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This online EDGE edition is available at:
http://www.edge.org/documents/archive/edge253.html
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EDGE FEATURE
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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.
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.
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.
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. ...
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PHOTO GALLERY
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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
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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.
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. ...
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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
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
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). ....
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THE REALITY CLUB
Comments on The EDGE Master Class 08:
W. Daniel Hillis, Daniel Kahneman, Nathan Myhrvold, Richard Thaler, Daniel Kahneman, Nathan Myhrvold
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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.
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DANIEL KAHNEMAN
Quick reply to Nathan on priming-I believe that the comparison of priming with the curiosities of visual illusions sells it short.
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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.
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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?
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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.
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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.
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This online EDGE edition is available at:
http://www.edge.org/documents/archive/edge253.html
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Copyright (c) 2008 by EDGE Foundation, Inc. All Rights Reserved.
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