrational human beings are?
It’s not that they want to do it, but economics is a very beautiful framework. Imagine that somebody from the government comes and tells you, “I want to figure out how to do a healthcare system.” If you’re somebody like me, you would say, “I have some ideas, I have some experiments, let’s run them. And in five years, maybe 10 years, I’ll give you some answers or guiding principles.” But if you have somebody who comes from the perfectly rational perspective, their lives are simple. It’s much more straightforward.
But what I think is the sin of economics is that they are not only a descriptive study, like physics, chemistry or biology, which all describe nature from very different perspectives, none of which is complete. Economists say, “We also will tell you how to live your life.” So it becomes prescriptive as well.
.. Their idea was to take the top 10 percent of teachers in each school and give them a bonus, and they asked me what I thought.
.. I explained that every particular solution is an antidote to some specific problem. If you think that the solution is to give the top 10 percent of teachers a bonus, it means that you think that teachers know what to do, and the only thing keeping them from doing it is that they are lazy, and they need another motivation.
.. Not only that, but this particular solution requires that every teacher thinks they could be in the top 10 percent. Right? Because if only the top 10 percent think they could be in the top 10 percent, it will not motivate the bottom people. So people need to be over-optimistic in this scenario.
And what was clear in that example, to me, was that they had this very naive notion: “Let’s just pay people and somehow things will magically become better.”
.. Now if this ministry of finance got their way, the only thing they would guarantee is that none of the good teachers would want to help the bad teachers because then their bonuses would be at stake, right?
.. people clearly would like a bigger bonus, but can they will themselves to perform better? And finally, to what extent is thinking about the bonus a good thing?
.. imagine I paid you $10 per mile that you ran or a million dollars. Right? If I paid you a million dollars, you could will yourself to run more. But if I paid you a bigger bonus to become funnier or more creative, that is not something that you can actually control.
.. the “IKEA effect”: when we build something ourselves, we not only like it better, but believe other people will love it, too.
.. “Tell me what to draw and I will draw it,” or “You draw and I’ll tell you what to draw.” And then they came out of the room and the research assistant stood in front of the kid, holding the drawing, and said to the kid’s mother, “Look what I did.”
.. There are professions that don’t need that help because it’s clear how difficult it is. People who run a marathon or train to be an Olympic swimmer don’t have to tell you how much they practice and how difficult it is. But when you do something like writing, it is very, very difficult to figure out how much effort actually went into it. So we kind of have to tell people because it does change how we think people view what we have done.
.. But if you’re a vegetarian, you could say to yourself, “Let me be vegetarian 85 percent of the time.” What would happen if that’s the rule that you set for yourself? You would fail. You would not fail all the time, but you would fail often, because it’s hard to keep a rule that is about 85 percent of the time. So people basically become vegetarians all the time and it’s an easier thing to stick to
.. a Ulysses contract: We constrain our behavior now to force ourselves to do something in the future. For example, have you ever made an appointment with a trainer in the gym and paid in advance, and if you didn’t show up, you couldn’t get the money back?
.. You write that as soon as the monetary system is introduced, it completely undermines the social contract.
.. I asked one bank, “What do you do with people when they get a bonus of more than a million dollars?” And they said, “Nothing. We don’t even shake their hands.” I was quite outraged. It’s a public company and they are wasting our money! I would much prefer if they paid people eight hundred thousand and invited them for a beer. But they’re so happy to give our money away that they don’t even think about what else they can do, and they’ve created a culture in which they don’t even say, “Congratulations, and thank you very much, I really appreciate your help.”
The Simple Economics of Machine Intelligence
When the cost of any input falls so precipitously, there are two other well-established economic implications. First, we will start using prediction to perform tasks where we previously didn’t. Second, the value of other things that complement prediction will rise.
.. Once prediction became cheap, innovators reframed driving as a prediction problem. Rather than programing endless if-then-else statements, they instead simply asked the AI to predict: “What would a human driver do?” They outfitted vehicles with a variety of sensors – cameras, lidar, radar, etc. – and then collected millions of miles of human driving data. By linking the incoming environmental data from sensors on the outside of the car to the driving decisions made by the human inside the car (steering, braking, accelerating), the AI learned to predict how humans would react to each second of incoming data about their environment. Thus, prediction is now a major component of the solution to a problem that was previously not considered a prediction problem.
.. However, this does not spell doom for human jobs, as many experts suggest. That’s because the value of human judgment skills will increase. Using the language of economics, judgment is a complement to prediction and therefore when the cost of prediction falls demand for judgment rises. We’ll want more human judgment.
.. when prediction is cheap, diagnosis will be more frequent and convenient, and thus we’ll detect many more early-stage, treatable conditions.