the Saddle

Everybody likes a kidder, but nobody lends him money.
–Arthur Miller

I think the first person to talk of this was my game theory professor, S. Kariv. One of the nice contributions economic theory has given is that game playing results in discrete and patterened signals across a wide samples of individuals. As opposed to telling someone to think about ‘love’ and the brain images light up like a fireworks display, having them play a cooperation game or the prisoners dillema gives some tangible results – that the neuralscientists are pretty much still grapling with. Though we are still very much a black box when it comes to understanding thought and decisions, this article from the Economist sheds light into the dark.
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Mind games
Jan 13th 2005
From The Economist print edition

Can studying the human brain revolutionise economics?

ALTHOUGH Plato compared the human soul to a chariot pulled by the two horses of reason and emotion, modern economics has mostly been a one-horse show. It has been obsessed with reason. In decisions from how much to produce to whether to save and invest, humans have been assumed to be coolly rational calculators of their own self-interest. Over the past few years, however, evidence from psychology has persuaded many economists that reason does not always have its way. Now, judging from a series of presentations at the American Economic Association meetings in Philadelphia last weekend, a burgeoning new field dubbed “neuroeconomics” seems poised to provide fresh insights on how the two horses together produce economic behaviour.

The current bout of research is made possible by the arrival of new technologies such as functional magnetic-resonance imaging, which allows second-by-second observation of brain activity. At several American universities, economists and their collaborators in the neurosciences have been placing human subjects in such brain scanners and asking them to perform a variety of economic tasks and games.

For example, the idea that humans compute the “expected value” of future events is central to many economic models. Whether people will invest in shares or buy insurance depends on how they estimate the odds of future events weighted by the gains and losses in each case. Your pension, for example, might have a very low expected value if there is a large probability that bonds and shares will plunge just before you retire.

Brian Knutson, of Stanford University, carried out one recent brain-scan experiment to understand how humans compute such things. Subjects were asked to perform a task, in this case pressing a button during a short interval in which a certain shape was flashed on to a screen. In some trials, the subjects could win up to $5 if successful, while in others they would have to defend against a $5 loss. Before presenting the target, the researchers signalled to subjects which kind of trial they were in.

Brain activity in certain neural systems seemed to reveal a strong correlation with the amount of money at stake. Moreover, the prospects of gains and losses activated different parts of the brain. Traditional economists had long thought—or assumed—that the prospect of a $1,000 gain could compensate you for an equally likely loss of the same size. In subsequent trials, subjects were given another signal: one that provided an estimate of the odds of success. That allowed the researchers to identify the regions of the brain used for recognising an amount of money and for estimating the probability of winning (or losing) it. Having identified these regions, the hope is that future work can measure how the brain performs in situations such as share selection, gambling or deciding to participate in a pension scheme.

David Laibson, an economist at Harvard University, thinks that such experiments underscore the big role that expectations play in a person’s well-being. Economists have usually assumed that people’s well-being, or “utility”, depends on their level of consumption, but it might be that changes in consumption, especially unexpected downward ones, as in these experiments, can be especially unpleasant.

Mr Laibson’s own work tries to solve a different riddle: why people seem to apply vastly different discount rates to immediate and short-term rewards compared with rewards occurring well into the future. People tend much to prefer, say, $100 now to $115 next week, but they are indifferent between $100 a year from now and $115 in a year and a week. In one recent experiment, noted in our science section on October 30th, Mr Laibson and others found that the brain’s response to short-term riches (in this case, gift certificates of $15 or $20) occurs largely in the limbic system, a region that governs emotion. By contrast, the prospect of rewards farther into the future triggers the prefrontal cortex, which is often associated with reason and calculation. Thus, choosing immediate economic gratification, by spending excessively on credit cards or not saving enough even though you “know better”, could be a sign that the limbic system is in charge. Government policies, such as forced savings or “cooling off” periods for buying property or cars, may be one remedy.

And then there is trust and deception. Colin Camerer, of the California Institute of Technology, has conducted experiments in which brain-scanned participants play strategic games with anonymous partners. In these, a subject chooses his own actions and also tries to anticipate the choices of the other player. When players are doing the best that they can to “win” the game by anticipating their opponents’ moves, their brains tend to show a high degree of co-ordination between the “thinking” and the “feeling” regions. Economic equilibrium, by this measure, is an identifiable “state of mind”.

Don’t let it go to your head

Some neuroeconomists claim that such brain-scanning experiments are the start of a revolution in economics. No longer will economists rely on crude statistical models of how people behave in response to a policy change, such as an interest-rate rise or a tax increase. Instead, they will be able to peer directly into the brain to predict behaviour.

One day, perhaps; but much work remains. Identifying the parts of the brain that control economic actions is one thing. Harder tasks include determining how neural systems work together to create behaviour, and how wide is the variation in brain patterns between different people. Then there are age-old questions of free will: is your failure to save for old age simply a lifestyle choice, or is it down to faulty brain circuits? Neuroeconomics is already providing fascinating conclusions. But Plato’s chariot will remain an alluring explanation for a while yet.

Though alot of sources were coming up with numbers close to this, I’m always happy to see the predictive powers of the Iowa markets. Numbers are a % of vote share:
Symbol Bid Ask Last Low High Average
KERR 0.482 0.486 0.485 — — —
BU|KERR 0.513 0.515 0.513 0.513 0.513 0.513

When you think about it
what is a relationship worth?
The tender moments – the happy moments – the bitter moments – the quiet ones. Sometimes we’re full, sometimes we feel sucked dry. Inevitably we a drawn to them, whomever we are. Is it worth it? – for those who’ve been hurt, Whats to loose? – For those who haven’t.

If you sit down with paper and a pen, are things like this quantifiable?

There is an interesting paper just published looking at relationships, sex, money and how they equate. A slew of psychological data has come out on this in the past few years. If you don’t feel like braving the paper – a NYT article sums it up nicely.

On the side – there is a great program from This American Life talking about this – and other things number related. (You’ll need Real Player)

How many greek speakers are in Alaska? This map tells you. ” The MLA Language Map displays the locations and numbers of speakers of the thirty languages most commonly spoken in the United States. “

Jobs lost to overseas doesn’t seem to be as bad as originally reported says a survey by the Labor Department, Highlights, of the 16,000 jobs lost to relocations 62% moved to other areas in the US and of the 240,000 jobs lost in Q1 only 4600 were relocated overseas(2%).Things to keep in mind though, the survey only tallies larger companies with layoffs of 50 or more. Smaller ones, and those with fewer layoffs, are left out of the pool.

I guess Monopoly was never very realistic anyway. Though I remember it being PRETTY DARN HARD to beat my sister and she’s done quite well for herself.This game supposedly one ups it, for the budding capitalists. At a pricetag of $195, i guess it teaches something about the laws of supply and demand, and who can afford risk and those who can’t.

NY Times:
The Rising Value of Play Money
By AMY WU

Published: February 1, 2004

VERY Friday night at 6:30, John T. Carr III, an administrative assistant at Columbia University, arrives at the Wendy’s restaurant at 45th Street and Lexington Avenue in Midtown Manhattan – not for a burger, but for a board game.

For the last two years Mr. Carr, 42, has forfeited Friday nights with friends and family to play the game, called Cashflow.
(more…)

I’ve been given a number of books for Christmas, here is what I’m currently reading:

Development as Freedom
by Amartya Sen

Very Good. Lays out a case for economic development to enhance personal and social freedoms.
The writing is a bit heavy, but the over all argument is sound.

In an Uncertain World:Tough choices from Wall Street to Washington
by Robert Rubin and Jacob Weisberg

Good. Memoirs of Robert Rubin from his time in Washington as Secretary of the Treasury. Very readable and enjoyable, although he does come off sounding a bit high-handed at times. However, there are alot of delightful jems in the book which make it easy to overlook.

The Worldly Philosophers:The Lives, Times and Ideas of the Great Economic Thinkers
by Robert L. Heilbroner

OK. From Smith to Schumpeter it covers decent historical ground.