March 30, 2013

At the Root of the Matter

The acts of exchange or accumulation are the building blocks from which economics is constructed, but the building blocks themselves contain the relationships of mutuality and domination that lie within, or below, all social life. At the root of the matter lies man, but it is not man the "economic" being, but man the psychological and the social being, which we understand only imperfectly.

Robert L. Heilbroner ~ The Worldly Philosophers (6th Ed.)

March 29, 2013

Price, Pricelessness, and Behavioral Economics

William Poundstone Priceless

William Poundstone ~ Priceless: The Myth of Fair Value (and How to Take Advantage of It)

Priceless is a book about price. It is pop science writing: the author is an author, not a behavioral economist. The pace is quick and most of the chapters, all of which have clever titles, are just a few pages. It eschews most pretense of grand narrative; the bulk of the book is examples of how the "prices that make our world go around are not so solid, immutable, and logically grounded as they appear." But there is enough there to tie these examples, and the stories of the social scientists that studied them, together

Poundstone opens with some eye-catching experiments and real-world examples, and then moves into section on psychophysics. I had never even heard of the discipline, but it turns out to have some revealing insights into the way we think and the way we percieve the world. From Poundstone's explanation, psychophyics is more or less dead today not because it was wrong, but because it basically exhausted its possibility for learning new things about the world.
Psychophysics established that our perceptions are based on a logarythmic (as opposed to linear) scale that, perhaps surprisingly, is the same across different people. If you think something is twice as bright, I think it is twice as bright as well. We may not think it is equally bright to begin with, but the relative change will be roughly the same.

Psychophysics established quite firmly that our perceptions are relative. You have probably seen optical illusions that convinced you something was darker or lighter than it was, based on what it was next to. All of our perceptions are that way: we judge things based on comparisons, not some absolute scale.

Psychophysics also established the phenomenon of "anchoring", which is one of the primary focuses of Priceless. Anchoring is when I change the way you percieve something by showing you something else first: I show you my wallet full of $100 bills and then give you $5, versus I hold up a penny and then give you $5. William Hunt was one of the first to notice the phenomenon and determined it could be influenced by "recency, frequency, intensity, area, duration, and higher-order attributes such as meaningfulness, familiarity, and ego-involvement."

Poundstone links the lessons of psychophysics directly to our perceptions of price. Part Three of the book is essentially a background on behavioral economics, and Poundstone does a nice job of tracing the development of different theories through various psychologists and economists. It's mostly a story of how the idea of an irrational individual came to be accepted by economists, culminating with Prospect Theory and the ultimatum game.

Prospect Theory is an economic theory with a solid technical/quanitative bases, and as such it is described in more mathematical/economics terms over at Wikipedia. Poundstone summarizes it in three points:
  • we use reference points to judge the value of things, so our judgements are fundamentally relativistic;
  • we have significant loss aversion, so we generally would rather have $10 than a 50% chance of having either $0 or $20 (typically we would only take the 50-50 bet if we were offered $30, or where the gain is double the loss);
  • and, there is a "certainty effect", which means that there is a big jump in value from say, 90% to 100% (much greater than, say the difference between receiving $90 or $100).
One implication of prospect theory is that we may not have consistent preferences, an important quality of the rational individual economists prefer to model.

The rest of the book is basically stories of different experiments based on the ultimatum game. The ultimatum game is where one player is told to divide $10 between them and the second player, and the second player can either accept the split or reject it. If the second person accepts the offer, they both get the amount the first person proposed; if the second person rejects the offer, neither player gets anything. There are hundreds of variations of this experiment and many of them are fascinating, but the last half of the book consists of little else besides bite-sized descriptions of these or related experiments. There are also a few chapters that read like an editor was encouraging the author to add some content for people who might want to read Priceless as a manual for pricing.
The book is not, however, anything like a manual. It certainly contains plenty of useful information, but the presentation is more a history of scientists and ideas than a handbook for pricing consultants. In that sense the parenthetical note in the title is a bit misleading, but it wasn't why I was reading the book so I won't complain. Overall Poundstone is an engaging writer and I enjoyed the book quite a bit.


It made me think, though.

There are two ways to understand the behavioral economics that Priceless is talking about. Behavioral economics is sometimes portrayed as proof of a fundamental flaw in more mainstream neoclassical economics, a set of evidence that undermines the most basic premises of rational-individual-based theory. But at other times behavioral economics appears to be just an interesting set of addenda--some lab experiments that help us fine-tune our neoclassical models, and the idea of 'bounded rationality' that advises against assuming too much about how people thing.

Which is it? Fundamental change or just smoothing out some rough patches? And how do we decide? And if it is fundamental change, how do we ensure that the necessary change is understood and acted upon?

Something [prominent behavioral economist] Dan Ariely said in a talk I was listening to the other day may clear things up. Neoclassical economics is fundamentally about examining static situations where many, many things are taken as given. Behavioral economics uses two key insights from other domains of social science to push against these neoclassical assumptions. First, the idea that social forces can have far-reaching impacts on markets, and second the idea that social actors create and alter their environment--including the markets they engage in.

In some situations, ignoring these two ideas may make perfect sense. Consumers do act in rational ways sometimes. But in other situations, social forces and the ability of actors to change their environment can render static equilibrium modeling absurd. Of course, economists make an effort to think about whether their results make sense on the level of individual studies. The problem is that once you have too many assumptions you start to exit the real world, and you may find a significant effect that is in fact insignificant relative to other (usually less measurable) factors.

These studies, realistic or not, tend to accumulate and coagulate into simplified worldviews like "markets are self-correcting". Behavioral economics challenges these views by lending credence, in a gradual way, to complexities that belie common assumptions. They give people the ability to ask, "Why did you assume XYZ when you were trying to explain this when we know things could be X, H, or F?"

Our economy is glued together by prices: they are the information that allocates our resources and drives our labor. But prices can only be as coherent as the people that pay them. We need to pay close attention to both the vagaries of pricing and the limits of what prices can represent. Please forgive the trite ending: there are some things money can't buy.

March 21, 2013

Production as Privilege: Rationalization

This post continues our series examining the connection between production and the distribution of wealth and resources. The series has grown far out of proportion and dragged on far longer than originally intended. But far more exciting than all that is the fact that we have scored an original comic from artist David Yoder. He has a bunch of awesome comics to read or buy on his site, and you should really check them out. With a bit of luck, this will not be the last comic you see here.

Conceptual Tool #10: Rationalization

One of my favorite ways to understand the last few centuries is as a process of rationalization, or as it is sometimes known, "McDonaldization". Rationalization is an important idea both in academia (particularly in sociology) and in actual real-world history. Economics as a discipline, however, has only touched on certain aspects of rationality, and has failed to see it as a connected process.

Rationalization as an academic concept came from Max Weber, who used the Prussian buraucracy as a model. More recently, George Ritzer has repackaged the idea of rationalization in his book The McDonalization of Society, using (you guessed it) McDonald's as the archetype of rationality.

Defining Rationality

So what is rationality? It is a concept ripe for circular definitions--we tend to use it interchangably with "reason", but what does reason mean? What does it mean to be "irrational" or to "rationalize" an idea or a process? Etymologically it is similar to "ratio", which means means to calculate or measure. But when we use the word rationality we are talking calculating or measuring a certain thing: I think the idea hinges on causality.

The best definition I can come up with is: thinking or acting in ways that accurately link cause and effect. By extension this implies that when we act in the world we do so coherently, in ways consistent with our intent and motivation.

In sociology, rationality has a much more specific meaning, which Ritzer describes and I will copy from Wikipedia. There are four components:

1. Efficiency - Choosing the best, quickest, or least difficult means to a given end.
2. Calculability - Emphasis on the quantitative aspects of the product being sold.
3. Predictability - Involves the customer knowing what to expect from a given producer of goods or services.
4. Control - A way to keep a complicated system running smoothly. Rules and regulations that make efficiency, calculability, and predictability possible.
The theme of measurement and calculation is obviously still strong in the sociological definition, and you can understand rationalization as the process of optimizing the function of the organization--that is, making the operation as consistent with intent as possible. Optimization is achieved through the the four components above, all of which are related to measurement in a way, but which together change the organization itself.

In practice, rationalization is a process of breaking down production, and reconstituting it in standard ways (e.g. written down and quantified) that are more successful. Success can be economic or military or anything you can measure or compare. It is not inventing new things; it is inventing new ways to do old things that are more successful beause they are able to achieve the intended ends.

Rationality and Economics

I have been writing about efficiency and its relationship to productivity a good deal lately, so I will not elaborate much here. Suffice to say, efficiency is a well-trodden topic in economics (but it is perhaps more helpful to think in terms of cost reduction). The other three aspects of rationality--calculability, predictability, and control--are concepts economics gives a short shrift.

Calculability is certainly fundamental to economics itself, and something on the mind of every economist, but the idea has a different focus in economics than in sociology. Ritzer is talking about the ability of businesses to quantify aspects of their own business and the world they are interacting with: measuring customers served or the time it takes to fry a burger. Economists think a good deal about what can be quantified and how to do it, but they do not think much about businesses creating quantifiability, which is what rationality is all about.

Similarly, the issue of predictability comes up in economics all the time (particularly in terms of risk and uncertainty for businesses) but this is only tangentially linked to the idea of predictability relevant here. The economic ideas of risk and uncertainty play into business decisions on a micro level, but only so far as the external envinronment influences the business. Ritzer is talking instead about the internal processes of the business and how similar iterations of it can be--iterations over space (McDonald's franchises that serve the same food in the same way) or over time (I want to get the same burger I ordered last time). In economics, these issues typically get lumped into the infuriatingly vague "tastes and preferences" category, or the "value and costs" category which is almost as bad.

Another aspect of predictability, however, is starting to make an impression on economics through the (re-)incorporation of institutional factors into economic models. Predictability is seen as an important feature of market regulation and the provision of public goods. "Personalistic" transactions, based on individual relationships, differ from rational, impersonal transactions based on standardized rules and procedures. Rationalized bureaucracies facilitate well-functioning markets.

Control in the sociological sense crops up in economics primarily through the idea of the "principal-agent" problem, which boils down to the question: "how do principals get agents do do what principals want instead of what agents want?" Principal-agent issues are typically understood as incentive issues, and more control, or control over the right things (pay, bonuses, production targets), is typically seen as the solution. If an economist is looking specifically at intra-firm dynamics, he or she might model interactions using game theory, but in most cases these dynamics are assumed away and firms are assumed to be single units.

In a sense, control can be understood as a component of technology, which economics has famously little understanding of. In years past "technology" was referred to as "technique", which hints at the more human and social aspects: teachers use classroom management "techniques", for example, to control their students.

The difference between control in economics and control in sociology is one of focus. Economics for the most part assumes away control--be it embedded in the firm organization or regulatory structure of a market. Sociology takes a more political view of control and all the ways in which different social forces can influence people's decisions and their views of the world.

How Rationalization Works

Ritzer does not focus on the causal relationships between the different aspects of rationalization (e.g. does predictability cause control or vice versa?). Instead he emphasizes that efficiency, predictability, calculability and control are all necessary, intertwined processes. The processes work together to provide businesses with an assortment of advantages. (Given that businesses are typically controlled by shareholders or owners, however, it may be better to think of these processes as providing shareholders and owners with more advantages.)

To understand the advantages of a rationalized business, simply compare a McDonald's hamburger to a local diner or even a home-cooked meal. Cooking at home is labor intensive--you have to go the store, purchase the meat and buns, start the grill, form the patties, and grill them each yourself. If you are not too good with the grill this can be a stressful process. A local diner is more specialized in that they are making more food at once, and can benefit from the accompanying economies of scale. Where a local diner has more trouble is in ensuring that the customer's expectations are precisely met each time--a different cook on the grill might make burgers differently, or someone just passing through town and eating at the restaurant might not know if the burgers were any good. Nor are local restaurants able to benefit from the economies of scale that franchised restaurants are able to--McDonald's presumably has more clout in the beef market, more money to spend advertising at the Superbowl, and more money to pay taste consultants to formulate the ideal blend of coffee than Bob's Local Diner.

The processes at McDonald's are better established, with established routines for each part of the burger's production. A diner, you could say, does not "produce" a burger. Obviously, not all of these things about the way McDonald's works are always advantages, and a burger on your grill may have certain qualities over one from McDonald's will never match. The point is that there are rational business reasons, given the way our economy is set up and our technology and people's preferences, for a business like McDonald's to exist.

The fast food business is only one example. In government bureaucracies, rationalization also plays an important role. Look at how the government regulates the transportation market. The system is made calculable through hundreds of different measurements: speed limits, point systems for driving infractions, and minimum ages are just a few of the obvious ones. The system is made predictable through clear rules that both drivers and police officers have to follow, and it is made efficient through changes through these laws. Laws also govern control: who can arrest you and who can be arrested; who can control vehicles and must be restrained by a seat belt (everyone).

Market economies based on laws, rights, and regulations must be administered, and the administration works best if it is done by a strong, capable bureaucracy with the correct incentives. While you may scoff at anyone calling the local Department of Motor Vehicles efficient, they do their job: if you fulfill the requirements you will get the license. Success or failure does not depend on whether you know the teller or whether they think you gave them a sufficient bribe. They may piss people off with wait times, but it is a fair system.

Rationalization can help organizations understand and respond to the world they operate in, but the idea is best understood as an internal process that governs actions and relationships within the organization. We can think of entire countries as organizations as well. Constitutional republics like the USA are rational not because they are able to conduct foreign policy that accurately reflects their self interest; they are rational because authority is vested in legal documents (their constitution and laws) and not people. Legal documents are predictable (they say more or less the same thing to anyone who reads them) and create calculable situations by specifying majorities or other criteria for power. The US constitution has many deliberate inefficiencies, but the difficulty in creating or changing laws can reduce other costs--such as unjust imprisonment.

Rationalization, Production and Distribution

Rationalization tends to take the productive process and break it into little pieces, because it is possible to arrange those peices in ways that better achieve the desired goals. The peices themselves might be simplified, but the simplified parts can facilitate a complex whole. (Complexity is not the goal, but a large complex system may outperform small simple ones.) The little pieces are often enhanced by mechanical technology or organizational structures.

The archetypal factory of the industrial revolution, the textile mill, is a perfect example of this. Instead of individual people spinning their own wool from their own sheep and weaving on small looms at home, large factories of workers weave processed cotton ceaselessly on giant steam-powered mechanical looms.

Rationalization is a specific way of understanding the technical improvements and cost reductions I have written about in several previous posts. Once you understand the idea of rationalization you start to see it everywhere, and you start to see how reactions to many other social issues are in a sense reactions to rationalization.

But we are concentrating here on production and distribution. The idea of rationalization is powerful because it starts us thinking about how technological change can remake the productive process--in ways that ultimately shape distribution. What ways am I talking about? Rationalization changes the skills required by workers, often polarizing low and high-skill jobs into lower and higher-skill jobs. It changes, often increasing, the nature of control in workplaces. It increases the scale of businesses. And it lowers costs in a myriad other ways, ways that have a wide range of consequences. These effects of rationalization have been some of the most powerful forces shaping distribution in the past two centuries.

Rationalization can cause skill polarization by reducing the required skill for some jobs while increasing the required skills for others. Think of the skill gap between the McDonald's burger flipper and the McDonald's food scientist with a PhD in Mouth Feel, and how they are the rationalized evolution of your dad standing outside by the grill. Unskilled labor is easily replaceable and cheap, and thus good for the bottom line. This is particularly important because of the scale of operations--the vast majority of employees are near the unskilled end. The skilled worker can command higher prices because they are inherently scarcer (due to things like PhD admissions). The polarization is not symmetrical; rather it ends up being a pyramid without a middle with a large cohort of unskilled work and a smaller tip of skilled labor.

Technology as a general concept may have an ambiguous effect on skills required of workers: it can deskill work or it can eliminate work (depending on the type of technology); it can make workers more productive or less necessary (depending on the demand for the product); and it can increase or decrease the skills required of workers. A cash register might eliminate a worker's need for math skills; but it might also increase the need for a worker to multitask, pouring drinks and assembling orders while answering a customer's question about calorie counts. Similarly, an advanced robot in an automobile factory might simplify employees' jobs to the push of a button, or it might require them, or a quarter of them, to know advanced robotic programming.

But technology in the context of rationalization is less ambiguous. As noted above, control itself can be understood as a technology: the processes rationalization touches are deliberately simplified, dumbed down and subjected to more control--partly because control enhances predictability, partly for its own sake, and partly because quantified, simplified processes make control easier. Although I do not have data on this, I would expect the overall trend within industries to be that of skill polarization.

Control can impact distribution of wealth and resources in ways that are not well understood by economics. Economics focuses on markets, but markets can only provide limited accountability in terms of price competition and demand. Control requires either hierarchy or some other accountability structure, which is why firms essentially shelter their internal operations from the market. As an example, pay is an important part of establishing hierarchy, and pay may be linked more closely to status in the hierarchy than with required effort, skill, or even supply and demand.

Rationalization also tends to shift control not to people but to written rules and procedures, shrinking the amount of people who actually shape the institution. Managers may have little to do with the actual design and processes of the business, instead simply enforcing what has been written. This standardization can have enormous benefits in terms of productivity and the ability of the organization to adapt, grow, and succeed. But the powerlessness of people within an organization can also be problematic not only in term of wages but in terms of rationality itself: anyone who has ever worked for a large organization quickly realizes there are some things that do not make sense but are nevertheless done "because that's just how we do things around here."

A third fundamental way in which rationalization impacts the production and distribution is through increasing scale. As somebody once said (apparently this is attributed to Stalin but no one is sure who said it first), "Quantity has a quality all its own." Scale changes many things, but it is not immediately clear what.

Scale in business has the tendency to concentrate profits near the top because that is basically the point of the corporate model of control. If you have 100 different independently owned burger restaurants, those profits stay in each restaurant. But with McDonald's, a portion of those profits go back to corporate headquarters and then on to investors. McDonald's is a franchise, so in some ways the scale is actually not as large as other corporate entities. But the point is that at McDonald's, operations are standardized in cost-minimizing ways, ways that facilitate the minimization of employee wages across the board.

Assuming that there are certain market sectors that become crowded with competitive entrants, we can also think of scale as prohibiting new experimentation and diversity. A national market for fast food or groceries or auto parts or anything controlled by two or three huge players is a market that is difficult for small players to enter and compete within. Larger businesses have more leverage in the labor marketplace (as well as many other markets) and are less likely to be susceptible to institutions that increase worker's ability to gain a part of the profits. For example, if the person who controls a basic wage rate for someone flipping burgers is far away at corporate headquarters, there may be less pressure to pay a living wage than if the business owner lives down the street.

In the end rationalization is primarily about reducing costs in the above-mentioned ways. Scaling up, increasing control, and decreasing the skill required of workers all help lower costs to organizations. This can be a very good thing: if cars were built by hand by a single craftsman nobody would have a car. But costs can also be a zero-sum game. Institutions that have become too rational can end up being irrational for a large portion of the people they affect, because their rationality is too narrowly considered. This is a major point of Ritzer's. Rationalization may come with costly externalities, like pollution or repetitive stress injuries, or it may simply shift costs in ways that benefit some at the expense of others.

Rationalization is not going away; if anything it is only in its infancy. Organizations like Samasource specialize in breaking down work even further, rationalizing processes that were not previously economically feasible. Control over employees is also evolving, as new technologies help quantify the previously unquantifiable. And technology continues to encroach on scarce abilities.

As our technologies, our workplaces and our work change, we need to use all the tools at our disposal to understand the economic as well as the social impact of those changes. The concept of rationalization helps reveal the how the forces shaping businesses can have social impacts as well as distributional consequences.

March 15, 2013


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March 14, 2013

Let Them Save Cake

Blogger Noah Smith has an article on wealth inequality up in The Atlantic's business section. The article uses the excellent recent viral YouTube video on wealth inequality in the US as a starting point to make a number of observations and recommendations. Smith has a wealth of fascinating posts on his site and a much better understanding of most things economic than I do, so the article caught me by surprise.

Leading off with an unflattering photo of overweight Americans eating dinner in a house crammed with artifacts of their presumed overconsumption, the article goes on to argue that (1) wealth inequality isn't quite as bad as it appears in the video, (2) redistribution of income could help make the wealth gap better because poor people would save more and take more risks that would benefit them, and (3) income distribution is not enough and we need to teach poor people how to save more effectively.

Strictly speaking, these ideas are well-founded in theory and evidence and I agree with them. But nonetheless the analysis ends up in a very wrong-headed place for several reasons.

First of all, I really think the article is missing the point about the massive concentration of wealth at the top. Maybe saving more would help, but how much? How much of a dent in the inequality graph would it make if the lower quintiles starting saving their entire incomes, for example? Would we get back to where we thought we were? Or where we would like to be?

Second, helping people save might theoretically increase their wealth, but it's a zero-sum game with their current consumption. Weighing welfare effects between present consumption and future consumption is ambiguous here because it is extremely subjective, so I suppose it makes sense to stigmatize one of the alternatives (yuck! those people are fat!).

Instead, shouldn't we understand the problem as being too little income in the lower quintiles first, and understand the lack of savings as an effect of that unequal income? The consumers would save more if they had more money to save. Obviously there are countries with far lower incomes with far higher savings rates, but there is a good argument to be made that relative incomes are what matter. Or at least that expectations about living standards is what matters, which brings us to the next point.

Third, the article ignores the idea that credit has been extended and saving decreased amid working and middle class Americans precisely because of the stagnation in real wages. Whether or not you see this as a deliberate political strategy as Rajan does (along with others more toward the left), the availability of consumer credit has increased in dramatic, important ways (housing loans, education loans, credit cards) since income inequality started rising in the 1980s. And this has kept a lot of people happy. Or fed. The availability of credit has also been a primary driver of demand, without which our economy would be at a far greater standstill today.

There are certainly improvements to be made in wealth inequality through better financial literacy. But ignoring the political economic context for the drastic rise in credit, and moreover ignoring the importance that credit plays in demand, seems problematic--if not vindictive.

Most frustrating, however, is the article's blithe passivity toward the workings of the market. There is no mention in the article regarding what seems to be the fundamental problem: an income distribution that is almost as revolting as the distribution of wealth. Maybe this distribution is simply the innocent working of a "natural" capitalist economy and we are powerless to make it better, but probably not. Probably there are plenty of good reasons why the wage gap has grown in recent years. Many of those reasons we can do something about; ignoring them just helps those at the top keep raking it in.

March 4, 2013

Charlie Munger on "24 Standard Causes of Human Misjudgement"

I listened to a talk yesterday by Charlie Munger, a bigshot at Berkshire Hathaway (Warren Buffett's investment firm). (via)

I took notes on the talk because it was interesting and conducive to note taking (being a list and all). They are not out of line with the content of this blog so I thought I would post them. Although I would recommend listening to the talk if you have time. In a way, most of it is common sense, but I think framing these tendencies and addressing them in this way can be very helpful.

24 Standard Causes of Human Misjudgement

1. Underrecognition of the power of reinforcement/incentives
He also talks about "Man With A Hammer Syndrome", the tendency of people look at everything through the same lens.

2. Simple psychological denial

3. Incentive-caused bias (both in your own mind and also of trusted advisor--where it causes agency costs) (avoid cognitive dissonance)
This is essentially the Upton Sinclair quote: "It is difficult to get a man to understand something when his job depends on not understanding it."

4. Bias from consistency and commitment tendency (particularly biased toward expressed and hard-won conclusions) (This is a particularly strong bias.)
Once you think or say something you are biased toward it in the future.

6. Bias from pavlovian association
* coke wants to associated with lots of good things
* persian messenger syndrome--still exists: bad for the messenger
* raising price of alternative product often raises sales because we think higher priced is better
* what causes information
* bias from skinnerian conditioning--skinner created superstitious pidgeons
* the accounting system here is really important--loose accounting standards are just inviting bad behavior

7. Bias from reciprocation tendency (including the tendency when on a roll to act as other people expect)
It is easy to be a patsy for "compliance practicitioners".
Salespeople ask for a lot and then back off: experiment where people are asked to take juvenile deliquents to the zoo 2 for two days? Ok how about just one? (this technique gets way more people to sign up than just asking for one day a week)

8. Bias from overinfluence from social proof (from conclusions of others)
"better to be roughly right than precisely wrong" ~ Keynes

9. Bias from contrast-caused distortions in perception, sensation, and cognition
We percieve things on a contrast scale with quantum effects.
* magicians remove watches
* cognition mimics sensation--people are manipulating you all day long
* marriage
* frog in boiling water

10. Bias from over-influence from authority

11. Bias from deprival super-reaction syndrome

12. Bias from chemical dependency--distorts all other reality very easily

13. Bias from gambling compulsion

Variable reinforcement and Skinner (he gives a gambling example--but is clear that this bias is not only reason gambling is popular--e.g. people love to pick their own numbers)

14. Liking distortion

15. Disliking distortion
Man with a hammer syndrome and Skinner himself: 4-5 of these tendencies combine to create this syndrome.
Revised quote: "In the last analysis every profession is a [subconscious psychological tendency] against the laity"

16. Bias from the non-mathematical nature of the brain and its tendency to get probability wrong
We have whole heuristics of misjudgement, like "availability". The availability [e.g. of coke] changes behavior. But it isn't the lack of availability that distorts your judgement.
You have to train yourself to run down this list--these tendencies make thoughts unavailable because you jump to new conclusions.
Example of the trusted employee that does something wrong/illegal and you don't punish them because of many combined biases.
If we don't then evil behavior spreads.

17. Bias from overinfluence from extra-vivid evidence

18. Mental confusion caused by information not arrayed in the mind and theory structures creating sound generalization developed in response to the question why. Also misinfluence from information that apparently but not really answers the question why also failure to obtain deserved influence by not properly explaining why.
"you've got to array facts on theory structures answering the question why"
If you want to pursuade somebody you have to tell them why (show people incentives for them).

19. Other normal limitations of sensation, memory, cognition, and knowledge

22. Stress induced mental changes, small and large, temporary and permanent.

Pavlov's dogs had total reversal of their conditioning under stress.

23. Other common mental ilnesses and declines including the tendency to lose ability through disuse.

24. Mental and organizational confusion from "Say-Something Syndrome".
E.g.: honey bees do incoherent dances when the nectar is straight above the hive because they don't have a genetic program to describe that direction.
You have to make sure people with "say something syndrome" don't affect decisions

He provided a bit of a FAQ at the end. Questions included:

What happens when these tendencies combine?
Answer: The combination greatly increases the power to change behavior.
-Alcoholics Anonymous
-Milgrim experiment
-contrast principle, commitment and consistency tendency
-"lollapalooza effects"
-"what you should search for in life is the combination"
-McDonnell Douglas airliner evacuation disaster--they did a disasterous test twice: decided to do it, authorities told you to do it, incentive-caused bias, etc...
-Open-outcry auction
-Institution of the board of directors

Isn't this list improperly tautological?
Answer: yes. And there is overlap, etc...

What good is knowing these things?
Answer: These tendencies are partly good--in fact, they are mostly good rather than bad and that's why they are programmed into us by physical and cultural evolution. This thought system is very useful in spreading good thinking and good conduct.
Some of where these tendencies can be used to good effect:
-Use of simulators in pilot training
-Clinical training in medical schools. "watch one, do one, teach one"
-Rules of the US constitutional convention --totally secret, no votes until the final vote
-Use of "granny's rule": you don't get the ice cream unless you eat your carrots--do the unpleasant and important first
-HBS's emphasis on decision trees -- looking at elementary probability
-Postmortems at Johnson & Johnson
-Darwin paid always extra attention to the disconfirming evidence

What special-knowledge problems lie buried in the list?
"damn the paradoxes"
the more people learn about it, the more attenuated the effects of the list get
--the manipulation still works even though you know if you do it

How should the best of psych and econ interrelate?
Answer: There are two views of the relationship between psychology and economics.
-thermodynamics model--some economists like thermodynamics model
thermodynamics model is overstrained--knowledge from these different soft sciences has to be reconciled--behavioral economists are bending econ rules
-equinoxes: the world would be much easier for climatologists if there wasn't a little wobble. in many ways psych may just add a little wobble

Miscelaneous Direct and Indirect Quotes from the Talk:
"all reality has to respect all other reality"

"the lord is subtle but not malicious"

"wanted to get rich so he could be independent"

people are trained to follow the ideas of others in academia