by Michael Patrick O'Leary
This article was published in Ceylon Today on Thursday May 25 2017.
In every cry of every Man,
In every Infants cry of fear,
In every voice: in every ban,
The mind-forg’d manacles I hear
Jim Morrison was a big fan of Blake – The Doors got their name from Blake. In Unhappy Girl
Morrison sings: You are locked in a prison/Of your own devise. Perhaps Morrison was also inspired by Richard Lovelace: Stone walls do not a prison make /Nor iron bars a cage. All three poets seem to me to be saying that we delude ourselves when we think that we are independent agents blessed with free will which enables us to make informed rational judgements. In reality, we are restricted from fulfilling our true potential by an accumulation of bad and good habits or addictions, futile daily rituals, false memories, gut feelings, tribal loyalties. We are our own jailers – although Lovelace was actually in a real prison with stone walls and iron bars when he wrote To Althea.
The first article I published, on 31 October 2008, under the byline ‘Padraig Colman’ was on the subject of behavioural economics. Behavioural economics combines the insights of psychology with the rigour of economics, factoring human unpredictability into market analysis. Nine years on, behavioural economics is still being discussed but it has come to be considered somewhat sinister by some critics despite the efforts of proponents to portray it as a benign form of Libertarian Paternalism.
Michael Lewis recently published a book on the subject, which renewed the controversy. The Undoing Project: A Friendship That Changed Our Minds , describes the friendship and intellectual partnership of Daniel Kahneman and Amos Tversky, the psychologists whose work provided the foundation for behavioural economics. Kahneman’s book Thinking, Fast and Slow was a best-seller. The book summarizes research that Kahneman conducted over decades, often in collaboration with Tversky.
What Is Behavioural Economics?
Behavioural economics studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation.
Kahneman characterized the human mind as the interrelated operation of two systems of thought: System One, which is fast and automatic, including instincts, emotions, innate skills, as well as learned associations and skills; and System Two, which is slow and deliberative and allows us to correct for the errors made by System One.
In real life, economic behaviour does not fit in with the accepted norms of economic theory. In reality, homo economicus failed to pursue his own self-interest. Decisions were based on received wisdom or bizarre rules of thumb rather than logic. The key factors are inertia, overconfidence, and loss aversion. In their everyday existences, people tend to stick with what they are doing, even if trying something different would be easy as well as beneficial.
Kahneman and Tversky developed heuristics, or rules of thumb, to describe specific flaws in our intuitive thinking: the “endowment effect” (overvaluation of what we already have), “status quo bias” (an emotional preference for maintaining the status quo), and “loss aversion” (the tendency to attribute much more weight to potential losses than potential gains when assessing risk) are all related to an innate conservatism about what we feel we have already invested in. We find it hard to tune out information that should, strictly speaking, not be of high relevance to our judgment.
Behavioural economists have taught politicians and policy-makers that the ‘invisible hand’ of the market is not infallible. Their theories and experiments are of interest to politicians because of their relevance to decisions in the public sphere – whether to grant patients buying power in the health service, whether to compel individuals to save for their old age.
Rationalising the Irrational
The systematic errors that psychologists have identified make human irrationality predictable and people can be helped to avoid bad outcomes through “nudges”. Cass R Sunstein devised “choice architectures” or “nudges” that would work with the intuitive apparatus people have in order to guide their choices. For example, if people refuse through inertia to choose between retirement plans, government can help them by automatically enrolling them in the most beneficial plan with the option to withdraw.
Behavioural Economics and Government
Richard Thaler has built upon the work of Kahneman and Tversky in books such as Nudge: Improving Decisions about Health, Wealth, and Happiness which he co-wrote with Cass Sunstein. Thaler wrote a column called Anomalies (sometimes in collaboration with Kahneman, the first psychologist to win the Nobel Prize for economics).
Governments have taken up these ideas. Thaler taught at the University of Chicago Graduate School of Business and was close to Austan Goolsbee, who was Obama’s economic advisor. Sunstein was for ten years a colleague of Obama’s at the University of Chicago Law School (he is also the husband of Professor Samantha Power, who was Obama’s foreign policy adviser until she resigned after calling Hillary Clinton a ‘monster’). Sunstein oversaw the Office of Information and Regulatory Affairs in the Obama White House (Obama subsequently created a Social and Behavioural Sciences Team). Thaler was an advisor to David Cameron’s Behavioural, based in the Cabinet Office.
Nudge or Manipulation?
The Economist’s columnist, Bagehot, suspects that the theories of behavioural economists appeal to politicians because they provide a cover for a hands-off approach to problems they should be facing head-on. “Nasty behaviour—such as the propensity of some British teenagers to drink too much, get pregnant or stab each other—is often symptomatic of a deeper malaise: skewed values, social atomism, despair and so on.” Problems of this kind might require the smack of firm governance, rather than a gentle nudge, but the term “nanny state” has long been part of the dictionary of political abuse.
Sunstein’s Libertarian Paternalism might well be what philosopher Bernard Williams called “Government House utilitarianism” a moral philosophy underlying the practice of the British Empire that envisaged an elite who knew the moral truth and could put out simple rules for the natives (or ordinary people) to use.
Heuristics have a relevance to business in the private sector for what they can reveal about consumer behaviour. Thaler has an investment company, Fuller and Thaler’s Asset Management Inc. whose mission statement says: “Investors make mental mistakes. Fuller and Thaler’s objective is to exploit them”. More sinister still, Frank Babetski, a CIA Directorate of Intelligence analyst has called Kahneman’s Thinking, Fast and Slow a “must read” for intelligence officers looking for ideas about control and coercion.
In 2007, and again in 2008, Kahneman gave a masterclass in “Thinking About Thinking” to, among others, Jeff Bezos (the founder of Amazon), Larry Page (Google), Sergey Brin (Google), Nathan Myhrvold (Microsoft), Sean Parker (Facebook), Elon Musk (SpaceX, Tesla), Evan Williams (Twitter), and Jimmy Wales (Wikipedia). Psychologists helped to develop myPersonality, a Facebook application that allowed users to take psychometric tests and gathered six million test results and four million individual profiles. Scores on these tests could be combined with enormous amounts of data from the user’s Facebook environment. The architects of myPersonality claim that these tests, in conjunction with other data, permit the prediction of individual levels of well-being.
Many people manacle themselves to Facebook. As well as possibly being the cause of them not using their time most productively, they are leaving themselves open to manipulation by those expert in the dark arts of behavioural economics.
Hannes Grassegger and Mikael Krogerus, writing in the Swiss publication Das Magazin, claimed that Cambridge Analytica (a data science firm created by a British company with deep ties to the British and American defence industries) had used psychological data culled from Facebook, combined with vast amounts of consumer information purchased from data-mining companies, to develop algorithms that were supposedly able to identify the psychological makeup of every voter in the American electorate. The company then developed political messages tailored to appeal to the emotions of each one.
As Sue Halpern wrote in the New York Review of Books: “Donald Trump is our first Facebook president. His team figured out how to use all the marketing tools of Facebook, as well as Google, the two biggest advertising platforms in the world, to successfully sell a candidate that the majority of Americans did not want.”
How about that for a nudge!