Unpredictably Rational
by ilene - April 5th, 2010 3:44 pm
I don’t think humans are rational creatures but we do have an ability to make rational decisions. And perhaps an even greater ability to rationalize our (rational and irrational) behavior. Just saying. – Ilene
Unpredictably Rational
Courtesy of Tim at The Psy-Fi Blog
Common Sense
As we go about our everyday lives we don’t spend a lot of time reflecting on the irrationality of the people around us. Certainly from time to time people do stupid things, but by and large most of us make it through most of our days without driving the wrong way up roads, roasting our dogs in microwaves or buying stocks in stupid companies. Even when we do odd things there’s usually some recognisably rational reason for us doing them.
This version of human rationality is virtually unknown to all brands of economics which largely insist on defining rationality in an irrational way and then sniggering at the human race when it fails to live up to the standards that some rather over-focused economists think it should. The problem for them is that we’re not the irrational ones, they are. The problem for us is that the people that matter listen to them, not us.
Maximal Utility
The definition of rationality that’s at the centre of modern economics is a strange conceit, based around the idea of maximising utility. Underlying this is an assumption that rationality means that we’re consistent in our choices: faced with the same situation we should always do the same thing. From this position economists have then spent a great deal of time trying to design experiments to show that this is what we do, which is just about possible when you remove all vestiges of reality from the situation (see, for instance, Be a Sceptical Economist).
However, real-life isn’t like this. We rarely, if ever, face the same situation twice: life is a stream and we can’t stand in it twice. Mostly we must face each situation anew and make new choices each time. Obviously we rely on past experience to guide us in our decision making and, as we all have different experiences to guide us, we make different decisions. We even make different choices ourselves between very similar circumstances and most of us will see nothing wrong in this. It’s certainly not…
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Valentine’s Day Sexonomics
by ilene - February 21st, 2010 2:36 pm
Valentine’s day revisited through the eyes of Eric and from an economic perspective. The same principles that are used in choosing which stock to buy can be used in selecting a mate, or the other way around. – Ilene
Valentine’s Day Sexonomics
Courtesy of ERIC FALKENSTEIN
Steve Levitt’s Freakonomics bestseller highlighted that many quirky phenomenon can be analyzed using economic reasoning, or really, assuming individuals are self interested, and applying statistics and logic to that. Many people find this application of ‘economics’ much more interesting than applying such logic to widgets or muni bonds, so why not just get all those cost and indifference curves in price/quantity space out of economics textbooks, and replace with sexy pictures and fun sex trivia? One could then see economic lessons on Spike TV, right after Manswers. After all, sex is an object of exchange just like any other commodity, but a lot more fun for college-aged students to contemplate.
For example, Charlotte Allen’s article on the New Dating Game, and Lori Gottlieb’s book on why women should settle rather than become spinsters, brought forth a lot of ‘Freakonomic’ issues around dating, sex and marriage, and generated considerable blog buzz (see Robin Hansen, Slate, Jezebel). Writing about these matters is always sure to get people excited, because these are issues people feel they understand pretty well, so people who disagree are way wrong! This got me thinking about the fun book, Mathematics and Sex, which is good nerd porn. Consider the application of economic models to the following issues:
Asset pricing: Choosing a young man for a long-term mate means evaluating his future value; you don’t want a young hottie who won’t age well. Hot Chippendale dancers with low intelligence aren’t good buys. But then, if you want to get the next billionaire, should you try to find the next Bill Gates or Warren Buffet? These are true nerds, and at 18 they weren’t attractive to most women (Buffet writes candidly about his social ineptness as a young man). So, should women glom on to nerds? Well, it could be that nerds have a higher top return, but lower average return, so this isn’t optimal even abstracting from their obviously lower current value. Fads based on conspicuous successes can alter the value of current young men. Perhaps your dad was a prior bubble (eg, he…
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Science, Stocks and Superstition
by ilene - August 31st, 2009 10:55 pm
Science, Stocks and Superstition
Courtesy of Tim at The Psy-Fi Blog
Unreliable Science
As we’ve seen – repeatedly – people aren’t particularly good at overcoming the behavioural biases built into our nature by evolution. There’s no real reason we should be – computing the statistical probability of an above average return on the stockmarket over a twenty year period wasn’t of much value for most of human history. This was partly because twenty years was more than the average lifespan of a proto-human but largely because no one had yet got around to inventing money or stockmarkets or stocks. Or ‘years’.
If these biases are inherent and cause us to do stupid things around finance we might expect that they’ll appear in other areas as well where humanity has only recently started to apply its higher cognitive functions. So it’s unsurprising that our basic intuitions about science are about as reliable as those we have about finance. To whit: not reliable at all.
Greek Geeks
Science has been around a lot longer than modern financial theory. The Ancient Greeks developed many concepts that aren’t out of place in the modern pantheon of university science faculties – atomic theory, planetary orbits and toga parties amongst them. Unfortunately they failed to marry their scientific insights to a stable economic system and much of their knowledge was lost for the best part of a millennium. The lesson being, presumably, that disenfranchising women and relying on slave labour is a poor way of building a stable society. Global corporations take note.
During that lost thousand years or so the only real legacy of Greek knowledge in the Western world was a smattering of Aristotle, who was a bloody good thinker but a bit weak on stuff like planetary motion and mathematics. Somewhere along the line Aristotle’s ideas got mixed up with Christianity and resulted in the odd position of the Catholic Church defining God’s word on the basis of the scientific writings of an atheistic Greek who died before Christ was born. We can blame Thomas Aquinas for that one.
The period known as the Renaissance – the rebirth – was marked by a remarkable rediscovery of Ancient Greek thought. Some of this came from the Muslim world, where many ideas and writings had been sustained through the European Dark Ages, and some of it from the
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site
