Sunday, February 2, 2014

The Logic of Life by Tim Harford

Source of book: borrowed from the library

I have wanted to read this book for a few years, after reading a few excerpts and other shorter bits by Tim Harford online. Economics has fascinated me for many years, and I have been thrilled to see an increasing use of economic analysis applied to tough social questions. 

Economic analysis has been laughed off by many, usually on the basis that it is (wrongfully) assumed to require humans to be fully logical and predictable. That is, it assumes that people make decisions based on a dispassionate weighing of the alternatives and costs. Choices made entirely without emotion. This is a misstatement of the concept of economic analysis, which doesn’t require perfect rationality, but merely that people respond to trade-offs and incentives. As the author points out, when behaviors change in response to changing incentives and costs, those choices are “rational,” even if made by emotional humans.

Thus, this book seeks to look at the behaviors of humans in real life, and look at the incentives that influence those behaviors. In a few cases, it examines some undesirable social phenomena and explores why they exist and why they are so difficult to eradicate. On the more esoteric level is the question of why upper management and CEOs are so grossly overpaid compared to their actual contributions to society; while on the more personal level, the questions of racism and sexual behavior are explored.

In most of the cases, Harford’s reasoning and citations to research are solid. In a few others, he admits that he is speculating (particularly about the early development of human society), which is fun, but not as useful or persuasive as the rest.

In light of the current highly polarized political situation in the United States, I believe that both factions could benefit from a greater use of this sort of analysis; although, as the book points out, the rational incentives are actually in favor of an uninformed electorate, and politicians who co-opt prejudice and self interest for their own gain.

A quick example (not from the book, but from my own thoughts.) Both the left and right have a vague idea that incentives matter. This is reflected from time to time in their rhetoric. The right often likes to preach toughness on crime. Punish more, and fewer people will take the risk. To a certain degree, this is true. On the left, there are calls to tax energy use, or other behavior deemed undesirable (although not criminal.)  This is true to a certain degree as well. Increase the cost, and behavior changes to a degree. Both sides are guilty as well of completely ignoring the effect of incentives, and instead accusing others of being evil, immoral, or at least stupid. (This is pretty well the pastime of both political parties, and most of my politically passionate friends these days.) I am at the point of loathing politics right now, so I will leave it at that.

Where I have found that I have been most challenged by this change in thought, though, is in the area of moral choices. As a Christian and Republican Conservative by upbringing, I was trained to see nearly everything that went wrong exclusively in terms of individual sin. The problem came in that a number of social undesirable results - usually attributed to sin or stupidity - seemed unequally distributed. One could easily conclude, for example, that white people were less sinful than black or brown people, based on how well their social and financial outcomes were. And, in what really started to shake my thinking, one could just as well - and for the same reasons - conclude that rich people were more “godly” than poor people. This couldn’t possibly be reconciled with the words of Christ about the difficulty of the rich in entering the His kingdom.

For this reason, I had been using my own observations of incentives to explain things for some time. It was eye-opening to see it spelled out in relatively simple terms.

Although it is beyond the scope of this post, I hope to blog at some point about the economic factors that are driving the decline of marriage among low to middle income couples. For an increasing portion of the population, having children out of wedlock makes complete economic sense. Furthermore, for - again - an increasing portion of the population, marriage means a substantial - often catastrophic - cost. Alas, it appears that the religious right is completely oblivious to this problem, and keeps making policy decisions that double down on the incentives. And then, whining that the young people are so much more sinful and lazy and stupid than they used to be. Certainly people make bad decisions and do bad things, but are laziness, stupidity, and sin really concentrated in poor people - or people of color? Are younger people really inferior to older people?

In this, the author’s own words are best:

Rational individuals make many choices that are bad news for others...And when rational individuals face a miserable set of choices...they cannot do better than pick the best of a bad lot. We will not solve social problems if we pretend that they are caused only - or even mostly - by the mad, the stupid, and the morally degenerate.

On a lighter note, one chapter that I particularly enjoyed was the one on the development of game theory. Confession: I love game theory. Maybe it is because I use it regularly in my legal practice. The art of negotiating a settlement in a divorce or family estate struggle often revolves around incentives, and the potential outcomes with varying behavior by the parties. One of the things I have had to do a few times is find a way to give a positive potentiality to the other side. If there is no upside, they have nothing to lose by behaving well. They might as well litigate to the bitter end, destroying relationships in the process. By providing the possibility of gaining something by better behavior, one can change the incentives of the game.

In the book, this is illustrated by an amazing discussion of the Cold War standoff. (Amazing because Harford tracks down several of the “gamers” of the nuclear standoff and gets insight into their thought processes. Also amazing because of how wrong some people were - in hindsight - and how blessed we are that they didn’t get to make policy.) Speaking now, nearly a quarter century after the fall of the Berlin Wall, it is easy to underestimate the accomplishment in that nuclear war never occurred. Whether one wants to see it that way or not, it is clear that both sides won.

Really, isn’t it incredible that the last use of nuclear weapons was 69 years ago? How easy it would have been to pull the trigger (even by mistake), and yet the incentives were leveraged in a way that made the rational decision that of relative peace. Clive James, in one of my favorite non-fiction books of all time, Cultural Amnesia, quoted Raymond Aron on this very point:

In the course of the last forty years, the only part of the world that has enjoyed peace is the continent divided between two zones of political civilization both of them armed with atomic bombs.

If I were to pick one chapter, however, to recommend, it would be the one on racism.

Again, Harford illuminates one of the most troubling problems of race, which he calls “rational racism.”

Probably most of us have at least met a truly prejudiced racist: someone who irrationally dislikes people of another race, and could never be a friend of such a person. But they are rare, and fairly universally contemned. More common is what singer-songwriter Brad Paisley would call an “accidental racist,” the person who unconsciously harbors prejudiced ideas and says dumb stuff from time to time, but who would never consciously take racist action. All of us can probably think of an embarrassing uncle or aunt who does the Phil Lancaster thing from time to time. I certainly can. This kind of person isn’t motivated by malice, like the prejudiced racist. In some cases, they may even be acting rationally.

By now, a certain study should be familiar. Researcher sent out thousands of fake resumes to potential employers. While the resumes varied in qualifications and education, in each case two identical resumes of each kind were sent out. One had a stereotypically “white” name such as Brendan Baker or Alison Walsh. The other had stereotypically “black” names such as Latoya Washington or Tyrone Jones. (These are actual names from the study, and were picked based on an extensive survey.)

Identical resumes except for the names. Radically different results. A “white” name got a substantially higher response rate.

The follow up study on this is fascinating. Harford examines it in detail. Boiling it down, the researchers created a game wherein potential employees were assigned randomly to “green” and “purple” teams, and then given the option to pay extra for education. “Employers” selected candidates without knowing whether they had the education or not.

In the second round, the employers were given the statistics from the first round regarding whether greens or purples were more likely to have the education.

Very quickly, a “rational” prejudice appeared. Or, as one might understand it, a “feedback loop.” The group that randomly chose education in smaller numbers was now largely discounted in hiring decisions, while the other was favored.

Again, the initial differences were entirely random. And, again, the prejudice was entirely rational, based on past performance.

The problem is that this rational behavior produced a societally disastrous result. Those in the disfavored group had little incentive to obtain the education, because they were largely ignored in hiring decisions. Employers they had less and less reason to hire from that group.

As Harford points out, this occurred even when the disparity was initially random. In the case of minorities here in the United States, the differences are most certainly not random at the outset, but the result of deliberate oppression in the past. The feedback loop now reinforces and locks in place the errors of the past, using the entirely rational decisions of both sides.

This circles back to my earlier point about morality. For someone born into privilege to sink to a lower class, it usually does take poor judgment, laziness, stupidity, or immorality. Conversely, an extraordinary person can rise through good judgment, hard work, intelligence, and good morals, but this is not guaranteed. More importantly, perhaps, the average person, of average intelligence and morality will typically stay locked in his or her social class because of the incentives. Thus, to automatically assign immoral qualities to someone who fails to overcome his or her obstacles while assigning positive moral qualities to someone who simply fails to be bad enough to fall to a lower class misses the entire point.

Again, I strongly recommend this chapter. It helps to understand why the work of the civil rights movement isn’t over, and explains why we still haven’t attained Martin Luther King’s dream.

Just a couple more interesting points. Harford also draws out some interesting ideas about why Colonialism had different effects in different places. In a nutshell, political and social institutions are hard to change. Colonizers pretty universally destroyed the existing institutions, and set up their own. In some places - particularly those in the tropics - the institutions were designed to extract a maximum of profit in the short term while investing little or nothing in the future. (Say, the goal of extracting gold or slaves…) In others, the colonizers actually lived in the area, and thus invested in institutions intended to last for the indefinite future. Of course, in these areas, that also meant extermination of the “natives” along with their institutions.

As a final fascinating study, Harford explored the effect of the enforceability of promises on society. I recently read Trevelyan’s book on the Stuarts. At the end of that period, William and Mary were invited to come rule England, but with a catch: they had to submit to parliament. Particularly in the area of revenues. In a twist, it turned out that the “limitation” of their power actually increased it. Because kings could no longer raise money by confiscation and monopoly, and had to pay back what they borrowed, it was now safe to lend them money. And many did. The power of the enforceable promise. We see this every day. Much of our current economic system is based on the assumption that there is an orderly way of collecting debts and enforcing promises. Far from being a restriction, this actually leads to greater freedom.

Again, this is an excellent book, and one that can change one’s way of looking at the world.

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