macauley on behavioural economics

I obliquely mention behavioural economics from time to time, for example when drawing from Nassim Nicholas Taleb’s Black Swan which is full of references drawn from BE to back up his own observations.

This is a summary of You can see a lot by just looking: Understanding Judgment in Financial Decision Making by  Ian MacAuley published by the Centre for Policy Development provided by Fiona Guthrie

Main points

The discipline known as behavioural economics has strengthened our knowledge of consumer decision-making. It explains why we make certain, consistent departures from what is generally described as “rational” decision-making. These departures result from our use of short-cuts (“heuristics”) in situations where more deliberation would result in more beneficial decisions, from short-sightedness, and from innate concerns for fairness in transactions.

unordered black swan notes incomplete

The narrative fallacy.

” the way to avoid the ills of the narrative fallacy is to favour experimentation over story telling, experience over history, and clinical knowledge over theories.” p84

Nonlinear relationships are ubiquitous in life.

financial planners v charlatans

Nasim Nicholas Taleb is a money market guy with a talent for telling a story. He knows a lot about risk and a lot about our decision making biases. If we accept just a couple of propositions he puts forward, then one can see that a charlatan and a financial planner have many things in common – but they’re not the same.

economists votes don’t count?

Sometimes Tim Harford, the undercover economist, uses economic analysis to show us interesting things about real life, and sometimes to challenge sloppy thinking in the interests of efficiency and/or justice, but other times he glosses over important qualifications to his argument, or just comes up with whoppers. Tim’s evidently fond of a three course meal so let’s give him a light challenge for entree, a big serve for main, and soften the blow with fulsome praise for desert.

For entree let’s consider his views on combating global warming. Essentially uncontroversial: that we need to let the market do the necessary work by bringing the price of the externality into the equation through a carbon price. So far so good, if rather less enlightening than usual. But he proposes this specifically to rail against government intervention in limiting choice (for example by helping us make better choices about light bulbs by removing the least climate friendly option from our list of potential purchases). This unambiguous claim is rather bizarre from the proponent of ‘keyhole economics’ – “target the problem as closely as possible rather than attempt something a little more drastic.” [TUE p132] In an excellent analysis of the failings of both the private dominated US health care system and the public provided UK one [TUE pp115-138] he suggests that the Singapore health system illustrates the result of good keyhole economics in the combination of compulsory health savings accounts, good information flows and universal catastrophe insurance. And then he asks why this success is so unusual: