Chutes and Ladders [UPDATED AGAIN]

May 12, 2009 at 10:03 pm (By Amba) (, , , , )

Okay, since economics is what we find ourselves talking about, I’ll bite:  here’s an aspect of economics, contentious and critical to economic policymaking, that strikes me as important and fascinating.

It’s the study of how impulses, incentives, and consequences shape human behavior.  I think it’s called behavioral economics:

Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.

When we turn to actual human beings, we find, instead of robot-like logic, all manner of irrational, self-sabotaging, and even altruistic behavior. [...]

Nonetheless, neoclassical economics sidelined such psychological insights. As recently as 15 years ago, the sub-discipline called behavioral economics—the study of how real people actually make choices, which draws on insights from both psychology and economics—was a marginal, exotic endeavor. Today, behavioral economics is a young, robust, burgeoning sector in mainstream economics, and can claim a Nobel Prize, a critical mass of empirical research, and a history of upending the neoclassical theories that dominated the discipline for so long.

This new field doesn’t just pick the brains of psychologists (to whom, one senses, it could give a whole new useful life), but those of neurologists, and, implicitly, of sociobiologists, who view these hard-wired behavioral mechanisms as winners of the competition to survive:

“Economists specialize in taking really complex things and boiling them down to simple principles,” says David Laibson. “So, rather than treat the brain as billions of neurons, or trillions of neurotransmitters, we want to ask, what is the right level of analysis? It turns out that the brain has two key subsystems. One, the limbic and paralimbic system, rules the intuitive and affective parts of our psyches. It’s shared by all mammals and seems to do a lot of emotional cognition—how we feel emotionally, how we respond to other humans, or to being treated unfairly. This system seems to function unconsciously; we don’t have access to it and maybe can’t even control it. It’s experiential and rapid in function.

“Contrast that with the analytic system, centered in the frontal and parietal cortexes,” Laibson continues. “It controls a lot of the thought processes we learn to do: calculated, conscious, future-oriented thinking. It’s not based on past experience; you could have the rules of a brand-new game explained and the analytic system would be able to figure out how to play.”

Brain researchers have shown that an interaction of the limbic and analytic systems governs human decision-making. The limbic system seems to radically discount the future. While the analytic system’s role remains constant from the present moment onward, the limbic system assumes overriding importance in the present moment, but rapidly recedes as rewards move into the future and the emotional brain reduces its activation. This explains impulsiveness: the slice of pizza that’s available right now trumps the dietary plan that the analytic brain has formulated. Seizing available rewards now might be a response pattern with evolutionary advantages, as future benefits are always uncertain.

There it is right there:  the seat of no-tomorrowism!

Strangely, even more interesting to me than the study of human motivation (which is only going to end up proving what the wise have always known, verifying millennia of maxims and canny clichés) is the engineering angle:  the study of how to motivate humans.  It interests me, I think, because it’s what so much of the disagreement between right and left comes down to.  What optimizes motivation?  Struggle or security?

America, relatively speaking, lacks a social safety net.  There’s a feeling — I’ve felt it — that you have to succeed to survive.  It’s very starkly Darwinian:  there isn’t much middle ground.  Is it this anxiety that spurs us on to great heights as a nation?  Or does it actually sap creativity, condemning all but the entrepreneurially fierce and fit to waste their lives and gifts struggling to get by?  Does assuring people’s basic survival, at the root of Maslow’s hierarchy of needs, free them to climb that tree and be curious and creative?  Or does it take the edge off and make them lazy and dependent?  I don’t know the answer, but suspect it’s not totally either/or.  On the one hand, our nervous systems are tuned to peril and triumph.  On the other hand, beyond a certain degree of stress we lapse into “learned helplessness,” the depressed state of experimental animals that have learned there’s nothing they can do to predict, avoid, or prevent random electric shocks.  The Maslovian view posits way too much Rousseauian optimism about human nature.  The social-Darwinian view selects for manic extraversion, creating a bit of a one-note culture.  Introverts must medicate to keep up.

A related question is:  what is definitely in society’s collective interest to provide, overriding concerns about the effects on individual self-reliance and moral fiber?  The common defense, clearly.  The internal version of defense — law and policing, the maintenance of public order.  Sanitation, a no-brainer.  I think a strong case can be made for education:  not that the public sector should monopolize education, but that it should make it available to all as the default.  Very much in the collective interest — anyone care to count the ways?  Scientific competitiveness (from Sputnik to the new spur of globalization) is only one.

Far more controversial:  various forms of the basic income guarantee, and health care.  To many liberals it seems self-evident that providing single-payer health care is in the collective interest.  Conservatives say that market incentives make American health care, for all its problems, much more innovative and effective.  You saw the arguments that Natasha Richardson would not have died in the U.S.

Incentives and consequences are the most fascinating part of the picture, on every level.  The elusive preventive aspect of health care, for instance.  This is one of the areas where the limbic system presents a major stumbling block.  When the supermarket is packed with snacks and advertising issues perpetual siren songs for supersized this and that, how do you help the analytical forebrain override the impulse with remote concerns about longevity, economy, and even vanity, a limbic reward that requires an analytical abstinence?  The limbic brain doesn’t get the time lag between eating a pint of Ben & Jerry’s and gaining a pound.

And then, when there are penalties for good behavior, and rewards for bad behavior, what do you think you’re going to get?

Front page story of today’s NYT discusses the small, well managed, profitable, risk averse banks.

Indeed, as Chris Whalen has so frequently noted, the vast majority of banks in the United States are Triple A by his standards. Its just that these 6,500 banks hold a minority of the total deposits in the nation, with biggest dozen or so banks sitting on 65% or so.

Talk about burying the lead: The Times also noted — in the very last paragraphs — how the big incompetent banks and their very pricey bailouts are screwing these small healthy banks:

“At DeMotte [State Bank, an 11-branch operation in the northwest part of Indiana, Bank President] Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.

Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

Thus, yet another reason why these bailouts are so absurd: They punish the risk averse and reward the irresponsible . . .

Why do we have different standards for large institutions and little guys?  I’ve long been fascinated by what I think of as “selective Darwinism” — applying the stringency of survival of the fittest to some categories while bailing out others.  (I guess you could argue that getting too big to fail is a form of fitness, a special case of the general point that mega-success is the surest path to survival.) Our thinking, both right and left, seems extremely muddled in this regard.  Incentives and consequences — chutes and ladders — are what it’s all about.  Both the sages and the neurologists will tell you that.

I wish I could do a better job of thinking this through, but I’ve already stolen too much time from work.  Please jump in.

UPDATE: And speaking of incentives, what do you think of paying kids to learn, promoted by Newt Gingrich?

[T]he Learning Makes a Difference Foundation [...] focuses on innovative learning programs, such as Learn, Earn and Achieve, which offers students financial rewards for studying math and science.

[...P]reviously uninterested students not only improve their math and science scores but discover the thrill of learning for learning’s sake.

The pilot program is called Learn, Earn & Achieve.  It may not be idealistic — it turns my vestigial hippie stomach, sure — but it’s realistic, isn’t it?  Remuneration is one of the reasons why we do what we do.  Getting up, getting dressed, and “going to school” in the morning already trains you for getting up, getting dressed, and “going to work” in the morning.  School is a kid’s job.  It has the same structure.  For better or worse, it’s training for adult life in our society.  Why not teach them that good work brings good pay?  Instead of an allowance?  (And instead of the basic income guarantee?)  Of course, then parents would have to help them decide how much of it they should save for college tomorrow and how much they can blow on gear today.  That could be good training too.  What do you think?

I guess the part of it I might question is that last:  discover the thrill of learning for learning’s sake.”  Would kids who got paid for learning ever see any point in doing it voluntarily for free?  But then, school as it is today doesn’t exactly consistently convey the thrill of learning for learning’s sake.  Raise your hand if you enjoyed the Great Novels you had to read?  The thrill of learning for learning’s sake depends most on the quality of the teacher.

UPDATE II: @newtgingrich “Learning IS the most important civil right in the 21st century and it should apply to every american of all ages to compete with china”

And, as stated above, in society’s collective interest to provide, for many reasons, scientific competitiveness being only one.  Think of the advantages of having an informed, critically thinking populace — or more to the point, a populace with the skills to inform itself.  Or, even more to the point, think of the disadvantages of not having such a populace.

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15 Comments

  1. Maxwell said,

    I’m fascinated by behavioral economics. I think it is problematic from a regulatory standpoint, though, as the assumption that people are not rational actors inevitably conflicts with traditional notions of free will.

  2. wj said,

    Does the lack of a safety net in America encourage entrepreneurs? Or make people less likely to take the risk? Yes.

    Either may be true, depending on the individual’s overall tolerance for risk and the situation he or she finds himself in at the moment. In my 20s, with a spouse whose salary could support us and no kids, I might be much more likely to innovate. In my 30s, with a family to support, I might be much less likely to try to start a new business if the safety net wasn’t there. In my 50s, and out of work during a recession, I might be more likely to start a business, simply because there was no other prospect of keeping food on the table.

    At most, you could measure an overall net impact — if you could somehow control for all the other factors that influence innovation.

  3. wj said,

    An allowance always struck me, growing up, as a bad thing. (Possibly because I was one of the few kids in my school who didn’t get one.) My impression was that it fostered a sense of entitlement — “the world owes me a living” kind of view.

    What we had (easier, because we lived on a farm) was chores. Some, we did “just because you live here.” Other things, we had as options to earn money for ourselves; which we could spend as we saw fit — after saving part of it. The other farm kids had, from what I could tell, very similar situations. Which was why the local merchants discriminated in hiring in our favor: “farm kids know how to work, and are responsible about showing up for the job.” The kids who got allowances were both less motivated and less accustomed to being reliable about doing things regularly; knowing that the animals will die if you don’t get them fed every day is a real learning experience.

  4. amba12 said,

    wj: I think you’re still operating from a “rational man” model. You’re talking about how rational it is to take the risk of starting a business, depending on one’s life circumstances (plus temperament, acknowledged). But how many people fit the model of the prudent enough but daring enough innovator? Think of all the people who borrow money and lose it because of their dream of starting a business. Some of them will be basket cases, others will pick themselves up, try again and again, and eventually succeed. (Sometimes I think insane perseverance trumps EVERYTHING.)

    I just came across the word “stochastic” in an article about . . . well, it was about how sea snakes turn out to need to drink fresh water, but “stochastic” referred to the complexity and interregulation of climate patterns in the tropics, sometimes causing drought . . . basically the “butterfly effect.” Processes that are too complex and subtle to analyze. Human behavior, en masse, may be the same way, as your last sentence suggests.

    Innovation is a special case of my big question: does security or necessity (or some mix of the two, differing for different individuals) make people more motivated and responsible?

    Tom: the “engineering” spinoff of this “science,” if it deserves that name, is not regulation but what a friend of mine calls “euthenics” (it’s originally an environmental-engineering word, with interesting feminist origins): manipulating the environment to change human behavior by changing the opportunities and incentives. Regulation is for behavior that society cannot afford to permit. Motivation — incentives and consequences — is more like judo, working with human nature instead of trying to beat it into shape.

  5. wj said,

    Maxwell, why do non-rational motivations conflict with the concept of free will? As far as I can see, it merely changes the basis on which decisions are made. The fact of the decision is still there.

  6. amba12 said,

    Yes, a major problem is that when you allow people free will, a lot of us will do bad things with it, even short of the threshold of legal penalty. Among the freedoms we have are the freedom to destroy ourselves or to waste our lives or to be beastly (below the threshold, etc.) to others. That’s why the whole question of what motivates people is so important. Culture is a hugely responsible entity, but culture, too, arises organically — it’s hard to artificially create it. The trick is to get people’s wants aligned with their needs. Because people do what they want; they almost have to be tricked into doing what they need. Even though our wants are based on nature’s way of making sure we get what we need. A mind is a hall of mirrors — put in a simple biological urge, get out great art and crime.

    wj, you reinforce a sort of Jeffersonian feeling that the work and the culture of family farming was traditionally a great character-builder. (Karen? You there?) I don’t see why the same notion could not be applied to household chores. A lot of American kids have an astounding sense of entitlement to be taken care of, to live rent free, and to insult and piss on their parents who provide it all. Few seem even to be aware that money has to be earned or that they perhaps should be (and would feel better as) contributors. This is quite a change from the past when children were frankly a home-grown source of labor.

  7. wj said,

    Annie, I don’t really think I am assuming a “rational (economic) man” in this. On a rational basis, I suspect that almost nobody would start a new business, especially in a new field. The odds of success are just too small. But the non-rational psychology of the individual may well say: “Yes, most people will fail. But I am one of the exceptions — I’m going to make it big.” Which is especially irrational in the case of someone who has tried and failed before. Yet, as you say, there are those who just pick themselves up and try over and over until the succeed.

    Perhaps a more advanced theory would say, people combine rational analysis and irrational motivations. So they take what they irrationally want to do, apply some rational analysis, and then make a decision which is neither totally rational not totally irrational. The irrational motivations will vary between individuals. AND, the degree to which rational analysis will be applied also varies.

    Will that make it really challenging to model behavior and figure out how incentives will work? Sure, but not impossibly. Consider what the Navier-Stokes equation manages to do in fluid mechanics. It is definitely not simple. (And, being a second order, non-linear, partial differential equation, cannot be solved exactly without making one of several simplifying assumptions. Which is why we talk about “perfect (frictionless) fluids” and boundary layers and other special cases.) But they get used all the time by engineers. Can a model for economic behavior be all that more intractable?

  8. amba12 said,

    Perhaps a more advanced theory would say, people combine rational analysis and irrational motivations. That seems to be exactly what the neuroeconomics people are driving at.

  9. amba12 said,

    Can a model for economic behavior be all that more intractable? I suspect it’s more on the order of complexity of climate science, which is notoriously a bitch, at least given our current level of understanding and modeling capabilities. But then, climate science, as complex as it is, is still based on the laws of physics. Are the laws of mind and psychology as reducible to equations? Can we make generalizations that will enable us to predict what madness or greatness will do?

  10. PatHMV said,

    One of the essential components of becoming an adult human being is learning to control our impulses. We can do that, that part of the mind can be trained to deny the urge for immediate gratification. And it doesn’t take any special upbringing or training. Most of us actually did learn it, to one extent or another, during the routine process of being brought up by our parents.

    So part of raising children is teaching them to do things because of the long-term benefits they offer. Children who learn the proper balance between “look before you leap” (look for long-term gratification) and “strike while the iron is hot” (act on impulse) tend to be more successful, on the whole, once they grow up.

    It seems to me that bribing the kids to study may be counter-productive, by reducing the demand to learn to look at the long term. On the other hand, we regularly force kids to do something in order for them to develop a good habit (like brushing their teeth every night). The goal is to ingrain the behavior in their head with whatever works to do so, in the hopes that once they get old enough, the habit will continue without parental prompting.

    There are also plenty of non-monetary rewards available to children. Teachers have been bribing their kids for centuries, no doubt, with promises of a story hour, extra recess, some candy, no test, class outside, whatever. Young children also instinctively seek to please the adults in charge of them (on the whole), so the praise of a teacher or parent is itself a reward which can affect behavior. If we imbued a generation of kids with an entirely mercenary attitude toward studying, would that be a good thing?

    And in general, I think Newt has gone off his rocker lately, so I don’t trust his judgment anymore.

  11. Donna B. said,

    My parents sometimes paid for good grades, sometimes not. It wasn’t something you could depend on. It was a variable-ratio thing, seldom was it promised. That made it addictive.

  12. Maxwell said,

    wj, I understand on a basic level that incentives are incentives, whether rationally derived or not. What bothers me is the notion of behavioral economics, which is founded on the notion that individuals often do not know or cannot act on what is best for them, becoming the major tool used to develop social and economic policy. It may be true – hell, I believe it is true – but I think there’s enough of that presumption already embedded in government without having scientific models to back it up.

    Which probably makes me sound much more conservative than I usually do.

  13. mileslascaux said,

    Probably the entire history of America — at least since 1870 or so, maybe 1830 — could be written from the perspective of the slowly receeding tide of economic liberty. It would be an interesting history.

    There are safety nets in America. But they are rough and uncertain. That’s the point of a safety net; it catches you when you fall, but it’s not a place where you stay. You only stay there long enough to climb off and get back up on the high wire.

    When we do get a basic free healthcare system in this country, it will be dreadful, and people will work hard to be able to afford to avoid it for themselves and their loved ones. Academics and crusading journalists will make careers out of decrying and exposing its deficiencies and bureaucratic cruelties, but most Americans will be satisfied with that.

  14. amba12 said,

    Seems like we’re creating ever larger classes of people who are ever more unable to fend for themselves.

  15. mileslascaux said,

    That’s the other half of the story.

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