Edge 253August 5, 2008
(9,340 words)

A SHORT COURSE IN BEHAVIORAL ECONOMICS
Edge Master Class 08
Richard Thaler, Sendhil Mullainathan, Daniel Kahneman
Sonoma—July 25-27, 2008

AN EDGE SPECIAL PROJECT

SAN FRANCISCO SCIENCE DINNER 08
Kokkari
July 28, 2008



EDGE MASTER CLASS 08
July 25-28, 2008

[Permalink]


Retreating to the luxury of Sonoma to discuss economic theory in mid-2008 conveys images of Fiddling while Rome Burns. Do the architects of Microsoft, Amazon, Google, PayPal, and Facebook have anything to teach the behavioral economists—and anything to learn? So what? What's new?? As it turns out, all kinds of things are new. —George Dyson

A SHORT COURSE IN BEHAVIORAL ECONOMICS
Edge Master Class 08
Richard Thaler, Sendhil Mullainathan, Daniel Kahneman
Gaige House, Glen Ellen, CA, July 25-27, 2008

AN EDGE SPECIAL PROJECT

RICHARD H. THALER is considered to be one of the founders of behavioral economics—the study of how thinking and emotions affect individual economic decisions and the behavior of markets. He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human. Thaler is Director of the Center for Decision Research at the University of Chicago Graduate School of Business. He is coauthor (with Cass Sunstein) of Nudge: Improving Decisions About Health, Wealth, and Happiness.

Richard Thaler's Edge Bio Page

SENDHIL MULLAINATHAN, a Professor of Economics at Harvard, is a recipient of a MacArthur Foundation "genius grant" and conducts research on development economics, behavioral economics, and corporate finance. His work concerns creating a psychology of people to improve poverty alleviation programs in developing countries. He Executive Director of Ideas 42, Institute of Quantitative Social Science, Harvard University.

Sendhil Mullainathan's Edge Bio Page

DANIEL KAHNEMAN is Eugene Higgins Professor of Psychology, Princeton University, and Professor of Public Affairs, Woodrow Wilson School of Public and International Affairs. He is winner of the 2002 Nobel Prize in Economic Sciences for his pioneering work integrating insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.

Daniel Kahneman's Edge Bio Page

ATTENDEES: Jeff Bezos, Founder, Amazon.com; John Brockman, Edge Foundation, Inc.; Max Brockman, Brockman, Inc.; George Dyson, Science Historian; Author, Darwin Among the Machines; W. Daniel Hillis, Computer Scientist; Cofounder, Applied Minds;
Author, The Pattern on the Stone; Daniel Kahneman, Psychologist; Nobel Laureate, Princeton University; Salar Kamangar, Google; France LeClerc; Katinka Matson, Edge Foundation, Inc.; Sendhil Mullainathan, Professor of Economics, Harvard University; Executive Director, Ideas 42, Institute of Quantitative Social Science; Elon Musk, Physicist; Founder, Telsa Motors, SpaceX; Nathan Myhrvold, Physicist; Founder, Intellectual Venture, LLC; Event Photographer; Sean Parker, The Founders Fund; Cofounder: Napster, Plaxo, Facebook; Paul Romer, Economist, Stanford; Karla Taylor, Edge Foundation, Inc.; Richard Thaler, Behavioral Economist, Director of the Center for Decision Research, University of Chicago Graduate School of Business; coauthor of Nudge; Anne Treisman, Psychologist, Princeton University; Evan Williams, Founder, Blogger, Twitter

INTRODUCTION

This edition of Edge is a preliminary report of the second annual Edge "Master Class," which occurred July 25-27 in Sonoma, which was followed on July 28th by a San Francisco dinner.

Below we present a summary of the Master Class by Nathan Myhrvold (Day 1) and George Dyson (Day 2) as well as some spirited exchanges among the attendees regarding the reports. Also, you will find the photo galleries of both the Master Class and the dinner.

The San Francisco 08 Science Dinner

A year ago, Edge convened the first "Master Class" in which psychologist and Nobel Laureate Daniel Kahneman taught a 9-hour course on "Thinking About Thinking". among the attendees were a "who's who" of the new global business culture. This year, to continue this discussion, Richard Thaler of the University of Chicago, one of the fathers of Behavioral Economics, and Sendhil Mullainathan, a brilliant young Harvard Economist, along with Daniel Kahneman taught an intensive 9-hour course on behavioral economics.

[See Edge Master Class 07; "Thinking About Thinking"; Edge Master Class 07 Photo Gallery]

"Retreating to the luxury of Sonoma to discuss economic theory in mid-2008 conveys images of Fiddling while Rome Burns," writes George Dyson below in his summary of the second day of the proceedings. "Do the architects of Microsoft, Amazon, Google, PayPal, and Facebook have anything to teach the behavioral economists—and anything to learn? So what? What's new?? As it turns out, all kinds of things are new. Entirely new economic structures and pathways have come into existence in the past few years."

Indeed, as one distinguished European visitor noted, the weekend involved "a remarkable gathering of outstanding minds. These are the people that are rewriting our global culture."

The Master Class is the most recent iteration of Edge's development, which began its activities under than name "The Reality Club" in 1981. Edge is different from The Algonquin, The Apostles, The Bloomsbury Group, or The Club, but it offers the same quality of intellectual adventure. The closest resemblances are to the early seventeenth-century Invisible College, a precursor to the Royal Society, whose members consisted of scientists such as Robert Boyle, John Wallis, and Robert Hooke. The Society's common theme was to acquire knowledge through experimental investigation. Another, perhaps, more apt example, is the nineteenth-century Lunar Society of Birmingham, an informal club of the leading cultural figures of the new industrial age — James Watt, Erasmus Darwin, Josiah Wedgewood, Joseph Priestly, Benjamin Franklin.

In a similar fashion, Edge, through its "Master Classes" is attempting to gather together those intellectuals and technology pioneers who are exploring the themes of the post-industrial Internet age.

In the coming weeks, Edge will publish the proceedings of this year's Master Class, including streaming video and edited transcripts

JB


A SHORT COURSE IN BEHAVIORAL ECONOMICS—PHOTO GALLERY
Edge Master Class 08
Richard Thaler, Sendhil Mullainathan, Daniel Kahneman


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SAN FRANCISCO SCIENCE DINNER 08—PHOTO GALLERY
Kokkari Estiatorio, July 28, 2008

Anne Anderson, former Editor, Nature Genetics ; Chris Anderson, Editor, Wired; Author, The Long Tail; W. Brian Arthur, Economist, External Professor, Santa Fe Institute; Yves Behar, Industrial Designer, Fuseproject; Lera Boroditsky, Psychologist, Stanford; Stewart Brand, Long Now Foundation; Author, How Buildings Learn; Larry Brilliant, Director, Google.org; John Brockman, Edge Foundation, Inc.; Max Brockman, Brockman, Inc.; Daniel Kahneman, Psychologist, Nobel Laureate, Princeton University; Drew Endy, Genomics Researcher, MIT; Sunnie Evers; Salar Kamangar, Google; Kevin Kelly, Editor-At-Large, Wired; Author, New Rules for the New Economy; Heather Kowalski, J. Craig Venter Institute; Brian Knutson, Neuroscientist, Stanford University; Jaron Lanier, Computer Scientist and Musician; George Lakoff, Cognitive Scientist, Rockridge Institute, Berkeley; Author, The Political Mind; John Markoff, Technology Correspondent, New York Times; Katinka Matson, Edge Foundation, Inc.; Sendhil Mullainathan, Professor of Economics, Harvard University; Executive Director, Ideas 42, Institute of Quantitative Social Science; Erling Norrby, Virologist, Royal Swedish Academy of Sciences; Larry Page, Cofounder, Google; Sean Parker, Founders Fund; Cofounder: Napster, Plaxo, Facebook; David Pescovitz, Cofounding Editor, BoingBoing.Net; Ryan Phelan, Founder, DNA Direct; Stanley Prusiner, Neurologist, Biochemist, and Nobel Laureate, UCSF Medical School; Lisa Randall, Theoretical Physicist, Harvard; Author, Warped Passages; Paul Romer, Economist, Stanford University; Frank Sulloway, Visiting scholar, Institute of Personality and Social Research, Berkeley, Author, Born to Rebel; Leonard Susskind, Theoretical Physicist, Stanford; Author, The Black Hole War; Karla Taylor, Edge Foundation, Inc.; Richard Thaler, Behavioral Economist, Chicago; Coauthor, Nudge; J. Craig Venter, Human Genomics Researcher; Founder, Synthetic Genomics; Author, A Life Decoded; Jimmy Wales, Founder, Wikipedia


   

   

Anne Anderson
Drew Endy


   

 

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Anne Anderson

 

 

 

 

   

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Retreating to the luxury of Sonoma to discuss economic theory in mid-2008 conveys images of Fiddling while Rome Burns. Do the architects of Microsoft, Amazon, Google, PayPal, and Facebook have anything to teach the behavioral economists—and anything to learn? So what? What's new?? As it turns out, all kinds of things are new. —George Dyson

A SHORT COURSE IN BEHAVIORAL ECONOMICS
Edge Master Class 08
Richard Thaler, Sendhil Mullainathan, Daniel Kahneman
Gaige House, Glen Ellen, CA, July 25-27, 2008

AN EDGE SPECIAL PROJECT

RICHARD H. THALER is considered to be one of the founders of behavioral economics—the study of how thinking and emotions affect individual economic decisions and the behavior of markets. He investigates the implications of relaxing the standard economic assumption that everyone in the economy is rational and selfish, instead entertaining the possibility that some of the agents in the economy are sometimes human. Thaler is Director of the Center for Decision Research at the University of Chicago Graduate School of Business. He is coauthor (with Cass Sunstein) of Nudge: Improving Decisions About Health, Wealth, and Happiness.

Richard Thaler's Edge Bio Page

SENDHIL MULLAINATHAN, a Professor of Economics at Harvard, is a recipient of a MacArthur Foundation "genius grant" and conducts research on development economics, behavioral economics, and corporate finance. His work concerns creating a psychology of people to improve poverty alleviation programs in developing countries. He Executive Director of Ideas 42, Institute of Quantitative Social Science, Harvard University.

Sendhil Mullainathan's Edge Bio Page

DANIEL KAHNEMAN is Eugene Higgins Professor of Psychology, Princeton University, and Professor of Public Affairs, Woodrow Wilson School of Public and International Affairs. He is winner of the 2002 Nobel Prize in Economic Sciences for his pioneering work integrating insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.

Daniel Kahneman's Edge Bio Page

ATTENDEES: Jeff Bezos, Founder, Amazon.com; John Brockman, Edge Foundation, Inc.; Max Brockman, Brockman, Inc.; George Dyson, Science Historian; Author, Darwin Among the Machines; W. Daniel Hillis, Computer Scientist; Cofounder, Applied Minds;
Author, The Pattern on the Stone; Daniel Kahneman, Psychologist; Nobel Laureate, Princeton University; Salar Kamangar, Google; France LeClerc; Katinka Matson, Edge Foundation, Inc.; Sendhil Mullainathan, Professor of Economics, Harvard University; Executive Director, Ideas 42, Institute of Quantitative Social Science; Elon Musk, Physicist; Founder, Telsa Motors, SpaceX; Nathan Myhrvold, Physicist; Founder, Intellectual Venture, LLC; Event Photographer; Sean Parker, The Founders Fund; Cofounder: Napster, Plaxo, Facebook; Paul Romer, Economist, Stanford; Karla Taylor, Edge Foundation, Inc.; Richard Thaler, Behavioral Economist, Director of the Center for Decision Research, University of Chicago Graduate School of Business; coauthor of Nudge; Anne Treisman, Psychologist, Princeton University; Evan Williams, Founder, Blogger, Twitter


Look, this is science. Belief isn't an option. —Daniel Kahneman

FIRST DAY REPORT—EDGE MASTER CLASS 08
By Nathan Myhrvold

DR. NATHAN MYHRVOLD is CEO and managing director of Intellectual Ventures, a private entrepreneurial firm. Before Intellectual Ventures, Dr. Myhrvold spent 14 years at Microsoft Corporation. In addition to working directly for Bill Gates, he founded Microsoft Research and served as Chief Technology Officer.

Nathan Myhrvold's Edge Bio Page


The recent Edge event on behavioral economics was a great success. Here is a report on the first day.

Over the course of the last few years we've been treated to quite a few expositions of behavioral economics—probably a dozen popular books seek to explain some aspect of the field. This isn't the place for a full summary but the gist is pretty simple. Classical economics has studied a society of creatures that Richard Thaler, an economist at University of Chicago dubs the "Econ". Econs are rather superhuman in some ways—they do everything by optimizing utility functions, paragons of bounded rationality. Behavioral economics is about understanding how real live Humans differ from Econs.

In previous reading, and an Edge event last year I learned the most prominent differences between Econs and Humans. Humans, as it turns out, are not always bounded rational—they can be downright irrational. Thaler likes to say that Humans are like Homer Simpson, Econs are like Mr Spock. This is a great start, but to have any substance in economics one has to understand that in the context of economic situations. Humans make a number of systematic deviations from the Econ ideal, and behavioral economics has categorized a few of these. So, for example, we humans fear loss more than we love gain. Humans care about how a question is put to them—propositions which an Econ would instantly recognize as mathematically equivalent seem different to Humans and they behave differently.

Daniel Kahneman, a Nobel laureate for his work in behavioral economics told us about priming—how a subtle influence radically shifts how people act. So, in one experiment people are asked to fill out a survey. In the corner of the room is a computer, with a screen saver running. That's it—nothing overt, just a background image in the room. If the screen saver shows pictures of money, the survey answers are radically different. Danny went through example after example like this where occurred. The first impulse one has in hearing this is no, this can't be the case. People can't be that easily and subconsciously influenced. You don't want to believe it. But Danny in his professorial way says "Look, this is science. Belief isn't an option". Repeated randomized trials confirm the results. Get over it.

The second impression is perhaps even more surprising—the influences are quite predictable. Show people images of money, and they tend to be more selfish and less willing to help others. Make people plot points on graph paper that are far apart, and they act more distant in lots of way. Make them plot points that are close together, and damned if they don't act closer. Again, it seems absurd, but cheap metaphors capture our minds. Humans, it seems, are like drunken poets, who can't glimpse a screen saver in the corner, or plot some points on graph paper without swooning under the metaphorical load and going off on tangents these stray images inspire.

This is all very strange, but is it important? The analogy that seems most apt to me is optical illusions. An earlier generation of psychologists got very excited about how the low level visual processing in our brains is hardwired to produce paradoxical results. The priming stories seem to me to be the symbolic and metaphorical equivalent. The priming metaphors in optical illusions are the context of the image—the extra lines or arrows that fool us into making errors in judgment of sizes or shapes. While one can learn to recognize optical illusions, you can't help but see the effect for what it is. Knowing the trick does not lessen its intuitive impact. You really cannot help but think one line is longer, even if you know that the trick will be revealed in a moment.

I wonder how closely this analogy carries over. Danny said today that you can't avoid priming; if he is right perhaps the analogy is close. Perhaps not.

I also can't help but wonder how important these effects are to thinking and decision making in general. After the early excitement about optical illusions, they have retreated from prominence—they explain a few cute things in vision, but they are only important in very artificial cases. Yes, there are a few cases where product design, architecture and other visual design problems are impacted by optical illusions, but very very few. In most cases the visual context is not misleading. So, while it offers an interesting clue to how visual processing works, it is a rare special case that has little practical importance.

Perhaps the same thing is true here—the point of these psychological experiments, like the illusions, is to isolate an effect in a very artificial circumstance. This is a great way to get a clue about how the brain works (indeed it would seem akin to Steven Pinker's latest work The Stuff of Thought which argues for the importance of metaphors in the brain). But is it really important to day-to-day real world thinking? In particular, can economics be informed by these experiments? Does behavioral economics produce a systematically different result that classical economics if these ideas are factored in?

I can imagine it both ways. If it is important, then we are all at sea, tossed and turned in a tumultuous tide of metaphors imposed by our context. That is a very strange world—totally counter to our intuition. But maybe that is reality.

Or, I could equally imagine that it only matters in cases where you create a very artificial experiment—in effect, turning up the volume on the noise in the thought process. In more realistic contexts the signal trumps the noise.

The truth is likely some linear combination of these two extreme—but what combination? There are some great experiments yet to be done to nail that down.

Dick Thaler gave a fascinating talk that tries to apply these ideas in a very practical way. There is an old debate in economics about the right way to regulate society. Libertarians would say don't try—the harm in reducing choice is worse than the benefit, in part because of unintended consequences, but mostly because the market will reach the right equilibrium. Marxist economists, at the other extreme, took it for granted that one needs a dictatorship of the proletariat—choice is not an option, at least for the populace. Thaler has a new creation—a concept he calls "libertarian paternalism" which tries to split the baby.

The core idea (treated fully in his book Nudge) is pretty simple—present plenty of options, but then encourage certain outcomes by using behavioral economics concepts to stack the deck. A classic example is the difference between opt-in and opt-out in a program such as organ donation. If you tell people that they can opt-in to donating their organs if they are killed, a few will feel strongly enough to do it—most people won't. If you switch that to opt-out the reverse happens—very few people opt out. Changing the "choice architecture" that people have, changes choices. This is not going to work on people who feel strongly, but the majority don't really care and can be pushed in one direction or another by choice architecture.

A better example is a program called "save more tomorrow" (SMT), for 401K plans in companies. People generally don't save very much. So, the "save more tomorrow" program lets you decide up front to save a greater portion of promotions and raises. You are not cutting into today's income (to which you feel you are entitled to spend) but rather you are pre-allocating a future windfall. Seems pretty simple but there are dramatic increases in savings rates when it is instituted.

Dick came to the session loaded for bear, expecting the objections of classical economics. Apparently this is all very controversial among economists and policy wonks. It struck me as very clever, but once explained, very obvious. Of course you can put some spin on the ball and nudge people the right way using to achieve a policy effect. It's called marketing when you do this in business, and it certainly can matter. In the world of policy wonk economists this may be controversial, but it wasn't to me.

An interesting connection with the discussion of priming experiments is that many policy contexts are highly artificial—very much like experiments. Filling out a driver's license form is a kind of questionnaire, and the organ donation scenario seems very remote to most people despite the fact that they're making a binding choice rather than . So the mechanics of opt-in versus opt-out or required choice could matter a lot in these contexts.

Dick has a bunch of other interesting ideas. One of them is to require that government disclosures on things like cell phone plans, or credit card statements be machine readable disclosure with a standard schema. This would allow web sites to offer automated comparisons, and other tools to help people understand the complexities.

This is a fascinating idea that could have a lot of merit. Dick is, from my perspective, a bit over optimistic in some ways—it is unclear that it will be overwhelming. An example is unit prices in grocery stores—those little labels on store shelves that tell you that Progesso canned tomatoes are 57 cents per pound, while the store brand is 43. Consumer advocates thought these would revolutionize consumer behavior—and perhaps they did in some limited ways. But premium brands didn't disappear.

I also differ on another point—must this be required by government, and would it be incorruptible were it so mandated. In the world of technology most standards are de facto, rather than de juris, and are driven by private owners (companies or private sector standards bodies), because the creation and maintenance of a standard is a dynamic balancing act—not a static one. I think that many of the disclosure standards he seeks would be better done this way. Conversely, a government mandate disclosure standard might become so ossified by changing slowly that it did not achieve the right result. Nevertheless, this is a small point compared to the main idea which is that machine readable disclosures with standardized schema allow third party analysis and enables a degree of competition that would harder to achieve by other means.

Sendhil Mullainathan gave a fascinating talk about applying behavior economics to understand poverty. If this succeeds (it is a work in progress) it would be extremely important.

He showed a bunch of data on itinerant fruit vendors (all women) in India. 69% of them are constantly in debt to money lenders who charge 5% per day interest. The fruit ladies make 10% per day profit, so half their income goes to the money lender. They also typically buy a couple cups of tea per day. Sendhil shows that 1 cup of tea per day less would let them be debt free in 30 days, doubling their income. 31% of these women have figured that out, so it is not impossible. Why don't the rest get there?

Sendhil then showed a bunch of other data arguing that poor people—even those in the US (who are vastly richer in absolute scale than his Indian fruit vendors)—do similar things with how they spend food stamps, or use of payday loans. He was very deliberate at drawing this out, until I finally couldn't stand it and blurted out "you're saying that they all have high discount rate". His argument is that under scarcity there is a systematic effect that you put the discount rate way too high for your own good. With too high a discount rate, you spend for the moment, not for the future. So, you have a cup a tea rather than double your income.

He is testing this with an amazing experiment. What would these women do if they could escape the "debt trap"? Bono, Jeffery Sachs and others have argued this point for poor nations—this is the individual version of the proposition.

Sendhil is studying 1000 of these fruit vendors (all women). Their total debt is typically $25 each, so he is just stepping in and paying off the debt for 500 of them! The question is then to see how many of them revert to being in debt over time, versus the 500 who are studied, but do not have their debt paid off. The experiment is underway and he has no idea what the result will be.

The interesting thing here is that, for these people, one can do a meaningful experiment (N = 500 gives good statistics) without much money in absolute. It would be hard to do this experiment with debt relief for poor nations, or even the US poor, but in India you can do serious field experiments for little money.

Sendhil also has an amusing argument, which is that very busy people are exactly like these poor fruit vendors. If you have very little time, it is scarce and you are as time-poor as the fruit ladies are cash-poor. So, you act like there is a high discount—and you commit to future events—like agreeing to travel and give a talk. Then as the time approaches, you tend to regret it and ask "why did I agree to this?". So you act like there is a high discount rate. This got everybody laughing. The difference here is that time can't be banked or borrowed, so it is unclear to me how close an analogy it is, but it was interesting nonetheless.

Indeed, I almost cancelled my attendance at this event right before hand, thinking "why did I agree to this? I don't have the time!". After much wrestling I decided I could attend the first day, but no more. Well, this is one of those times when having the "wrong" discount rate is in your favor. I'm very glad I attended.

Nathan


There's new technology emerging from behavioral economics and we are just starting to make use of that. I thought the input of psychology into economics was finished but clearly it's not! —Daniel Kahneman [7.27.08]

SECOND DAY REPORT—EDGE MASTER CLASS 08
By George Dyson

GEORGE DYSON, a historian among futurists, is the author Baidarka; Project Orion; and Darwin Among the Machines.

George Dyson's Edge Bio Page


The weekend master class on behavioral economics was productive in unexpected ways, and a lot of good ideas and thoughts about implementing them were exchanged.

Day 2 (Sunday) opened with a session led by Sendhil Mullainathan, followed by a final wrap-up discussion before we adjourned at noon. Elon Musk, Evan Williams, and Nathan Myhrvold had departed early. In the absence of Nathan's high-resolution record, a brief summary, with editorial comments, is given here.

"I refuse to accept however, the stupidity of the Stock Exchange boys, as an explanation of the trend of stocks," wrote John von Neumann to Stanislaw Ulam, on December 9, 1939. "Those boys are stupid alright, but there must be an explanation of what happens, which makes no use of this fact." This question led von Neumann (with the help of Oskar Morgenstern) to his monumental Theory of Games and Economic Behavior, a precise mathematical structure demonstrating that a reliable economy can be constructed out of unreliable parts.

The von Neumann and Morgenstern approach (developed further by von Neumann's subsequent Probabilistic Logics and the Synthesis of Reliable Organisms From Unreliable Components) assumes that human unreliability and irrationality (by no means excluded from their model) will, in the aggregate, be filtered out. In the real world, however, irrational behavior (including the "stupidity of the stock exchange boys") is not completely filtered out. Daniel Kahneman, Richard Thaler, Sendhil Mullainathan, and their colleagues are developing an updated theory of games and economic behavior that does make use of this fact.

Sendhil Mullainathan opened the first hour, on the subject of scarcity, by repeating the first day's question: what is it that prevents the fruit vendors (who borrow their working capital daily at high interest) from saving their way out of recurring debt? According to Sendhil, many vendors do manage to escape, but a core group remain trapped.

Sendhil shows a graph with $$ on the X-axis and Temptation on the Y-axis. The curve starts out flat and then ascends steeply upward before leveling off. The dangerous area is the steep slope when a person begins to acquire disposable income and meets rapidly increasing temptations. "To understand the behavior you have to understand the scale." Thaler interjects: "It's a mental accounting problem—but I think everything is a mental accounting problem." All human beings are subject to temptation, but the consequences are higher for the poor. Conclusion: temptation is a regressive tax.

Paul Romer notes that the temptation of time is a progressive tax, since time, unlike money, is evenly distributed, and wealthy people, no matter how well supplied with money, believe they have less spare time. Bottom line: the effects of temptation do not scale with income.

How best to intervene? Daniel Kahneman notes: "Some cultures have solved that problem... there seems to be a cultural solution." Sendhil, whose field research may soon have some answers, believes that lending at lower interest rates may help but will not solve the problem, and adds: "It would be better for the microfinanciers to come in and offer money at the same rate as the existing lenders, and then make the payoff in some other ways." The problem is the chronic effects of poverty, not the lending institutions (or lack thereof).

Sendhil moves the discussion to the subject of "depletion"—when judgment deteriorates due to the effects of stress. Clinical studies and real-world examples are described. Mental depletion correlates strongly with high serum cortisol (measurable in urine) and low glucose. Poverty produces chronic depletion, and decisions are impaired. High-value decisions are made under conditions of high stress. This results in what Sendhil terms the scarcity trap.

During the mid-morning break (with cookies), Richard Thaler shows videos from a 40-year-old study (Walter Mischel, 1973) of children offered one cookie now or two if they wait. The observed behavior correlates strongly, by almost any measure, with both the economic success of the parents and the child's future success. Hypothesis: small behavioral shifts might produce (or "nudge") large economic results.

After the break we begin to wrap things up. Richard Thaler suggests a "nudge" model of the world. The same way a digital camera has both an "expert mode" and an "idiot mode," what the economy needs is an "idiot mode" resistant to experts making mistakes.

Thaler notes that Government is really bad at building systems that can be operated in "idiot mode"—just compare private-sector websites vs. public-sector. Imagine if the Government had designed the user interface for Amazon!

Sendhil makes a final comment that elicits agreement all around: "R&D in the poverty space has huge potential returns and there is too little thinking about that."

Daniel Kahneman concludes: "There's new technology emerging from Behavioral Economics and we are just starting to make use of that. I thought the input of psychology into economics was finished but clearly it's not!" The meeting adjourns.

My personal conclusions: retreating to the luxury of Sonoma to discuss economic theory in mid-2008 conveys images of Fiddling while Rome Burns. Do the architects of Microsoft, Amazon, Google, PayPal, and Facebook have anything to teach the behavioral economists—and anything to learn? So what? What's new?? As it turns out, all kinds of things are new. Entirely new economic structures and pathways have come into existence in the past few years. More wealth is flowing ever more quickly, and can be monitored and influenced in real time. Models can be connected directly to the real world (for instance, Sendhil's field experiment, using real money to remove real debt, observing the results over time). The challenge is how to extend the current economic redistribution as efficiently (and beneficently) as possible to the less wealthy as well as the more wealthy of the world.

A time of misguided economic decisions, while bad for many of us, is a good time for behavioral economics. As Abraham Flexner argued (26 September 1931) when urging the inclusion of a School of Economics at the founding of the Institute for Advanced Study: "The plague is upon us, and one cannot well study plagues after they have run their course." All the more so amidst the plagues of 2008.

It was Louis Bamberger's wish (23 April 1934), upon granting Abraham Flexner's request, that "the School of Economics and Politics may contribute not only to a knowledge of these subjects but ultimately to the cause of social justice which we have deeply at heart."

George Dyson


Comments by W. Daniel Hillis, Daniel Kahneman, Nathan Myhrvold, Richard Thaler, Daniel Kahneman, Nathan Myhrvold


W. DANIEL HILLIS

Just one more minor observation.

Dick Thaler assumed that we already understood and accepted the standard models economic discussion making. When you think about it, it is very flattering—he assumed that we had internalized the standard models to such a degree that we needed to be talked out of them.


DANIEL KAHNEMAN

Quick reply to Nathan on priming—I believe that the comparison of priming with the curiosities of visual illusions sells it short.

A) The priming studies provide a mechanism that explains the major "heuristics and biases" effects.

1) Anchoring effects are (mostly) caused by the fact that when I ask you if the tallest redwood is more than 800 feet tall I have primed you to think of very tall trees, and the sample of trees you recover from memory is biased upward—compare to what would have happened if I had asked if the tallest redwood is more than 80 feet tall. What you think about redwoods is affected by mention of the number. (true even if the anchor is known to be random).

2) Other heuristics come to be used because activating a cognitive goal actually activates a whole cluster of goals. You ask whether something is true, and that activates judgments of whether it makes sense in context, whether it is metaphorically true, etc. You ask whether someone will be a good President and an enormous amount or irrelevant garbage questions get answered automatically. This is how you can get judgments of similarity being used as proxies for judgments of probability.

B) Priming effects tell us generally that we don't have much access to what goes on in our minds. They make some common ideas sound silly—like "voters who are concerned about the economy prefer Obama". The kind of associative coherence in which everything primes everything else within a bundle of reactions is a better model than this. Associative and intuitive coherence is different from logical coherence.

C) Priming effects may provide one of the mechanisms by which culture works. Some cultures provide the equivalent of constant reminders of money. Other cultures remind you that there are eyes looking at you. Some make you think in terms of 'we', others in terms of "I"—and those are just examples that I mentioned in that one random hour.


NATHAN MYHRVOLD

One reply to Danny Kahneman's reply about optical illusions and priming...

After reading your response, I still wonder if the optical illusion analogy isn't quite apt. I say "wonder" because I don't really know and it would require more thinking—and probably some experiments—to really tell.

The mechanism of priming that Danny gives in his reply is that the brain unconsciously retrieves (a computer scientist would say "pre-fetches") a context based on environmental cues. This context then indelibly colors the next thought. Even if you are told that the data (such as tree height) is known to be random. This seems entirely plausible, and I accept it (but I have to ask, is there direct evidence of this, or is it a surmise?).

But isn't this very closely analogous to what happens in optical illusions? In that case the brain also automatically processes the scene in light of visual context and it reaches a conclusion. It is entirely subconscious and works even if you are told that you are looking at an optical illusion. This seems to me to be almost exactly analogous to priming.

Here is a classic example:

I can tell you the punch line up front, but it won't change the results. The lines are all the same length—but no matter how much you know that, you still see them as different lengths. The arrowheads on the end of the horizontal lines subconsciously change our estimate of the length of the lines. They are like giving a number when talking about tall redwoods.

There are many optical illusion sites—but for quick reference here is a very nice one that has LOTS of quite different effects—http://www.michaelbach.de/ot/

Of course any analogy is only that—an analogy—and it will break down somewhere. Priming is not identical to optical illusions, but both seem to be due to unconscious processing by the brain which is highly context dependent. I've read that there are multiple kinds of priming—conceptual and perceptual—and this may not apply to all of them (but I bet it does).

I think what Danny doesn't like about this analogy is not how closely it applies, but rather the inference that priming might only be as important as optical illusions—i.e. as "just" an optical illusion.

That is a fair comment, since that was partly what I intended. But not as a condemnation of priming—what I wrote is that "I wonder" how close the analogy is. Now I could be foolish for confessing this, but I will admit it: I wonder how important priming is to everyday life. Or, in keeping with our theme, to economic life?

Rather than wonder indirectly I'll put this as a question to Danny—how important is priming to everyday life? Or economic life? How could that be measured?

The processing that goes on in optical illusions exists because it often gives the right answer—often enough that it is very useful. In particular many of the seeming paradoxes in optical illusions arise because the visual system is trying to solve what we know mathematically to be an ill-posed problem that has no unique solution. One example is inverting a 2D picture into a 3D shape. The simple classic is a Necker cube.

This is a perfectly good 2D picture, but we cannot help trying to force into being a 3D object. The 3D reconstruction problem is ill posed—there are two very different solutions, each of which is feasible. So, when you look at it you alternately see one then the other—you can feel it pop in, or pop out. Without a unique solution your brain flips between the possible solutions. If there was a bit more context it would lock in one interpretation and keep it there. To create this class of optical illusion you must carefully balance two different visual interpretations so closely that they compete.

Similarly, the experiments under which priming show up are also highly artificial contexts—that is not a criticism because to make a controlled experiment you need this. Part of that is asking people questions about things that they don't know—to which there is no solution.

If you asked a park ranger from Redwood National Park, I don't think he'd be influenced by priming up front—because he gives tours to tourists all the time quoting the world's tallest redwood (by the way, it is a tree named Hyperion that is 379.1 feet tall).

My guess is that the largest priming effect is going to occur when you have somebody who either has no clue about the real answer, or who is grasping for a poorly remembered solution, or sitting on the fence between two compelling solutions. That is the case where context sensitivity would seem to be most important.

A lot of life is spent sitting on the fence trying to decide between multiple solutions or courses of action (purchase decisions, for example), and a lot of life is about things that we don't have a clue about or only dimly grasp. So priming could be quite important even if it is restricted to that case. Or maybe it isn't restricted, and we are all at sea in a storm of contextual metaphors.

Anyway to sum up here are my questions:

1. Is priming strongest when your the answer is indeterminate (i.e subject doesn't know, or is struggling to get the answer, or to choose between answers)?

2. Or, does priming influence people even on topics where they feel that they know the answer?

3. How important is priming? Is there a way to measure this? Is it a curiosity that occurs in some corner cases (which is how I would characterize optical illusions)?


Finally, I will admit to wondering about more thing, which I am sure you've all be thinking also : why on earth am I arguing with the guy who won the Nobel prize in this area?

Nathan


RICHARD THALER

Nathan, lots of good questions here, except the last one. Being with you for 36 hours was enough to not be surprised that you are still pushing the debate! Danny is really the right one to have this debate with but I am not sure your questions have good answers. For example, we have no idea what percentage of the time we are fooled by optical illusions. Presumably the answer is a small number, but how would we know?

Let me respond briefly to two of your points regarding my stuff. First, I agree that unit pricing was a bust, though interestingly, in an experiment done by Jay Russo, when prices were listed in order of unit prices, this had a big effect on behavior. However, I am not excited about that result because we don't know whether it leads to a good outcome if the products are not of homogeneous quality. For example, I pointed out in an old paper (1985) that the price of dish washing liquid per dish washed was inversely related to the price per ounce. So the "most expensive" brands were actually the best values, at least as evaluated by Consumer Reports. This is an example of the mapping problem Sendhil and I were talking about. If consumers don't know how to map their purchase into utility, then markets can break down. Some firms will make money selling diluted dish washing liquid to consumers who use the wrong heuristic for buying (price per ounce). But they won't make huge amounts of money because it costs more to bottle and distribute diluted product, so competition itself does not solve the problem. Nor does Consumer Reports if most people don't read it. (The re-did the study a few years later and got the same result.) My idea of electronic, machine-readable disclosure will not solve these problems completely either, because not everyone will go on-line, but it would make markets more efficient.

The most interesting question is whether it is necessary for the government to mandate the disclosure. Before I address that let's clarify one point. It may not be necessary that the government be the body that decides what the template is for disclosure. So, for example, the travel web sites might determine what the disclosure template would be for hotels and airlines. The only problem with this is if the travel web sites are captured by the airlines and hotels. However, there can be no debate about whether it is necessary for the government to require that the disclosure be made at all. Consider the case of mortgages. Let's stipulate that some borrowers took out loans that they did not understand, and that mortgage brokers, especially those marketing to the sub-prime sector, were profiting exactly by not disclosing clearly some of the features of the loan. If I am making money precisely because I do not disclose everything, then I cannot be expected to start disclosing voluntarily. (Suppose the guys who play three-card-monte on the street had to reveal all their tricks. Who would play?)


DANIEL KAHNEMAN

I have no problems with Nathan's discussion of illusions and the Necker cube—both appear in early chapters in what I have been writing. Indeed, illusions have something in common with priming effects and with most of mental life: the processes that determine them are not represented in consciousness. As Nathan suspected, my objection to the comparison of priming to illusions related to their importance. Illusions do not play a very important role in the modern study of perception, whereas priming is, I believe, critical to understanding how the mind works.

Anchoring effects work on everybody—including professionals, such as judges in actual courtroom cases, who get demonstrably anchored on numbers that have little more content than random numbers. Anchoring also works quite well in negotiations, where getting your number in first gives an advantage (this is experimental, but confirmed by negotiations experts as a phenomenon observable in significant negotiations).

True, anchoring effects are largest in areas in which there is little experience. If you know how tall the tallest redwood is you won't show an anchoring effect. But not everyone knows everything—although there may be one or two exceptions… Anchoring is not a laboratory curiosity. Nor are framing effects, which are best explained as effects of priming—different frames evoke different associations in memory and different emotions.

I cannot resist quoting a paragraph from a discussion of anchoring:

German judges were shown detailed files on a rape case, then told that someone with no expertise in the law—a freshman computer-science student—had recommended a prison sentence for the rapist. One group of judges saw that the amateur had suggested 12 months in prison; a second group read that he had suggested 34 months. Most of the judges were firmly convinced that the opinion of the computer-science student could not influence their own sentencing decision, but they were wrong. When the judges were asked how long a term they would assign in their own courtroom, those who had seen the amateur advice of a 12-month term recommended 28 months in prison; the judges who had seen the 34-month suggestion concluded that 36 months was appropriate.

These effects are large and robust—Nathan, they work on you too!


NATHAN MYHRVOLD

Well, I am going to sound like I was primed by the recent X files movie, but Danny, I want to believe!

Nevertheless it is not easy to believe it. Despite your having primed me, I'm just not getting it. So while I believe you that it does work on me, in this particular instance it seems to be failing me. So I have a couple more questions.

Perhaps practicing on me will help your book :-), but don't feel compelled to answer if you don't have the time. Indeed one reply you give would be "wait for the book".

My natural inclination is to go in two directions with this:

1. There must be a catch—meaning something which winds up lessening the importance of priming from what you seem to be saying. Here is a list (I will try to be brief) of objections that come to mind.

a. The effect occurs, but it is proportional to ignorance, or indecision, or making your mind up when you don't have enough information (indeterminate or ill posed problem). So it is a very real effect, but only occurs a portion of the time. And in that portion, we don't know what to do anyway (see coin flip argument below).

b. In particular, the kind of question one asks on a questionnaire tends to be something where the person must either grasp at an answer, or make up a hypothetical—or otherwise are particularly prone to the effect. So this might be much stronger in precisely the cases studied in the experiments. Is it known whether people act this way "for real"? For example, one branch of experimental economists holds that doing experiments with real money (which may itself be priming!) makes things more real than hypothetical questions. Have those experiments been done with priming? I can't help but point out here that your colonoscopy experiment was real—to the extreme! Have similarly real world tests been done here?

c. Other influences may drown out priming in cases of interest. The German judges were asked about a sentence—they weren't presiding over an actual trial where they had heard weeks of testimony and had both prosecution and defense repeatedly try to prime them. Would the freshman opinion count as much after all that context?

d. It may last only a short time, in which case the next priming comes in and overwrites it.

2. Or, I believe. But now explain how to reconcile our intuitive view of life with the strange reality you propose. The naive reaction to taking you seriously is the storm tossed sea of metaphors—can we really be reality? Could unconscious suggestion send us lurching between extremes all the time without our being aware of it? Perhaps, but it deserves explanation. How could it be so hidden? Why aren't we all switching political parties, wives, cars, and other decisions randomly based on some damn number we hear, or points we plot on graph paper? How can we go thorough life so gullible? Most aspects of life do not seem like a totally random walk—yet that is what you seem to be leading us. The incredible constancy and directionality of some aspects of life is hard to reconcile with the notion that we are almost whimsically influenced by cheap metaphors.

I think it would help the uptake of this idea if you gave people some sense that one can reconcile priming with our life experience. Otherwise it becomes easier to reject the whole thing. Here are some attempted reconciliations I have thought of:

a. Dick asked whether we know how often optical illusions come into play in real life. I would argue that the neural processing behind optical illusions happens almost constantly. What is rare is that it produces a paradoxical answer. So, the answer to Dick's question depends on whether you mean "tendency to recognize faces" which occurs constantly, or the "picture that might be an old lady's face, or a young woman's torso" (another classic illusion) which occurs only rarely. So, perhaps priming is just as constant as the processing behind illusions, but its impact is usually small. You won't like this because it seems to de-emphasize priming, but there is a pro-priming way to think of this.

b. Similarly one could make a case that lots of subtle things—like the example of culture you mentioned—could be due to priming. Yet culture, while pervasive at a large scale does not utterly dominate individual life. Indeed most people would agree that there is such a thing as culture, while at the same time arguing that they are their own man (or woman), exercising free will. One could argue that priming is not only responsible for culture, but like culture it is simultaneous palpable in some ways and diffuse in others, subject to ex post facto denial.

c. If indeed priming works best when we don't otherwise know, or have enough information, then it could be a substitute for a coin toss. If you are asked a hypothetical question, or are sitting on the fence on a decision, then what does it matter whether it is a priming effect, or a cosmic ray that pushes you over one way versus another? Instead of tossing the coin the brain takes whatever random thing it was told recently and turns up the gain on that noise to get an answer.

d. The sum of sufficiently many random vectors is arbitrarily close to zero. So, maybe we are totally influenced—slaves to the cheap metaphors of life's contextual poetry. But if there are enough of those influences in enough directions, then overall they tend to balance out. Culture would be a good example of a systematic bias, but many other things would wash out. So maybe German judges just go by the last thing they heard, but there are plenty of integers so overall it would wash out over time.

e. Perhaps it is getting caught that is rare. It is very unusual for German judges to get caught in the act of cribbing their jurisprudence from freshman CS majors. Instead we have plenty of ex post facto rationalization, and lots of other window dressing to explain how we act. So perhaps that is the strange part.

f. In fact life is a random walk in most ways and we just don't see it. I don't believe this, but out of completeness thought I would add it.

Finally, I have one additional question. Have you considered "Bayesian priming"?

Suppose that I am an Econ, not a human, and I am a very good Bayesian. Before making a judgment I recall my priors—the prior distribution has a very strong sway on what I do. If my prior distribution is accurate, great. But although I aspire to Econ-hood, I am only human. So if my prior distribution is faulty—for example if my prior distribution is influenced by the last thing I heard, then I could use a good procedure (Bayes' theorem) and get a bad answer.

The question here would be this—if you do numerical priming experiments (guess tallest redwood after hearing a random number), then one might be able to calculate what people's prior distribution was, and how it changed on hearing the priming number.

The answer might be that people are non-Bayesian, or that they can't do the prior. But it seems like there would be some merit in figuring out what effect the priming number is. If you said the tree was 1 million miles high, or 1 inch high, I bet it would be less priming effect. I would guess that the maximum effect occurs once you are in a zone of plausibility (i.e. has a probability consistent with your naive prior), and that the priming number tends to cause you to update the prior distribution in a systematic way.

Nathan



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