Beyond the Dismal Science

The Passionate Science

Back in the nineteenth century Thomas Carlyle described economics as “the dismal science”, a term that’s been wheeled out ever since whenever some hackneyed journalist or febrile blogger feels the need to criticise something to do with money. It’s a snappy little phrase, and is all too often justified.

Well, now a couple of behavioral economists have written a book that attempts to refute that label. In the words of John List and Uri Gneezy in The Why Axis: Hidden Motives and the Undiscovered Economics of Everyday Life economics is a passionate science – one that is:

“Fully engaged with the entire spectrum of the human emotions … and with the capacity to produce results that can change society for the better”.

So if you want to know how to price wine correctly, or to improve the performance of students or get people to donate more money to charity or level the playing field for women at work then this is the place to start. And if you want a tool kit to improve your performance at, say, investing, then you’re in the right place.

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The Emergent Rationality of Markets

Frogs and Philosophers

In Games People Play we alighted upon the germ of an idea that bears further investigation – that although individual investors may themselves be as mad as a box of frogs on mescaline their combined behavior can somehow result in relatively rational markets.  The idea is that, somehow, rational markets arise out of irrational traders doing stupid things.

Odd though this may seem as an idea the possibility of new properties emerging from systems made up of complex component parts isn’t new, although it does serve to make a lot of scientists and philosophers extremely annoyed.  Which is a good reason for pursuing the idea, is it not?

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The Language of Lucre

Talk the Talk

Once we get past blood-lust, misogyny and an insatiable desire for saturated fat presented in peculiar forms, language is probably the defining feature of humanity. Thus it’s unsurprising that some psychologists think that human behavior is defined by language, rather than through some cognitive super-controller that oversees our every action.

Discursive psychology, the study of how language impacts human behaviour, would expect to see investors swayed by use of language in a way that more rationalist theories would not. Language deployed by the financial media might, for instance, be employed to promote buying or selling of stocks regardless of their fundamental attractions or otherwise. Which, of course, is a stupid idea and therefore, inevitably, looks like it’s probably correct.

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Trust Is In the Eye of the Beholder

Is Beauty More Than Skin Deep?

There’s been quite a bit of debate down the years about so-called beauty biases. Various bits of research have suggested that us humans have a bit of a soft spot for other humans who are easy on the eye, to the extent that we tend to attribute abilities to them that they haven’t got. Merely looking attractive is enough to help you get on in life, it seems.

However, there are usually potentially confounding problems with these experiments, in particular the possibility that lovely looking people might actually be better at stuff than the rest of us ugly has-beens. Fortunately a combination of the banking crisis and the proliferation of the internet has offered a glorious opportunity for field experimenters to conduct a bit of real-world research. Even better, it’s suggesting that automating risk management removes a vital layer of protection for lenders and that scammers can play on these traits to defraud us. So are the beautiful also brighter?

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Be A Sceptical Economist

Small Furry Animals

It’s unsurprising that behavioural finance is gaining ground in economic circles, as the wanton failures of more traditional versions have become all too clear over the last decade. However, just because psychology can provide us with valuable insights into the workings of finance there’s no need for us to drop our defences. Like any new subject there’s plenty to be sceptical of.

One of the biggest problems is one that psychology has faced since it began, to do with the authenticity of its experiments. If you take a bunch of people, shut them in a darkened room and make them do odd things, out of context, you might expect them to behave a bit peculiarly. Psychologists, on the other hand, tend to live in darkened rooms and regard doing odd things in them, often involving small, furry animals, as quite normal. So they see nothing wrong in this and are quite happy to write up the results of these experiments in order to help deepen our knowledge of human behaviour.

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