Pursuit of Truthiness

my gut tells me I know economics

Archive for the ‘rationality’ Category

Better to remain silent and be thought a fool…

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“The worst thing that can happen to a good cause is, not to be skillfully attacked, but to be ineptly defended.” ― Frédéric Bastiat

Though Bastiat wrote in the 1800’s, this point (like his other main points) still seems woefully under-appreciated today. So often I hear people defending one sort of idea by pointing out the weak character or arguments of the idea’s opponents.

While this itself borders on fallacious reasoning, it seems to be simply how people work. Because of this, we should all consider from time to time whether to best thing we can do to advance our own ideas is to simply stay quiet, at least until we have thought more.

Dostoevsky has a great illustration of this idea through the character of Semyonovitch in Crime and Punishment:

Andrey Semyonovitch was an anæmic, scrofulous little man, with strangely flaxen mutton-chop whiskers of which he was very proud. He was a clerk and had almost always something wrong with his eyes. He was rather soft-hearted, but self-confident and sometimes extremely conceited in speech, which had an absurd effect, incongruous with his little figure. He was one of the lodgers most respected by Amalia Ivanovna, for he did not get drunk and paid regularly for his lodgings. Andrey Semyonovitch really was rather stupid; he attached himself to the cause of progress and “our younger generation” from enthusiasm. He was one of the numerous and varied legion of dullards, of half-animate abortions, conceited, half-educated coxcombs, who attach themselves to the idea most in fashion only to vulgarise it and who caricature every cause they serve, however sincerely.

Though Lebeziatnikov was so good-natured, he, too, was beginning to dislike Pyotr Petrovitch. This happened on both sides unconsciously. However simple Andrey Semyonovitch might be, he began to see that Pyotr Petrovitch was duping him and secretly despising him, and that “he was not the right sort of man.” He had tried expounding to him the system of Fourier and the Darwinian theory, but of late Pyotr Petrovitch began to listen too sarcastically and even to be rude. The fact was he had begun instinctively to guess that Lebeziatnikov was not merely a commonplace simpleton, but, perhaps, a liar, too, and that he had no connections of any consequence even in his own circle, but had simply picked things up third-hand; and that very likely he did not even know much about his own work of propaganda, for he was in too great a muddle….

Written by James Bailey

January 11, 2016 at 6:30 pm

Ignoring Economics: Tactics for Beginners and Advanced Practitioners

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President Obama called for an increase in the minimum wage to $9 in last night’s State of the Union speech. A lot of economists will take this as a personal affront, wondering how people still think this is a good idea after we explain in every MicroEcon 101 class how it will backfire and result in poor people losing their jobs and losing non-wage benefits. If you are determined to support a minimum wage, you could simply ignore all these arguments, but this beginner tactic will leave you looking ignorant.

A more advanced tactic for not having to change your mind about the minimum wage allows you to know two things instead of none. You can know the Econ 101 arguments, and also know about Card and Kreuger’s 1996 empirical study showing how the minimum wage might not affect unemployment. Pull out your pocket copy of Card and Kreuger’s paper whenever someone brings up the topic.

Be careful, though, not to take this whole “acquiring new information” thing too far. Remember that your goal isn’t to understand how the world works, but rather to keep the beliefs you started with. Don’t develop a general rule of looking at the academic literature on a subject: this would lead you to do things like read other papers about the minimum wage, but the vast majority suggest problems with it. Don’t decide that David Card and Alan Kreuger are the most trustworthy economists- this would mean you need to take their other work seriously, and then you would have to change your mind about immigration or occupational licensing. Remember, reasoning works by starting with a conclusion you like, and then looking for information that supports it. Otherwise you might have to admit you were wrong!

Obviously this is my poor attempt at a joke. More seriously, as a researcher I worry that even when people do seem to be interested in your work, it is only because it confirms their prior beliefs. Alan Kreuger is a great econometrician and managed to become an advisor to the President. This could be a great opportunity for his work to inform which policies to choose, but instead his work is either ignored or used as a decoration for policies that would be pushed anyway. So, depsair.

Written by James Bailey

February 13, 2013 at 1:22 pm

Were the Roots of the Global Financial Crisis in our Business Schools?

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No. Well, maybe, the proposition does sound like there is something to it, but after reading “The Roots of the Global Financial Crisis are in our Business Schools” I am actually much less convinced of this thesis than I was when I read the title. This is because the article throws a bunch of shit on the wall hoping some will stick, without even considering that some of the shit might be contradictory. But I think it is a good example of how populism that sounds reasonable at first will end up providing its own contradictions.

Two of the main arguments are that people in finance are too self-interested and care too much about profit maximization (and that they learned each of these in business school), and so don’t consider morality or what is good for society generally. Attributing the financial crisis to individual selfishness or to profit maximization might each sound good individually, but can’t work together, which is the whole point of principal-agent theory. Are people acting in their own best interest (work as little as possible, make as much money for yourself as possible, be neutral about what all this means for the firm), or are they acting in the firm’s shareholders’ best interest and trying to maximize profits? Given the actual history of the financial crisis, it seems more realistic to blame selfishness, since many of the firms involved spectacularly failed to maximize their profits, while the compensation structures based on short-term performance allowed many individuals to make a killing in the process of sinking their firms.

Another main bogeyman of the piece is Milton Friedman and the Chicago school of economics, who are claimed to have taken over business education (I wish!). They are blamed for teaching that individuals are rational and selfish utility maximizers, something which was actually in the textbooks of Alfred Marshall and Paul Samuelson well before the ascent of Chicago. More importantly, the very existence of many departments in business schools and financial companies demonstrate that the people involved do not believe in the standard economic model. How much marketing and advertising is based on the premise that the audience is rational? How many investment companies could justify their existence and huge salaries and fees if they really believed in the Efficient Markets Hypothesis, and believed that their clients were also rational and believed the EMH? Basically just index funds, which don’t have the huge salaries and fees anyway. As an economist, it is very hard for me to believe that my kind has had a huge influence over business schools or business practice. Though I may be a bit biased as a member of a department which just left the business school, and to its credit this argument is more empirically wrong than actually contradictory.

The article also blames Milton Friedman specifically for arguing that a corporation’s sole goal should be to maximize profits and shareholder value, rather than also caring about “corporate social responsibility”. What corporate goals should be is up for debate, but I think it is hard to say that the problem was firms being too profit focused. Again, the problem was that many of these firms turned spectacular losses and failed, or would have failed without bailouts. There are many possible reasons for this, which have been discussed to death: compensation structures, previous bailouts and moral hazard, lack of regulation or poorly structured financial regulation, a giant pool of investment-seeking money caused partly by overly loose monetary policy in 2003-4, misregulation and massive subsidies for the housing sector- all these could have encouraged excessive risk-taking that led to giant losses. But it is hard to argue that firms lost money because they were focused on making money. Furthermore, some of the firms which exploded worst were actually known for “corporate social responsibility”.

But suppose the financial crisis was caused by the standard economics model and the business schools- what do we do about it? This article provides further evidence that an argument jumps the shark when its proposed solution is “more Holistic approaches”. This is the epitome of something which sounds vaguely nice but is actually meaningless. Even better, the article calls for “the rejection of the ideology of rational knowledge in favor of one that gives greater weight to experience, or to spirituality”. I couldn’t make this stuff up.

So, the people actually making this argument made themselves into strawmen. What would a better version look like? Is it possible to “steelman” the argument? I would start with the observation that students who have taken economics classes are more likely to defect in the repeated prisoners dilemma, and their selfishness in this case leads them to worse outcomes than those who haven’t taken economics. Then discuss the importance of cooperation in business, especially as work is done by larger teams. Finally and most importantly, look for empirical evidence that firms act differently based on the college major of their management, and see if firms with more business majors and MBA’s actually take more risks and act less socially responsible.

One major advantage blaming business schools is that it can give new life to an old argument. After any financial crisis or other economic problem people tend to blame “greed”. Economists will often reject this argument by asking, “why was there suddenly more greed now? The crisis started suddenly but human nature changes slowly if at all”. But one possibility is that business schools have in fact been teaching people to be greedier. I’m sure one could make a reasonable case for this; but as we have seen, the worst fate for a position is not to be adeptly attacked, but to be ineptly defended.

Written by James Bailey

November 25, 2012 at 2:03 pm

Does Politics Actually Make Us Dumber?

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It is sometimes said that while talking about politics the average person loses 15 IQ points. You could look for evidence that this effect persists with a classic priming experiment: people are randomly assigned to answer questions about either current political issues or something innocuous before taking an IQ test. See if the people who recently had politics on the brain did worse than those who didn’t.

This test may already have been done inadvertently by someone trying to figure out which political groups have higher IQ scores, since the same experiment could also provide evidence on that front.

Bonus: If the experiment finds the predicted effect, calculate what the lengthening US election cycle may be doing to average effective IQ (and therefore GDP, et c).

Written by James Bailey

August 12, 2012 at 4:49 pm

Explaining the Puzzle of Congressional Popularity

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There is a seeming paradox in the fact that the US Congress is extremely unpopular (its current approval rating is 17%), while most individual members of Congress are reasonably popular (approval ratings more in the 50% range, with incumbents extremely likely to be re-elected). People like each of the parts but hate the whole.

The simplest way to resolve this paradox is to say that people are irrational, and as an economist I am ashamed to say that this was always my reaction when I heard these facts. But there is a good reason for the usual economist’s assumption of rationality: saying people are irrational often serves as a curiosity-stopper. You see something puzzling, but you just say that people are weird and dumb and you can stop thinking about it. But often it doesn’t take much more thinking to realize how people could be rational after all. Here are some possibilities in this case:

1. Different congressional districts have voters with different political beliefs. Congresspeople should usually have beliefs closer to their own district than someone representing another district would. Voters in Philadelphia should like their representative better than Congress as a whole because their rep is liberal while Congress is moderate.

2. An important specific case of (1) is that people know their representative is trying to bring them pork, while literally no other person in Congress is doing so; in fact the other Congresspeople are all trying to redirect pork away from my district and towards their own.

3. Congresspeople campaign and advertise heavily in their own districts, but very little in other districts. Congress as a whole does essentially no advertising (except, I suppose, putting up signs beside ARRA projects).

4. We may simply like individuals more than groups; perhaps you could call this a kind of irrationality. Certainly people dislike “corporations” but like almost every individual corporation.  Then again, some things probably poll better collectively- the military, the Supreme Court.  This is an interesting question in its own right.

I wonder if political science papers have succeeded in determining the importance of each explanation (and what other explanations they have advanced). One could get data on political beliefs of politicians and their districts to see how unpopular diverging from your district makes you (or see if congress as a whole is more popular in more moderate districts). You could examine how much popularity congresspeople get from bring more pork home (or being seen trying to do so). You could get at the individual-vs-group question by asking people what they think of specific congresspeople in other districts.

Written by James Bailey

June 14, 2012 at 12:57 pm

Politics is the Mind-Killer. Are Dark Arts the Solution?

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Politics tends to make people much dumber, or at least much worse at discovering the truth.  There is a good reason for this, and Eliezer Yudkowsky said it well:

Politics is an extension of war by other means.  Arguments are soldiers.  Once you know which side you’re on, you must support all arguments of that side, and attack all arguments that appear to favor the enemy side; otherwise it’s like stabbing your soldiers in the back – providing aid and comfort to the enemy.

This is one of the reasons that politics is not about policy.  I wish politics were really all about figuring out what policies are best for everyone and implementing them.  But in reality people are not strongly attached to policies.  It is fun to see everyone change positions on the merits of the filibuster when there is a new majority party in the Senate.  Recently we have been treated to the spectacle of the Heritage Foundation and Mitt Romney disavowing the health reform that strongly resembles the policies they advocated and implemented, because this one was passed by Evil Democrats.  Similarly, all the Democrats who claimed to feel very strongly about the Wars on Afghanistan, Iraq and Terror when the Big Bad Republicans were doing it forgot all about this once their guy was elected and continued the same policies.  Sociologist Fabio Rojas found that attendance by Democrats at anti-war demonstrations fell by more than half after Obama was elected; ironically, this is when the protests may have actually had a better chance at changing policy.

Glenn Greenwald (the currently-ignored conscience of the Democratic Party, or indeed the US) made some great points in this vein recently in a controversial (1700+ comments) article:

Then there’s the inability and/or refusal to recognize that a political discussion might exist independent of the Red v. Blue Cage Match. Thus, any critique of the President’s exercise of vast power (an adversarial check on which our political system depends) immediately prompts bafflement (I don’t understand the point: would Rick Perry be any better?) or grievance (you’re helping Mitt Romney by talking about this!!). The premise takes hold for a full 18 months — increasing each day in intensity until Election Day — that every discussion of the President’s actions must be driven solely by one’s preference for election outcomes (if you support the President’s re-election, then why criticize him?).

You should probably just read the whole Greenwald article, it is a better version of this post.  Anyway, I’ve been thinking about this a lot as we start election season in the US.  How can we be involved in both truth-seeking and politics when they don’t naturally mix?

Two great public intellectuals, Paul Krugman and Tyler Cowen, have been openly discussing the merits of their very different rhetorical strategies.  Krugman has a more political style, implying and often outright saying that people who disagree with him must be idiots.  Cowen is more intellectual and abstract.  Cowen implies that Krugman’s style lacks virtue and integrity:

“The issue is not that Krugman changed his mind (I’ve done that plenty, Alex too).  The issue is that Krugman a) regularly demonizes his opponents, including those who hold Krugman’s old positions, and b) doesn’t work very hard to produce the strongest possible case against his arguments….. There is a kind of hallelujah chorus for Krugman on some of the left-wing economics blogs.  The funny thing is, it’s hurting Krugman most of all”

This is a new chapter in an ancient debate; it reminds me of Socrates calling out the Sophists.  Socrates was a purist who thought we should seek truth and the good, while the Sophists realized that their rhetorical Dark Arts could win them money and influence.  Indeed, Krugman’s response is essentially that his style brings him influence, and you can’t argue with success:

I realized that I also wanted to say something in response to the concern trolling, the “if you were more moderate you’d have more influence” stuff. Again, this amounts to wishing that we lived in a different world. First, there is no such thing in modern America as a pundit respected by both sides. Second, there are people writing about economic issues who are a lot less confrontational than I am; how often do you hear about them? This is not a game, and it is also not a dinner party; you have to be clear and forceful to get heard at all.

Basically, Krugman is saying “If only you knew the Power of the Dark Side”.  But is this strategy really so powerful?  I may not be representative, but it certainly loses me.  I can help but notice how Krugman is trying to reframe the debate (and distort Cowen’s argument) in almost every sentence.  Cowen isn’t concern trolling because he practices what he is preaching; and he advocates a moderate tone, not moderate positions.  Krugman sets up false dichotmies: being civil means you aren’t clear and forceful, you can only be respected by one of two sides.  This last may be the most crucial: Krugman assumes that all discussion takes place where there are opposing sides (and only two of them!) and no respect across them.  This puts him squarely in the arguments-are-soldiers camp.

But is Krugman’s strategy effective in general?  He certainly has a large audience, which is valuable (in terms of income and status).  It is hard to say whether this results in much influence on policy though.  It is hard in general to determine the effect of individuals on policy, but I can’t think of a single issue where Krugman was a leader in getting a policy changed.  Cowen previously argued that most intellectuals, including Krugman (and himself), have little real influence.

Can we become more influential through the use of Dark Arts in general, and ridiculing the other side in particular?  I think the jury is still out here.  Milton Friedman was influential while being unfailingly civil and assuming the best of his opponents, and I think that this helps his work stand the test of time.  It is easier for people to adopt your position if this doesn’t mean they were being idiots before; as Brad Delong said (ironically, since he is guilty of the same vice) “No, Paul, No! You Don’t Slaughter the Returning Prodigal Son, You Slaughter the Fatted Calf!!”  The easiest way to convince people is not to change their mind, but to convince them they agreed with you all along; this is easier if you don’t call them names.

Even if the Dark Arts do confer the power to influence and persuade, it is likely that they erode the ability to find the truth.  In theory you could have a persuading public persona and a truth-seeking private persona with different beliefs.  But to reduce cognitive dissonance people must start believing their own propaganda.  Further, the best way to learn is often through open, honest debate that cuts to the heart of the issues; you don’t learn by beating up strawmen.  The power of the real Dark Arts, just as in so much literature and mythology, comes with a great cost.

Update: One big thing I missed in this post is the need to know your audience; there is no one form of argument that is most convincing to everyone.  My implicit assumption (and that of Kantoos, who made me realize this) is that you should target the median reader out there, just as politicians should target the median voter.  But of course, in primary season you do not target the median of the whole electorate.  Krugman is in a perpetual primary season.  He is not trying to convince the average reader that his “side” is better, but to educate, entertain and radicalize those already on his “side”, by noting that the other side is not even worth considering.  This should have been obvious since he named his book and blog “Conscience of a Liberal”, but I do catch on eventually.

Written by James Bailey

January 5, 2012 at 12:06 am

Berkeley Students Are So Conservative

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They, like most people, are small-c Burkean conservatives about life in general.  They have a strong status quo bias, but rather than admit this like Edmund Burke, they feel compelled to invent reasons why status quo things are good.  Berkeley psychology prof Seth Roberts said “Most of my students, for better or worse, were very conformist. My conclusion…. is that the reasons we give for our beliefs have roughly zero correlation with the actual reasons and shouldn’t be taken seriously (e.g., argued with).”  Robin Hanson said the same about George Mason students:

  • Ask random colleges student random policy questions and they will feel compelled to come up with opinions.
  • Ask them for reasons for those opinions and they’ll feel compelled to come up with such reasons.
  • Such opinions strongly tend to support the status quo – mostly whatever is, is assumed good.
I am thinking along similar lines today after discussing organ markets with my students.  Students say that legal markets in human organs would be bad mainly because it would lead to organ theft.  Even supposing there would be more organ thefts, it is hard to imagine there would be enough to outweigh the deaths of 9000 Americans every year caused by our current ban on organ sales.  If people were used to a functioning market in organs, I have to think they would be horrified by someone saying we should ban organ sales and consign thousands to death in order to reduce theft, just as it would seem crazy to ban day-laboring to protect laborers from employers who stiff them after a day’s work (stealing is already illegal!).  It is easier to think there must be a good reason for the status quo, that we live in the best of all possible worlds and aren’t doing something horrible.  Indeed, there is more right with the world than wrong with it; there is a reason status-quo-biased people continue to survive and thrive.  Further, it is dangerous to think that those who disagree with you must do so out of some ignorant bias; call this the “bias bias”.
In general though, if we are trying to figure out the truth, we have to fight pro-status-quo bias more often than its opposite.  The reason for this is wired into our brains: our dominant trait is to rationalize, not reason.  One part of our brain is dedicated to coming up with a reason for anything, whether it makes sense or not.  In extreme cases, paralyzed people can come up with all sorts of reasons to explain why they aren’t really paralyzed; their brain is acting as an apologist for what is done, not a reasoned truth-seeker (Seriously, check out that link- it is way more interesting than my post, even if you have heard of the phenomenon before).
I am optimistic about getting people who think of themselves as non-conformist or politically liberal to consider new ideas by telling them they are being conservative conformists.  Put name-calling to good use!

Written by James Bailey

October 17, 2011 at 3:00 pm