Category Archives: Economics

Prospect Theory & The Election

“Democracy is the theory that the common people know what they want, and deserve to get it good and hard. ~ H.L. Mencken

As a follow-up to my recent post, “Education and the Election,” another thing that struck me about the voting was how prospect theory in behavioral economics explains why many gambled on Trump.

Prospect theory helps explain why voters reject safe options—say remain in the EU or elect a well-qualified Democrat candidate—in favor of riskier ones. Here’s the idea. If I offer you a choice between giving you a $50 bill, or flipping a coin and giving you either $100 or nothing, most people take the $50. They accept the sure thing. But when people are already down $50, and they have a choice of either doubling down to get even or lose $100, most will accept the risk. When people are losing, or believe they are, they are less risk averse.

Now it’s pretty straightforward how this applies to a choice like Clinton-Trump or Brexit-NoBrexit. In fact, the behavioral economists Quattrone and Tversky showed how prospect theory rather than rational choice theory generally explains voting. Again, if people believe they are doing poorly, and/or that others are doing better than they are, then they favor riskier candidates. As explained by Christophe Heintz:

Many of the explanations for the Brexit and Trump votes … emphasized how frustrated citizens were with their economic situation, and the effect of fear mongering discourses and appeal to lost grandeur … The political discourses of the Trump and Brexit advocates have framed the stakes in terms of losses rather than gains. The slogans “Make America great again” and “Take back control” clearly refer to the lost grandeur of the past. This sets the reference point as a lost state that was much better than the current one. Also, fear mongering is by definition talking about the frightening (negative) state in which we find ourselves. All this motivates citizens to favor risky options: the gains, even if they are unlikely, are so strongly desired that they induce discounting the very likely losses.

This is the political equivalent of going “all-in” in poker. And, as a former professional poker player, I can assure you this is a dangerous move. Especially when the outcome of putting nuclear codes in the hands of unstable, narcissitic minds is much, much worse than losing all your chips in a poker game. Millions, if not billions of people will die if crazed, fascist leaders with nuclear weapons at their disposal make the wrong move.

And by the way, it is INSANE that there are thousands of nuclear warheads on hair trigger alert in the hands of anyone, even relatively sane people. Pleistocene brains aren’t to be trusted with such power. Oh, how I hope that we use technology to enhance ourselves.

Karl Marx for Dummies

In yesterday’s post, I discussed Professor Barry Schwartz‘s recent New York Times article “Rethinking Work.” I concluded that post by noting that no discussion of the nature of work is complete without a consideration of the economic conditions of the society or societies in question. And any such discussion must reflect upon the thought of Karl Marx.

Marx would say that Schwartz was talking about what Marx called alienated labor. The basic idea is that most workers aren’t happy with their work because it does not express or elaborate their being. Workers in modern capitalistic societies are alienated from the process and products of their labor, and ultimately from other people too. They work for money, but derive little satisfaction or meaning from their work. This short video provides an excellent introduction to the basic ideas of Marx’s philosophy. (I also recommend Terry Eagleton’s excellent book, Why Marx Was Right.)

Reader’s Comments on Thomas Piketty

On June 12 I wrote a post “Thomas Piketty & Neil deGrasse Tyson” which elicited some comments from readers. I then added a few more thoughts in my June 13 post and decided to elaborates somewhat in my June 14 post : “Thomas Piketty, Critical Thinking, and Social Stability.” These posts elicited comments from readers who put a lot of time into their responses. Since they did I thought I’d give two of those comments the front page today.  Both address the issues, with the latter a rejoinder to the former. (For those interested Charlie Rose devoted a recent PBS broadcast to an interview with Piketty.)

Professor Messerly:

Commenter #1.

I have read numerous (8+) reviews of Piketty’s book, which skewer it for different reasons, along several dimensions. If you read even a few of these reviews, you will see that Piketty repeatedly makes claims like:

Controversial assumption A + controversial assumption B, under economics model X, predicts conclusion Y, the data support Y, therefore … capitalism is fundamentally broken.

Over and over again, Piketty refers to the fundamental flaw or error in capitalism, based on far narrower and nuanced premises, just like in the example that I outline above.

You write: “As a non-expert in the field though I am more likely to accept his views–since they are consistent with the majority view among economists today–than those of blog post or articles by individuals who have a vested interest in his claims being false.”

FIrst, I’m not sure that his views are “consistent with the majority view among economists today.” Most moderate-left economists are cautiously supportive of capitalism as the engine of growth and abundance in the world, given certain constraints. Most of the economists do not, to my knowledge, regard modern capitalism as doomed to self-destruct without even greater reforms, taxes, and redistribution than we have now. That sounds more like Marx than The New York Times or the American Economic Review.

Second, even if your claim (Piketty is consistent with mainstream economics) is true, I’m not sure that’s a solid foundation to form beliefs, instead of reserving judgment. Your statement itself involve enormous complexity, in deciding what exactly is Piketty’s view, and what about it is consistent with the “majority” of economists. And do we really want to turn your beliefs about economics into a popularity contest?

Lastly, the far more important point: you discount critiques of Piketty by alleging that his critics are biased because they succeed through “plutocra[cy.]” The first major problem with this argument is that Piketty’s critics are typically not millionaire robber barons twirling their mustaches and counting their gold coins. They are libertarian, conservative, and independent economists, pundits, and scholars. Few people would call academics like Tyler Cowen or Bryan Caplan or Scott Sumner (or any of the writers at the Liberty Fund) to be “plutocrats.” They’re university economics professors, and bloggers, with various degree of success in publishing books (Cowen moreso than the others). The true plutocrats in the United States, like the deca-millionaire tycoons on Wall Street, generally don’t give a damn about Piketty because he’s too powerless, and his book too trivial, to upset their daily lives. Most of them are ignorant of academics and probably have no idea who Piketty is.

The second major problem with appealing to bias is that liberals are biased. If you live in, say, Seattle, surrounded by liberals, then there is undeniable pressure to fit in and agree with everyone else. Same if you teach in a college/university or surround yourself with academics. If you like women, and women are significantly more liberal than men, then you will feel pressure to be liberal. If you Piketty endorses signaling that you care by supporting more taxes and redistribution, and if women tend to be more caring and nurturing (and like those who signal the same tendency to care), then you’ll feel pressure to be liberal. If you stand to gain from liberal policies through increased welfare and handouts (as I would and you would and most people would) then you will feel increased pressure to be liberal.

So two can play the “bias” card. That’s why I asked you about Haidt’s theory of political differences and moral sensibilities (see his book The Righteous Mind). That’s also why I asked you about well-known sex differences in political views and voting patterns.

Commenter #2

Point 1 – From what I remember, Haidt’s main thesis was that reason is the slave of the passions. We have a gut reaction to some situation and find a justification that allows for the preservation of our mental framework as much as possible. If such accommodation is not possible, we’re much more likely to ignore the fact/situation than demolish our mental framework and start over. He also uncovers some “universal” moral sentiments based on surveys across cultures but I don’t remember what they are. I do remember that they are the way they are because they more or less fit with human nature (an evolved trait we can agree?). Whether you accept them or not is a function of where you were born (time, location, social-context) your particular biology, your personal experience and some amount of random chance. In all of his examination, he finds that Liberals have two of the moral foundations whereas Conservatives have six. All this is not say (in my interpretation) that one is better than the other but that neither is “right” each is appealing to different areas of moral sentiment that are necessary for a government to be responsive to humans as they are.

Now your question – what does Dr. M think of this. I can only surmise from reading this blog that he would say something along the lines of “Is” does not imply “ought”. At best, this would create a government/political party that mapped perfectly to “human nature” (let’s assume we can Identify the bell curve of whatever this is and not worry about outliers) which I don’t think Dr. M would think is a “good” thing.

Seeing as he espouses that we need science/technology to re-engineer human nature are get rid of traits that may have been useful in small tribes but that with bio and nuclear technology threaten our very existence as a species. I would think he would want us to use the scientific method to figure out what traits are best to ensure our long-term survival as a species so that we can get to the technological singularity and create a trans-universal species worthy of omnipotence and omniscience.

In a nutshell, Haidt is saying evolution produced x so let’s understand x and make a government that caters to it. Dr. M is saying, x is going to get us killed so let’s go turn x into y where y is awesome :)

Point 2 – It is only in a patriarchy that came to power and sustains itself through violence that some set of universally human characteristics are derisively called feminine. Violence vs. Diplomacy? How is one either feminine or masculine? Your assignment of these genders belies your misogyny.

Point 3 – From what I’ve read, all the “skewering” you talk about was pretty easily dealt with. In fact – here’s his response to the FT piece that kicked all this off and does deal with your issues of big data sets and questionable data. I mean we work with what we have right? Since there isn’t perfect data we can’t try to understand something? Then how is science ever to progress? Anyway here’s his initial response:

“Let me start by saying that the reason why I put all excel files on-line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues.

Let me also say that I certainly agree that available data sources on wealth inequality are much less systematic than what we have for income inequality. In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which everybody could agree with).

For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data; household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top); Forbes-type wealth rankings (which certainly give a more realistic picture of very top wealth groups than wealth surveys, but which also raise significant methodological problems, to say the least). As I make clear in the book, in the on-line appendix, and in the many technical papers on which this book relies, I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on-line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and together with my colleagues we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusions about the long run evolution of wealth distributions was much affected by these improvements.

I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what the FT suggests. Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least). In particular, the FT simply chooses to ignore the Saez-Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self-reported wealth survey data that notoriously underestimates wealth inequality.”

Thomas Piketty, Critical Thinking, Social Stability

A Reader’s Comments

I just wanted to thank all those who comment on my recent post and briefly reply to a comment from a reader who stated: “The confidence with which he [Piketty] states his conclusions … is staggering.” I don’t know if the reader has read the 700 page tome–I have only perused it–but on the very first page Piketty states: “Let me say at once that the answers contained herein are imperfect and incomplete.” This somewhat belies the reader’s claim about Piketty’s staggering confidence, although perhaps Piketty expresses more confidence later in the work. I do know the book is the culmination of fifteen years of research and that it was researched with and by multiple colleagues. I also suspect that the criticism of it is, for the most part, hastily derived. And as a lifelong academic I know that, for the most part, my colleagues were more interested in truth than political pundits. Still I acknowledge that Piketty’s basic ideas–and those of his multiple collaborators–may be partly or wholly mistaken.

The reader also states “Piketty’s book has been skewered in numerous blogs (see numerous posts on Marginal Revolution) and prominent articles.” I have no doubt that is true and there are differences of opinion in the world. As a non-expert I am not in a position to adjudicate among these disputes. If the massive data he and his collaborators presents turns out to be wrong, or if other evidence falsifies his various hypotheses then so be it. Still one must be skeptical of the critiques for reasons I will explain in a moment.

Critical Thinking

I would also like to address how these considerations bring up questions of critical thinking. How should we form opinions on topics about which we are not an experts? I am not an economist and I doubt most of my readers are. In general I have always held to the advice expressed by Bertrand Russell in his essay “Let the People Think:”

(1) that when the experts are agreed, the opposite opinion cannot be held to be certain; (2) that when they are not agreed, no opinion can be regarded as certain by a non-expert; and (3) that when they all hold that no sufficient grounds for a positive opinion exist, the ordinary man would do well to suspend his judgment.

This is a good starting point but there are other considerations. For example how precise is the subject matter we are talking about? Physics and biology are very precise sciences, psychology and sociology much less so, and theology and poetry are not precise at all. Thus I generally trust the views of biologists concerning biology but not the views of so-called theological experts, assuming there even are any. (I don’t think there are.)

Another consideration, perhaps the most important one, is to ask yourself who has a greater interest in lying to you or deceiving you? For example consider tobacco companies who for years and to some extent today still deny the connection between tobacco and various health risks associated with their products. It is possible they are correct, that over 50 years of medical research is mistaken, and that the research is part of some liberal plot to get the government involved in regulating tobacco. But such a view strains credulity. The tobacco companies have a much greater incentive to lie than the scientists and thus should be trusted much less.

Or consider that there is overwhelming evidence and reasons to accept the most basic idea of modern biology-evolutionary theory-rather than the non-scientific creation myths of various religions. But religious institutions often believe it is in their financial interests to oppose such science–otherwise they might lose contributors! Those who tell you to doubt biological evolution are either ignorant–they truly don’t know that evolutionary theory has the same scientific status as gravitational or atomic theory–or they are lying to you because they fear the consequences of you abandoning your religious beliefs. Unlike science, religious institutions believe they have a vested interest in lying, or perhaps they come to believe their own lies.

Similarly one should be skeptical of the claims of fossil fuel companies who for the most part deny the connection between human activity–burning fossil fuels, eating meat, etc.–and global warming. As stated in this blog and referenced numerous times, that view is at odds with the near unanimous view of climate scientists. It is much more likely that the disinformation campaign regarding climate change is motivated by the profit of the fossil fuel industry than that there is some conspiracy among scientists. There is also ideological opposition to believing in climate change because most likely it will require global governmental action to address this issue.  (“Cap and trade,” a conservative and market based approach also holds much promise, although for political reasons  it has recently been abandoned by the Republican party in the USA, since so many of their political donations come from the fossil fuel industry.)

Now consider Piketty’s work. There is a small but politically influential sector of plutocrats who believe they have a vested interest in Piketty’s claims being false. And of course Piketty’s basic claims may be false. Still, as a non-expert in the field though I am more likely to accept his views–since they are consistent with the majority view among economists today–than those of blog post or articles by individuals who have a vested interest in his claims being false. Of course economics is not as precise a science as climate science or biology and hence we cannot be as certain of its conclusions. The majority of economists at MIT, Berkeley and Harvard may turn out to be mistaken and the majority at the University of Chicago may be vindicated. (Although many of the ideas of the contemporary right of the American political spectrum are very radical and would be unrecognizable even to Adam Smith, Freidrich Hayek, and Milton Friedman.)

Social Stability

All of this leads to even larger issues. Since Piketty’s research is about, among other things, income inequality, it is easy to see why those with the most wealth generally oppose his ideas. But I am not sure that the wealthiest members of society benefit from their opposition to the minimal welfare state in the USA much less the more generous ones in Western Europe and Scandanavia. (Which I must add consistently are shown to be the happiest, most prosperous and most peaceful countries.) After all the wealthiest members of the society benefit the most from political stability. To the extent they undermine it–pay low wages, disenfranchise voters, support violent anti-government anarchists–they may undermine their power. The revolutionary ideas they foment may be self-defeating.

Thus it is probably not in the self-interest of prominent right wing commentators to go on national television and support anarchists who aim assault weapons at the government officials trying to collect money for using public lands. After all it is the police and the national guard who ultimately protect those who have wealth and power.


Yesterday’s Post–Tyson & Piketty

[I made a mistake in yesterday’s post. Immediately after the summary of Piketty’s and Tyson’s position I wrote: “Rosenberg believes that both messages are “almost quasi-religious,” which is why they strike fear into economic and religious conservatives.”

The actual quote from the article is: “If this sounds almost quasi-religious, you’re right. And that’s really the deepest terror that conservatives have when encountering Tyson, and the whole sweep of scientific discovery he articulates.” The quote immediately followed the summary of Tyson’s position and was meant to apply to the quasi-religious implication of cosmology. It had nothing to do with Piketty’s economic theories. I apologize for the error.] 

A Few More Thoughts

Also Rosenberg is not suggesting there is anything quasi-religious about the social or the natural sciences–they are based on reason and evidence. What he is saying is that the meaning or implication of scientific theories can have a religious-like effect on people. Persons may be moved–in a near religious way—by astronomy, economics, biology, or any other science. (They also may be religiously fanatical about astrology, scientology, libertarianism or Ayn Rand too.)

But the evidence for gravity, biological evolution, climate science, or economics stands on its own—as both Tyson and Piketty maintain. Here is how Rosenberg makes the point:

Indeed, open-mindedness lies at the heart of what both Piketty and Tyson are up to. “My view is that if your philosophy is not unsettled daily then you are blind to all the universe has to offer,” Tyson said. It’s a profoundly anti-dogmatic view, though well in keeping with mystical traditions of all faiths. As for Piketty, a similar spirit is reflected in the data openness that’s an integral part of his work, which makes it particularly easy for others to criticize it — as has happened with the Financial Times recently. Lest there be any doubt, here are the first two paragraphs of his initial response to FT’s criticism:

“I am happy to see that FT journalists are using the excel files that I have put on line! I would very much appreciate if you could publish this response along with your piece. Let me first say that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues” (if there was anything to hide, any “fat finger problem”, why would I put everything on line?).

As Piketty goes on to explain, wealth data are not nearly as systematic as income data are, so the challenge of making them comparable is considerable, as are the benefits of open dialogue, collaboration and debate. He continues in the same spirit in his detailed response, which he begins by saying, “This is a response to the criticisms — which I interpret as requests for additional information — that were published in the Financial Times on May 23 2014 (see FT article here).” Here, specifically, as is generally the case, openness is a requirement for the advancement of knowledge.

Final Thoughts

I am not an economist and will not revisit these issues again, especially since I have no expertise in economics. Moreover, economics, ethics, politics and religion are notoriously controversial subjects which elicit fervent emotions—and I am too old to argue about such matters. As the body withers and the mind slows down the debates of youth seem less relevant. Besides that I’ve found, as I’ve stated many times in this blog, that you almost never change anyone mind, primarily because people are wedded emotionally to their views. I am sure that I am guilty of this too. To avoid the pitfalls of emotionally based confirmation bias all one can do is apply the scientific method as assiduously as possible and proportion one’s assent to the evidence. This is what real seekers of the truth do and what I have tried to do all my life. Of course scientific truth is always provisional and evolving, so we can never be sure of our answers, as I’ve stated many times in this blog.

Finally the main point of the previous post, and of Rosenberg’s piece, was not to discuss the intricacies of economic theory but to reflect on the desperate human need for new ideas about how to create a more just and meaningful world. In that spirit I’ll let Tyson have the final word:

“I am driven by two main philosophies: know more today about the world than I knew yesterday, and along the way, lessen the suffering of others. You’d be surprised how far that gets you.”