Financial crisis & behavioral economics

TNR pubilish an article (click here) by Akerlof (Berkeley-Nobel Prize Winner) and Shiller (Yale). The title is provocative "Our New Theory of Macroeconomics' and very powerful excerpts below:

"The role of irrational behavior in the macroeconomy is not trivial and obvious to see. It requires the development of a new theory, which we only just have begun to provide in our book. In this book we strove to put together an array of evidence, some of it from psychology, some of it from economic research, that gave an overall picture that we think is in stark contrast to the usual paradigm.

It is a picture that stresses factors that are totally absent from conventional macroeconomic theorizing: that the economy is affected by variations in the level of trust, by storytelling and human interest, by perceptions of corruption or unfairness, by anger and optimism, by social epidemics causing changes in gut instincts and feelings. Those factors, we firmly believe, are ultimate causes of the boom we saw a few years ago, and the bust we are seeing now".

respond to Posner's (Chicago) review (click here) of their book "Animal Spirit.

Seem like a worthy book to read. And a call to arms for behavioral macroeconomist.

Update: more book reviews on origin of financial crisis (click here)

The long smoke of MUI 'fatwa'

I penned an op-ed in Jakarta Post (click here) on MUI fatwa.

The go-to model to analysed addictive behavior is the one developed (click here; JSTOR subcribtion required) by Gary S Becker, a Nobel Prize winner and briallant economist. A more recent model by O'Donogue and Rabin is worth a look (click here)

Interesting how religion could play part (or could they?) in policy debate. Even more so since there is no punishment (or excommunication) for disobeying the fatwa in the way MUI structured in Indonesia. It is more of moral suasion than a directive. Would be interesting to analyzed the impact on cigarette sales figure

The responds to more article on the comment section of Jakarta Post website are quite lengthy and passionate. Still thinking whether to respond and in what tone. Any suggestions?

Barack Obama and Behavioural Economics

This blog is not in the business of endorsing US presidential candidates. Nor we harbor illusion that our position can move votes there.

Nevertheless, as economist wanna-be I could not help but excited over an article (click here) that point how Richard Thaler, one of the early economist that point out behaviour anomalies could not be explain by standard model, is in close contact with the candidates. Behavioral Economics is currently getting stronger hearing in the mainstream after recognition from Nobel Prize committe in 2002 & 2005.

One of Obama policy attributed to his influence cited in the article is:

“For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called status quo bias.”

Good to know that Obama that despite his soaring rhetoric (watch here and here), base his policy on solid and strong economic ideas. They say that economics has turned cynical and can do nothing but become empty shell of materialism. They say that economics can not bring insight about real human behavior into useful policy recommendation. To those charges, let us answer in three words. Yes, we can!

Addendum (01/03/08) from an article in The Economist:

"His chief economic adviser, a respected young academic called Austan Goolsbee of the University of Chicago, is sensible and pragmatic. His plan to save millions of people from struggling to fill out their tax returns is a gem. Anyone who earns only a salary and bank interest, both of which are automatically reported to the taxman, will be sent a tax return that has already been filled in, which they can accept or reject. At a stroke, countless headaches would be averted."

So You Don’t Want To Regain the Lost Weight

So you lost some weight during the Ramadhan month and you afraid that the multiple Eid feasts on family and friend’s houses will (or already) bring back some added inches on your waist (and other places)

And there will be some halal bihalal meeting with family, friends and business partners. Such horrors.

What can you do about it? And what a marketing professor from Cornell can tell you?

Brian Wansink focuses his academic life to study how we decide and – and how much – to eat. Its not as silly as it first sound, food and beverages is a multi billion dollar business worldwide. Any cues that can make consumers eat more, and spend more money, mean some additional fat in the company's bottom line (pun intended).

In his book entitled Mindless Eating , some of his wisdoms at the table are to use small spoon, small plate, and don’t let other people clean the remains or refill your plate/glass while you are still at the table.

Those things should not make a different. After all it is the amount of food we put into our mouth that matter. And we as rational human with will power and self control should be able to know when enough is enough. Right?

Apparently not.

In his experimental studies, Wansink found that average subjects eat 15 % more using big spoon and 25 % with big plate. Having the bones of chicken wings cleaned up by waiters while watching a sport match at a bar on average resulted in you eating 28 % more.

The classical rationality argument that using small spoon and small plate resulted in more energy thus making you want to eat more seems not to be working here. It seem that human mind affect by relative as well as the absolute. The more we see empty space (a.k.a plate) the more we want to fill it up, with little regard on actual quantity, while taking every spoon as equal. This mispredictions are robustly repeated an not a one time aberration.

While you are at it. Loose the flower on the table and put food on the table with fewer colors since Wansink found doing the opposite strongly correlate with higher food intake. Apparently having color and smell around at meal time distract human mind and trick us to eat more.

People said we are what we eat. Maybe it’s better to say that we are what we decide to eat with.

Fasting and Intertemporal Choice.

by Berly

During Ramadhan, the Moslem all over the world withheld from food, drink and sex from sunrise to sunset. There are many research that point out the health and social benefit of this practice, but what drive most people to do it is the quest for the Almighty’s grace and benevolence.

Economists study the choice people made. While some still insist on model of fully self interest agent, some try explain why people behave the way they do. After all, isn't the great Gary S. Becker from University of Chichage that said De Gustibus Non Est Disbutandum (preference/choice is not to be questioned).

If people refrain from consuming certain goods, which bring positive utility in normal times, at certain then it must be because not doing so bring higher utility directly or indirectly (you can bring peer pressure and historical construct if you like) during Ramadhan.

Numerous researches has proven that most people care more about now and present than later. Even if the utility from consuming now is lower than the cost that likely to follow later. This has been one of the strongest explanations of self destructing behavior such as drug addiction, criminal, outside-marriage-pregnancy, etc. Many people are poor calculator of their own well being.

Thus, their utility function (sorry my apology for economists infatuation of making graphical representation out of almost everything, don’t get me start on mathematics) is shape like a hyperbola where the impact of present action get higher weight over the later period. The short hand is hyperbolic discounting.

If fasting work as intended (and robust through time) then the gravity of choice would shift from now to later and from this world to afterworld. People would care not about what good now for themselves but more to what good in the eye of Almighty. Daniel Goleman in his best seller "Emotional Intellegence" pointed out those with willingness and self control to wait for better things are more succesfull in life

When Robert E. Lucas Jr. in his Nobel Prize winning model of rational expectation model proved what ever government do would not matter (policy irrelevant) for a rational and fully informed economic agent, is it possible to extend the model so that for some people the utility function will be strongly anti hyperbolic (help me on this, what is the correct term) so that the present mortal and corporeal world do not matter? In the utmost case only the Almighty does, all else is irrelevant.