(16,460 words)
This online EDGE edition with streaming video is available at:
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THE THIRD CULTURE
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I want to close a loop, which I'm calling "The Irony of Poverty." On the one hand, lack of slack tells us the poor must make higher quality decisions because they don't have slack to help buffer them with things. But even though they have to supply higher quality decisions, they're in a worse position to supply them because they're depleted. That is the ultimate irony of poverty. You're getting cut twice. You are in an environment where the decisions have to be better, but you're in an environment that by the very nature of that makes it harder for you apply better decisions.
THE IRONY OF POVERTY
A Talk By Sendhil Mullainathan
SENDHIL MULLAINATHAN, a Professor of Economics at Harvard, a recipient of a MacArthur Foundation "genius grant", 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 is Executive Director of Ideas 42, Institute of Quantitative Social Science, Harvard University.
Sendhil Mullainathan's Edge Bio Page: http://www.edge.org/3rd_culture/bios/mullainathan.html
Daniel Kahneman, Paul Romer, Richard Thaler, Danny Hillis, Jeff Bezos, Sean Parker, Anne Treisman, France LeClerc, Salar Kamangar, George Dyson
Class 5: A Short Course In Behavioral Economics
Edge Video
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SENDHIL MULLAINATHAN: I told you there was a bunch of pieces to the puzzle to the poor, and I wanted to finish that argument because I got out the first piece of the puzzle, but there are two other pieces that are important and I want to kind of walk through those pieces. I'll walk through the other piece of the puzzle, and then I'll close on a slide about mental models. I realized in trying to write that up, everything can be shown in this one slide, and it's kind of a stunning fact.
To recap: The first piece of the puzzle is that scarcity buys a broader frame, the need for a broader frame. And one implication of a lot of this which is worth keeping in the back of your mind and that what should resonate for a lot of you is that even positive expenditures are tainted by the trade-offs.
If you're poor and you spend money on a luxury good, you're always at least partly thinking during the moment of consumption about what you're giving up to buy that good. If you are time scarce and you're spending time on a leisure good, you're at least partly thinking about what you're not doing during that time. That's an interesting hedonic aspect of things, which could turn out to be important.
The problem of a broader frame isn't just a planning problem, there's also a hedonic problem that it induces, which is the inability to not think about trade-offs during the consumption. That's an interesting indication. I won't talk more about it because I'm not talking that much about hedonics. But it's important.
Here's the second piece of the puzzle. And this is related to the question of, what is causing, what's preventing the vendors from saving up? Here's a little thought experiment. Eve and Ben both pass by a clothing store. A summer suit draws their eye and in a moment of weakness both make an ill-advised purchase.
Eve goes home and thinks, what a bad purchase. Ben goes home and thinks, what a bad purchase; now I won't have the money to repair my car. Why is this example is useful? It's that temptations have consequences. If you have slack, the consequences are that you've now used up some of your slack on this pointless purchase. And you may feel bad because it was a pointless purchase and it was in the spur of the moment. Of course, we're tempted by certain consumption acts. The poor are tempted by certain consumption acts. Here's an interesting observation. Suppose that the goods that tempt us, so say I make ten times as much as somebody else, suppose the goods that tempt me are ten times as expensive as the goods that tempt the other person. Then we both face the same structural problem. We've taken one problem and scaled it up.
It's like an exchange rate. Just multiply it by ten, but everything else is still the same, so nothing has changed. If, on the other hand, the things that tempt me are only twice as expensive or three times as expensive it's interesting that now I face the fundamentally easier problem than the poorer person. Does that make sense to everybody?
What that means is now that if I cave in, I'm caving in. The psychological experience is the same. I'm giving into something I don't want to give in to, but the monetary consequence is very different. It's going to be in proportion to my slack, my income it's one tenth as big. ...
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IN THE NEWS
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THE NEW YORK TIMES
OP-ED COLUMN
THE BEHAVIORAL REVOLUTION
By David Brooks
...Economists and psychologists have been exploring our perceptual biases for four decades now, with the work of Amos Tversky and Daniel Kahneman, and also with work by people like Richard Thaler, Robert Shiller, John Bargh and Dan Ariely.
My sense is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking.
Nassim Nicholas Taleb has been deeply influenced by this stream of research. Taleb not only has an explanation for what's happening, he saw it coming. His popular books "Fooled by Randomness" and "The Back Swan" were broadsides at the risk-management models used in the financial world and beyond.
In "The Black Swan," Taleb wrote, "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup." Globalization, he noted, "creates interlocking fragility." He warned that while the growth of giant banks gives the appearance of stability, in reality, it raises the risk of a systemic collapse - "when one fails, they all fail."
Taleb believes that our brains evolved to suit a world much simpler than the one we now face. His writing is idiosyncratic, but he does touch on many of the perceptual biases that distort our thinking: our tendency to see data that confirm our prejudices more vividly than data that contradict them; our tendency to overvalue recent events when anticipating future possibilities; our tendency to spin concurring facts into a single causal narrative; our tendency to applaud our own supposed skill in circumstances when we've actually benefited from dumb luck. ...
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THIS IS MONEY
NASSIM TALEB AND THE SECRET OF THE BLACK SWAN
Bill Condie, Evening Standard
Options trader turned author and philosopher Nassim Taleb has delivered returns of 50% - in some cases 110% - for investors he advises this year despite the market meltdown, thanks to his non-conformist view on managing risk. The Evening Standard investigates...
Lebanese-born Taleb is scathing of traditional risk-managers and says they should be jailed for the pain they have caused.
'We would like society to lock up quantitative risk managers before they cause more damage,' he says.
Those same risk managers have scoffed at Taleb's theories but may have to think again after his extraordinary returns over the past months.
'I am very sad to be vindicated,' Taleb says.
'I don't care about the money. We're proud we protected our investors.'
Taleb wrote last year at length about the market risks that have come home to roost lately. 'The financial ecology is swelling into gigantic, incestuous, bureaucratic banks - when one fails, they all fall,'
Taleb wrote in his book The Black Swan: The Impact of the Highly Improbable, published last year. He warned specifically of the dangers from mortgage finance giants Freddie Mac and Fannie Mae.
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THE TELEGRAPH
DEAN KAMEN: PART MAN, PART MACHINE
Some see Dean Kamen as a Willy Wonka character whose most famous invention - the Segway personal transporter - is still the butt of jokes. Others compare him to Henry Ford. His next project, after perfecting an electric car, is to 'to fix the world' - using a 200-year-old engine nobody else thinks can work. By Adam Higginbotham
Ten years ago, on the summit of a hill in the verdant New England countryside, at the highest point he could find between Boston and Manchester, New Hampshire, Dean Kamen designed and built the sprawling, hexagonal house he called Westwind. Filled with gadgets, tools and curios - including a 25-ton tugboat steam engine that once belonged to Henry Ford and an elevator featured in The Sting - and furnished with a 50,000 watt wind turbine to generate electricity and a floodlit baseball field to entertain his employees, it lies just seven miles from the headquarters of his research and development company, Deka.
Now 57, Kamen has a variety of ways of covering this distance: at the wheel of his gleaming black Humvee, or perhaps his Porsche coupé, the journey takes some 20 minutes; often, he chooses to pilot his helicopter, a two-seat, jet-powered Enstrom 480, which he keeps in a hangar beneath the house, and will put the inventor on the roof of his office in about three -and-a-half minutes. ...
...Kamen is now regarded as one of the most accomplished electro-mechanical engineers in the world - 'He's extraordinary,' says Bob Tuttle, who has worked with him since 1976 and is now executive vice-president of Deka, 'the ultimate systems engineer.'
'He's often compared to Thomas Edison or Henry Ford,' says Bill Doyle, who met Kamen while working at Johnson & Johnson in the mid-1990s. 'The comparisons are not without merit.' ...
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THE GUARDIAN
'PEOPLE SAY I'M STRIDENT'
He sold 1.5m copies of The God Delusion, and this week stumped up £5,500 for atheist adverts. So why does Richard Dawkins think science is losing its war with religion?
By Decca Aitkenhead
...This week, as Dawkins retires from the Charles Simonyi professorship for the public understanding of science, the Oxford post he has held for 12 years, you might expect him to feel that the secular, scientific cause to which he has devoted his career is winning. On Tuesday, campaigners announced plans for an atheist advertising campaign to appear on the side of buses with the message: "There is probably no God. Now stop worrying and enjoy your life." The campaign, which was launched by TV comedy writer Ariane Sherine, blogging on Commentisfree.co.uk, hoped to raise £5,500 from supporters, which Dawkins had pledged to match with his own money, but by yesterday public donations had already raised more than £96,000.
In the same week, immigration minister, Phil Woolas, predicted that constitutional reforms would banish bishops from the House of Lords within the next 50 years, and record numbers of new maths and science undergraduates were reported. Even in America, the religious right seemed to be losing its grip.
But when I ask Dawkins, now 67, if he feels that public understanding of science has improved during his career, he looks doubtful. "I would say that when my academic career began there was probably just as much ignorance - but less active opposition [to science]. If you were to actually travel around schools and universities and listen in on lectures about evolution you might find a fairly substantial fraction of young people, without knowing what it is they disapprove of, think they disapprove of it, because they've been brought up to."
Does he attribute that to lower standards of scientific education, or to the rise of religious fundamentalism? "Oh," he says without hesitation, "I think it's due to greater religious influence."
In Dawkins' view, there is a battle taking place in Britain between the forces of reason, and religious fundamentalism and it is far from won. He is one of its most famous and prolific combatants - but the question might be whether he is among its most effective. The God Delusion's stated aim was to "convert" readers to atheism - but he admits that as a proselytising tool it has broadly failed. "Yes," he smiles. "I think that was a bit unrealistic. A worthwhile aim, but unrealistic." ...
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THE TELEGRAPH
HARRY POTTER FAILS TO CASE SPELL OVER PROFESSOR RICHARD DAWKINS
By Martin Beckford and Urmee Khan
Harry Potter has become the latest target for Professor Richard Dawkins who is planning to find out whether tales of witchdraft and wizardy have a negative effect on children.
The prominent atheist is stepping down from his post at Oxford University to write a book aimed at youngsters in which he will warn them against believing in "anti-scientific" fairytales.
Prof Dawkins said: "The book I write next year will be a children's book on how to think about the world, science thinking contrasted with mythical thinking.
"I haven't read Harry Potter, I have read Pullman who is the other leading children's author that one might mention and I love his books. I don't know what to think about magic and fairy tales."
Prof Dawkins said he wanted to look at the effects of "bringing children up to believe in spells and wizards".
"I think it is anti-scientific - whether that has a pernicious effect, I don't know," he told More4 News.
"I think looking back to my own childhood, the fact that so many of the stories I read allowed the possibility of frogs turning into princes, whether that has a sort of insidious affect on rationality, I'm not sure. Perhaps it's something for research." ...
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TIME
Q & A
NASSIM NICHOLAS TALEB
By Tim Morrison
...You've said that this current market crisis isn't necessarily a black swan event. People did see this coming.
It is a white swan, but very few people saw it coming, I guarantee. Nobody saw the real cost. And let me tell you the problem. The system used to analyze risk is completely defective, and actually could not keep up with the complexity of the financial products that are involved. You have what I call a geometric or exponential increase in risks. For example, if the market drops 10% you lose $100 million. But if the market drops 15%, you don't lose another $50 million, you lose an extra $2 billion. And if the market moves an extra 5% you lose an extra $10 or $15 billion. All the metrics have the effect of underestimating the impact of the possibility of very large deviations. In other words it tells you how uncomfortable the plane ride is going to be, but tells you nothing about the crash.
But how do you get beyond that besides widening your margins of risk?
Eliminating leverage. If you don't have leverage, you don't have that problem. We have a faulty risk management system that underestimated probabilities while giving people the illusion of understanding them. It gave people the illusion of comfort. If I give you a number, you're going to take more risk. Regardless of the confidence you have in the number. It's psychological. If I ask you to write down the last 4 digits of your social security number, and then take you out to lunch and ask you how many dentists there are in Manhattan, there's going to be a high correlation between those two numbers. What happens is that the number psychologically makes you feel confident. It's kind of like a seatbelt on a plane. It doesn't do anything. ...
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THE VANCOUVER SUN
MOTIVATED BY FEAR
By Peter McKnight
Recent volatility in the markets is largely a result of mob mentality and the herding instinct, with anxiety spreading faster than any virus
By Peter McKnight
...This presents a problem for economists in their attempts to explain what's happening now and to predict what will happen in the future since many economic theories depend on the assumption that investors will act rationally. But what if that assumption is wrong, as seems to be the case right now?
Perhaps it's time to turn to psychology, as many economists have done in recent years. While psychologists and economists didn't have much to do with each other throughout most of the 20th century, the last few decades have seen something of a rapprochement between these two seemingly disparate disciplines, a meeting of minds that has produced the interdisciplinary field of behavioural economics.
The seeds of this rapprochement were sown by famed psychologists Daniel Kahneman and Amos Tversky, who in the 1970s demonstrated the phenomenon known as loss aversion. Despite having never taken an economics course, Kahneman was awarded the 2002 Nobel Prize in economics for his work; Tversky unfortunately died in 1996.
As the name of the theory suggests, loss aversion tells us that people are much more concerned with avoiding losses than they are with making gains. ...
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NATURE
Editorial
A LOOK WITHIN
A series of Essays examines what science has to say about being human.
...The combustibility of the interface between science and society is one major reason for the extraordinary fragmentation of research that tackles human behaviour. In part because of the sociobiology battle, most social scientists still steer clear of using evolutionary hypotheses. And even researchers who do work under the unifying framework of evolution tend to fall into distinct camps such as gene-culture co-evolution or human behavioural ecology - their practitioners divided by differences of opinion on, say, the relative importance of culture versus genes.
Given that humans are such a complicated species, it is no surprise that researchers from fields such as economics, political science, anthropology and biology are driven to pursue similar questions using their own distinct tools and approaches. But the lack of crosstalk between disciplines and subdisciplines means that efforts are too often duplicated, and opportunities to exchange insights lost. Much of the ethnographic data on hunter-gatherers collected by anthropologists, for instance, are largely unknown to modellers interested in the emergence of particular human traits. Similarly, evolutionary biologists constantly accuse social scientists of either ignoring evolution or invoking outdated versions of evolutionary theory.
It doesn't have to be this way. In other domains, such as the study of complex systems, scientists from biological, physical and social sciences are increasingly sharing information. Now is a particularly opportune moment for those studying human behaviour to follow suit. Genomics is beginning to provide a window onto many thousands of years of human history. Advances in mathematical analyses have greatly clarified our picture of the evolutionary process. And, because of the rapid assimilation of nomadic hunter-gatherer populations into modern societies, researchers have collected most of the ethnographic data on these groups they are ever likely to obtain.
In the spirit of fostering dialogue between disparate fields of research, Nature has commissioned a series of Essays that asks how discoveries in psychology, anthropology, genetics, neuroscience, game theory and network engineering are altering our understanding of particular human characteristics, or of issues that are central to human life. Starting this week with religion (see page 1038), and appearing every two weeks for the next five months, these Essays move from human prehistory to look at how we operate within self-made highly interconnected cities and communication networks. ...
[EDITOR NOTE: Philip Campbell is Editor of Nature]
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NATURE
Essay
BEING HUMAN: RELIGION: BOUND TO BELIEVE?
Pascal Boyer
Pascal Boyer is in the Departments of Psychology and Anthropology, Washington University in St Louis, Missouri, USA, and is the author of Religion Explained.
Atheism will always be a harder sell than religion, Pascal Boyer explains, because a slew of cognitive traits predispose us to faith.
Is religion a product of our evolution? The very question makes many people, religious or otherwise, cringe, although for different reasons. Some people of faith fear that an understanding of the processes underlying belief could undermine it. Others worry that what is shown to be part of our evolutionary heritage will be interpreted as good, true, necessary or inevitable. Still others, many scientists included, simply dismiss the whole issue, seeing religion as childish, dangerous nonsense.
Such responses make it difficult to establish why and how religious thought is so pervasive in human societies - an understanding that is especially relevant in the current climate of religious fundamentalism. In asking whether religion is one of the many consequences of having the type of brains we come equipped with, we can shed light on what kinds of religion 'come naturally' to human minds. We can probe the shared assumptions that religions are built on, however disparate, and examine the connection between religion and ethnic conflict. Lastly, we can hazard a guess at what the realistic prospects are for atheism. ...
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This online EDGE edition with streaming video is available at:
http://www.edge.org/documents/archive/edge263.html
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Edge Foundation, Inc. is a nonprofit private operating foundation under Section 501(c)(3) of the Internal Revenue Code.
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Copyright (c) 2008 by EDGE Foundation, Inc.
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