Posts Tagged ‘economics’

Taleb, Kahneman, and…Rajakovich?

April 4, 2013

Ok, so the headline might be a bit deceptive. I was not actually, physically present

Nassim Nicholas Taleb

when these two scholars met. But if we take the meta-universe as our context, then I could…oh, I’ll just move along.

Check out this discussion between Daniel Kahneman and Nassim Nicholas Taleb. Trying to summarize an 80-minute discussion would make me an even larger fool of randomness than I was before, so I’ll just subject you to some of it instead! Cha-ching.

A key point of the discussion centered around the following theme: Size means fragility. In percentage terms, the larger the project, the greater the overruns; the larger the organization, the more susceptible they are to risk of bankruptcy; generally, the greater the degree of centralization, the more susceptible we are to extreme negative outcomes.

Most people will understand this point at some level. Taleb used the example of government, the economy, and large banks. I’ll use the example of decision-making in just about any context. Where one person or a small group of people make decisions from on high without a very good knowledge of the details of a situation, they may make small gains in terms of continuity. They may also cause large problems.

The effect is even worse when the person or group is focused on things that will have little impact, instead of those that will have a large one.


Non zero sumness

June 26, 2012

The best argument for developing supplier relationships involves the concept of non zero sumness i.e. by working together, we can achieve benefits that are beyond the sum of what we could get working separately.

In game theory, non zero sumness is crucial in determining how people play the games – e.g. divide the benefits amongst them.

In reality, people behave according to a number of factors, one of which is a conscious calculation of their costs versus their benefits. Most factors are unconscious, but we’ll leave that one for a later post.

Constant blame (the default setting) generally leads people to dig in, both at an individual level and organizational level. Incentives for cooperation and openness are achievable albeit rare. So, if we are to create a significant jump in profits/performance/improvement by working together, we need to have keep non zero sumness in the forefront of our minds. Conscious over unconscious. For some…impossible, but for some, a goal worth pursuing.

Now, I just need to throw in a line about football, so that lots of people check out this post. Google, are you listening?

English: Ehud Kalai is a prominent American ga...

Paul Krugman on the European Crisis

June 2, 2012
Paul Krugman - Caricature

Paul Krugman – Caricature (Photo credit: DonkeyHotey)

Paul Krugman wrote an article that really made me think. Brain, don’t worry, we’ll get our revenge somehow.

It always felt a bit simplistic to impose austerity on countries being smacked by the debt-hand. Luckily we have a real economist who is well-versed in statistical analysis, and can write surprisingly intelligibly. Krugman posits that it is really more about the current account deficit – i.e. the fact that the countries experiencing problems are importing significantly more than they are exporting.

One problem; you can make statistics say whatever you want them to say. While we are not supposed to run regression after regression to eventually find a pattern, once that pattern is found, it is hard to resist. Economists and others can then search for stuff that supports the view that feels right.

So what’s the solution? Live in a country that is really good at making stuff that lots of people want. What does Facebook make again? Oh yeah…friends. I’ll take three.

Branson’s conditioning

February 22, 2012
English: Sir Richard Branson at the eTalk Fest...

Good work, Richard. Image via Wikipedia

I recently received a two pieces of communication from Virgin media, who does my internet, phone, and cable TV. The first one celebrated the fact that I will be receiving up to 100 Mb/s in internet speed 18 months from now.

This celebratory letter spoke of the massive investment Virgin was making in me, and painted a clear picture of how wonderful life will be with all this speed. Richard Branson, the CEO of Virgin, was prominently featured…it was as if he reached into his own pocket and decided to help me out. What a guy!

Two days later I received a second letter telling me that there would be a price increase in my service bundle. No mention of Mr. Branson to be found. But I thought ol’ Richard was my benevolent, rich friend?!

This, ladies and gentleman, is called conditioning. In this particular case, Branson and staff played on how our minds are wired as it relates to gifts. We receive a gift (free extra internet speed), and are then hit with a price increase. Since we just received the gift (even one we didn’t ask for), we connect this to the price increase and the increase isn’t so bad. Fair is fair. And Virgin gets to win market share while having us pay for it.

The worst part is, it works. And there is nothing unethical or problematic about it.

The reality is that we’re just not as complex as we think we are.

Related articles

Behavioral Economics and Purchasing

November 19, 2011

I am currently reading a collection of scholarly articles by George Lowenstein. Who is George Loewenstein? Why, only one of the pioneers in the field of behavioral economics! If you did know who he was, well, neither of our lives are very exciting.

Ol’ George is also a man after my own heart. He’s taken concepts from psychology, and applied them to economics.

Painless Saving

Some of you out there will think you are very rational decision-makers when it comes to buying stuff. You are the ones that are especially dangerous…biased but in denial.

The funny thing is that humans make irrational decisions in systematic ways. For instance people fear loss more than appreciate the joy from a gain. We create stories by making sense out of random events. We predict that we’ll be more disciplined in the future than we act today, and inevitably don’t deliver.

It just so happens that in the day job, I advise on purchasing decisions, except in the realm of big corporate decisions rather than on an individual level. The question I get to, then, is whether behavioral economics is applicable at the organizational level. My hunch is that it is, but my next hunch is that “powerful” people will be uncomfortable with this notion…until 20-30 years from now when behavioral economics goes mainstream.

The other issue is the “So What?” factor…i.e. what do we do about it. Going through a process involving multiple viewpoints is a start, but the fundamental challenge is the fact that people who are, in fact, wildly biased are often those most convinced that they are perfectly rational. And, if perfectly rational, what need would there be to account for any biases? Compound all that by those same people surrounding themselves with those who either think the same as they do, or those that will realize it is much more profitable to fly under the radar without saying a word, and the problem is obvious.

All this may sound a bit cynical. However, I prefer to look at it the other way. Those who are open to this new knowledge will have an advantage over the rest.

Malcolm Gladwell on the business of basketball

August 24, 2011
Malcolm Gladwell speaks at PopTech! 2008 confe...

If this guy doesn't look like an economist...Hey wait, I'm an economist...Image via Wikipedia

In the midst of the NBA in a lockout that could last quite some time, Malcolm Gladwell opines on the economics of owning a basketball team. Check it out here.

We are Gladwell fans here at TPS report central. However, we suspect that the “psychic benefits” that he talks about here are just another way in which old guard economists are trying to save the theory of the rational economic man – of course without actually doing the research.

In fact, while writing that, it occurred to me that the entire article is based upon what a “rational” actor should do.

And the only completely rational people alive have prefrontal cortex damage.

Incentives and moralizing…welcome to college football

March 7, 2011

One of our human frailties is the need to put a face to a problem. Think about the latest problem you had at work. Now pretend you are investigating the problem, and you went around to talk to everyone about what went wrong. How often would someone say something like “It was my complete lack of initiative that is really at the root of this problem. I’ll try to do better in the future.”

Head football coach at University of Pittsburgh

Academic counselors don't make 2 million per

In college football, there is a similar phenomenon, except coaches and agents are seen as the people with no ethics rather than no initiative. Every time I read a moralizing sports writer talk about a college football coach that tries to recruit a kid out of high school that runs the spectrum from academically uninterested through to demonstrably criminal, I just have to shake my head. The University of Pittsburgh just hired a college football coach, Todd Graham, for around $2 million a year, based on his perceived ability to win football games. You think there might be a few other people that would like to get their hands on that? You think maybe someone might be less concerned about the ethics of the situation with that kind of money on the line?

The argument is taken one step further and blame is assigned to University presidents. Let’s take a look at their incentives. If their football program does well, it creates a buzz and students want to go there. They get lavished with praise (not to mention more money) as the benefits go beyond sports, leading to increased interest and an improved reputation for their school. Let’s not forget that just because football coaches make more money, that the University presidents are immune to status-seeking.

How about the NFL? They could go through the trouble of setting up a minor league system, but then they’d have to do annoying things like pay the players, manage the league, and pay for countless other expenses. Why not have the colleges bear the burden of prepping kids for stepping into this money-making system?

So how does change occur? There is only two ways, and both are quite unlikely. One involves the federal government getting involved. Taking college football away from the traditionalists in college football and other highly passionate fans is probably not high on anyone’s to-do list. The other is that the players organize themselves…also equally unlikely. There is no money in it for the person who seeks to do this, and the average prospective football player is surrounded by people telling him that he’ll make it big. What’s a couple years at school pretending to write research papers, when the pay-off is really big and right around the corner? Plus, the status of a college football player on campus means that the lifestyle is not exactly unattractive.

Think about it…are all these coaches and university presidents especially amoral people, or are they just responding to the circumstances in which they find themselves?

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