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Posts Tagged ‘decision making

“We cannot reason ourselves out of our basic irrationality. All we can do is to learn the art of being irrational in a reasonable way.”*…

Classical economists posit that investment decisions are driven by rationality — a clear-eyed evaluation of risks and rewards… but then, meme stocks.

Kwabena Donkor, an assistant professor of marketing at Stanford Graduate School of Business has just unveiled some new research that suggests that identity distorts our financial choices, leading us to overvalue investments that reinforce our sense of self…

People don’t just invest with their wallets — they invest with their identity,” says Donkor, a faculty fellow at the Stanford Institute for Economic Policy Research.

In a novel field study involving soccer fans, Donkor and several colleagues uncover evidence of how identity can skew economic thinking. The researchers ran a series of experiments focused on fans who placed nearly 40,000 bets on English Premier League matches during the 2021-22 season. Participants — nearly 800 from Kenya and 1,600 from the United Kingdom — were given a budget and asked to place bets on upcoming matches. They received winnings based on the outcomes of randomly selected games.

Most of the participants were longtime supporters of a particular team. (Manchester United was their top favorite.) They were more optimistic about their favorite teams, betting 20% more on them. They rated their teams as having a 10% to 18% higher chance of victory than other teams, even when presented with forecasts from professional oddsmakers suggesting otherwise. These results persisted even after accounting for factors such as personal beliefs and appetite for risk.

The study also finds that participants placed a lower value on gains not aligned with their identity — what the researchers referred to as an “identity tax.” Fans effectively devalued these neutral bets by 17% to 27%. For poorly performing teams, this “tax” could soar as high as 47%, reflecting a strong emotional impulse to support their favorite team even when the odds were against it

The research, detailed in a paper cowritten with Lorenz Goette of the National University of Singapore, Maximilian Müller of the Toulouse School of Economics, Eugen Dimant of the University of Pennsylvania, and Michael Kurschilgen of UniDistance Suisse, shows that identity-driven preferences explain much of the gap in bettors’ behavior. Simulations showed that distorted beliefs due to identity account for as much as 44% of the difference in fans’ betting behavior. The remainder stemmed from preferences rooted in identity itself — people were willing to sacrifice potential gains to support options that aligned with who they are…

… The study’s findings have far-reaching implications for understanding economic behavior, particularly in areas like consumer finance, brand loyalty, and even political decision-making…

… the research hints at how consumers view different products. Items that align with a person’s identity are likely to be seen as complements rather than substitutes. For example, Donkor says a consumer who identifies strongly with sustainability might view eco-friendly products as essential enhancements to their lifestyle, even if they’re similar to comparable, less expensive goods.

Ultimately, these findings could improve our thinking about the biases that influence our financial lives. As the researchers point out, acknowledging the role of identity in decision-making is one key to designing better policies, creating more effective financial products, and ultimately improving individual welfare. “If we ignore identity,” Donkor concludes, “we miss the bigger picture in decision-making.”…

Understanding the choices that we, and those around us, make: “What Soccer Fans Can Teach Us About Making Irrational Decisions,” from @SIEPR.

* Aldous Huxley

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As we ponder the price (and as a reminder that there are other kinds of irrational decisions and that sometimes returns do matter to investors), we might recall that it was on this date in 2008 that Bernard “Bernie” Madoff was arrested and charged with defrauding investment clients of as much as $65 billion. A pioneer in electronic trading and chairman of the Nasdaq stock exchange in the early 1990s, he had turned to money management. By 2008, Madoff was running a huge and growing fund that promised its investors high and stable returns… the problem: it was a Ponzi scheme, the largest known Ponzi scheme in history.

A 2008 mug shot (source)

“I’m not a member of any organized political party…. I’m a Democrat”*…

Word clouds from a Pew study on the differences in Democrats’ and Republicans’ views on the meaning of life

As we face the prospect of a post-Biden election, a consideration of the mechanics that will come into play. Much ink has been (justifiably) spilled dissecting the differences in the Republican and Democratic approaches to governance, their goals, and their potential implications for our future. Tanner Greer suggests that there are other important differences too– more specifically, he explains the difference between patronage (Republican) and constituent (Democratic) parties…

The Republican and Democratic parties are not the same: power flows differently within them. The two big political news items of this week—the happenings of the Republican National Convention and the desperate attempts of many Democrats to replace their candidate before their own convention next month—reflect these asymmetries. Nevertheless, many discussions of American politics assume that that the structures and operational norms of the two parties are the same. If these party differences were more widely recognized, I suspect we would see fewer evangelicals frustrated with their limited influence over the GOP party platform, fewer journalists shocked with J.D. Vance’s journey from never-Trump land to MAGA-maximalism, and greater alarm among centrist Democrats about the longer-term influence that the Palestine protests will have on the contours of their coalition.

My perspective on all this has been strongly shaped by two research articles penned by political scientist Jo Freeman. In her youth Freeman was a new left activist, one of the founding activist-intellectuals of feminism’s second wave. She is perhaps most famous today for two essays she wrote in her activist days (both under her movement name “Joreen”).  The first, “The Tyranny of Structurelessness,” is a biting critique of the counterculture dream of eliminating hierarchy from activist organizations. The second, “Trashing: the Dark Side of Sisterhood,” is one of the original descriptions of “Cancel Culture.” There Freeman provides a psychological account of how cancellation (she calls it “trashing”) works and the paralyzing effect it has within leftist organizations, where cancellations are most common. If you have never read these essays I recommend you do. Freeman’s internal critiques of left-wing movements at work are more insightful than most rightwing jeremiads against them.

Neither of these essays shed much light on the Republican Party. For that we must turn to her later, more academic work. In particular, her 1987 article “Who You Know vs. Who You Represent: Feminist Influence in the Democratic and Republican Parties,” and her 1986 “The Political Culture of the Democratic and Republican Parties.”

Freeman’s academic interests were framed by her activist experiences. She was deeply involved in the seventies attempts to get feminist planks onto the Democratic and Republican party platforms. Up to that juncture the Republican Party had far stronger feminist credentials than the Democrats did; had the feminist of 1960 been forced to predict which party would champion her cause thirty years later, she would have guessed the GOP.

This is not what happened. That is the mystery that drives much of Freeman’s late ‘80s work: why did the feminist movement succeed so brilliantly with the Democrats, but fail so miserably with the Republicans? Freeman argues that this had less to do with demographics or deep ideological alignment than with the structures and operational culture of each party. Although both parties have changed in the days since Freeman stalked the convention floors, many of the differences she observed between the two parties still hold true today.

The place to start is a 1980 vote on the floor of the Democratic National Convention. That year the primary feminist organizations working the convention hall were the National Woman’s Political Caucus (NWPC) and the National Organization for Women (NOW). Their pet cause was the Equal Rights Amendment (ERA). The Democrats had already endorsed the amendment, so NOW and the NWPC decided to up the ante: they would support a party plank that read “the Democratic Party shall offer no financial support and technical campaign assistance to candidates who do not support the ERA.” This measure, known as Minority Report #10, became the focus of their efforts.

Jimmy Carter’s delegates controlled the floor. Though no enemy to feminism, his team thought Ten was ill advised. The Democrat’s existing support for the ERA was robust, Carter balked at draconian single-issue “loyalty tests” that might erode his shaky coalition, and he did not wish to make feminist issues central to his campaign. He had the numbers to defeat this change. NOW and the NWPC understood this. They decided to push for a floor vote anyway. As expected, they lost that vote decisively. The platform was not changed.

What did this public defeat portend for the movement? Victory. Losing the fight on the floor did not set the movement back an inch. Far from it: at the next convention these same women’s organizations were given a greater share of decision making authority. All potential presidential candidates courted NOW’s endorsement months before the 1984 convention began; their preferred amendments were incorporated into the platform without issue. “Because feminists got pretty much everything they wanted prior to the Democratic Convention,” Freeman comments, “there wasn’t much to do there except celebrate.”

This is somewhat mysterious. The feminist movement leaders sought an intentional defeat—but only gained power because of it.

We still see this story play out on the left today. Though the contest for clout has shifted out of the convention halls and out onto social media, when you look at the trajectory of leftist movements over the 2010s—such as the Black Lives Matters movement—you find a similar pattern. Protests that closed with policy defeat, changing nothing but media coverage, did not lead to the marginalization of protest leaders or their moment. Quite the opposite: with each defeat the influence these movements held over the Democratic establishment grew.

Why does this happen? Freeman argues that peculiar features of Democratic Party organization and political culture allow activists to profit from defeat. Here is how she describes the salient Democratic Party features:

Both parties are composed of numerous units, which have a superficial similarity… In addition to these formal bodies, the Democratic Party, especially on the national level, is composed of constituencies. These constituencies see themselves as having a salient characteristic creating a common agenda which they feel the party must respond to. Virtually all of these groups exist in organized form independent of the Party and seek to act on the elected officials of both parties. They are recognized by Democratic Party officials as representing the interests of important blocs of voters which the Party must respond to as a Party. Some groups have been recognized parts of the Democratic coalition since the New Deal (e.g. blacks and labor); others are relatively new (e.g. women and gays). Still others which participated in State and local Democratic politics when those were the only significant Party units have not been active as organized groups on the national level (e.g. farmers ethnics).

Some of the Party’s current constituencies have staff members of the Democratic National Committee identified as their liaisons. In addition, in the last few years an informal understanding has arisen that one of each of the three Vice-Chairs will be a member of and represent women, blacks and hispanics. Labor — still the largest and most important constituency — does not feel the need for a liaison as it has direct contact with the party chair. However, a majority of the 25 at-large seats on the DNC, as well as seats on the Executive Committee and the Rules and Credentials Committees at the conventions are reserved for union representatives. Party constituencies generally meet as separate caucuses at the national conventions. Space for these meetings is usually arranged by the DNC. While caucuses are usually open to anyone, the people who attend are generally those for whom that constituency is a primary reference group; i.e. a group with which they identify and which gives them a sense of purpose. With an occasional exception the power of group leaders derives from their ability to accurately reflect the interests of constituency members to the Party leaders. Therefore, while leaders are rarely chosen by the participants, they nonetheless feel compelled to have their decisions ratified by them through debate and votes in the caucuses. The votes usually go the way the leaders direct, but they are symbolically important.

For Freeman the most important fact about the Democratic Party is that its representative constituent groups exist in an organized form independent of the party apparatus proper. This means that the position (and to a lesser extent the power) of the men and women who lead these constituencies is not dependent on the favor of party leaders. To the contrary, Democratic Party leaders tend to think of their personal power as being dependent on the support of the constituencies the activist leaders represent.

This has two important implications. The first is that the power and career success of Democrats who either lead or strongly identify with a minority constituency “is tied to that of [their minority] group as a whole. They succeed as the group succeeds. When the group obtains more power, individuals within that group get more positions.” Democratic leaders think of their party as a bargaining table: various groups looking for representation in the Democratic Party come to this table, demonstrate what they can do for the party, demand that the party do something for them in turn, and negotiate with competing constituencies on matters of policy and personnel. The more electorally important an identity group is, the more personnel slots it will generally receive.

The preceding paragraph is an imperfect model of actually existing Democratic politics—but it is the mental model of Democratic politics that Democratic politicians use as a reference point when evaluating the real thing. Ideals shape behavior…

… This leads to the second implication of the Democrats bottom-up structure. It is not always obvious who speaks for a given constituency. Activists and group leaders thus not only need to pick fights that demonstrate the importance of their group, but also need to pick fights that cement their legitimacy as representatives of this constituency

This is why the feminist maneuvers in the 1980 convention made sense: whether the feminists won the floor fight was less important than demonstrating that the women’s groups were a constituency capable of forcing a floor fight in the first place. The activists lost their battle, but successfully proved that their army could be mustered, and that its soldiers looked to them for marching orders. They demonstrated that they deserved a larger spot at the negotiating table—and during the next convention they were given one.

The Republicans are different. In the ‘70s and ‘80s Republican feminists refused to bring losing battles to the floor. Where most Democratic activists view their constituency identity as primary and their party identity as secondary, most of the Republican feminists Freeman worked with saw themselves as Republicans first. Many were the wives of sitting Republican officials. They were not outsiders clamoring for clout but insiders maneuvering for influence. Their party worked in a very different way from the Democrats:

The basic components of the Republican Party are geographic units and ideological factions. Unlike the Democratic groups, these entities exist only as internal party mechanisms. The geographic units—state and local parties— are primarily channels for mobilizing support and distributing information on what the Party leaders want. They are not separate and distinct levels of operation. 

Ideological factions are also not power centers independent of their relationship to Party leaders. Unlike Democratic caucus leaders, Republican faction leaders do not feel themselves accountable to their followers. Sometimes there are no identifiable followers… The purpose of ideological factions—at least those that are organized— is to generate new ideas and test their appeal. Initially these new ideas are for internal consumption. Their concept of success is not winning benefits, symbolic or otherwise, for their group, so much as being able to provide overall direction to the Party.

…The Republican Party does have several organized groups within it such as the National Federation of Republican Women, National Black Republican Council and the Jewish Coalition, but their purpose is not to represent the views of these groups to the party. Their function is to recruit and organize group members into the Republican Party as workers and contributors. They carry the party’s message outward, not the group’s message inward. Democratic constituency group members generally have a primary identification with their group, and only a secondary one with the Party. The primary identification of Republican activists is with the Republican Party. They view other strong group attachments as disloyal and unnecessary…

… the Republican party is fundamentally a leader oriented political organization. Power flows from the top down. Convention battles were not contests between constituencies, but contests between patronage networks. The party is organized around powerful leaders and those who fly their colors under their patron’s banner:

Legitimacy within the Republican Party is dependent on having a personal connection to the leadership. Consequently, supporting the wrong candidate can have disastrous effects on one’s ability to influence decisions. Republican Presidents exercise a monolithic power over their party that Democratic Presidents do not have. With the nomination of Ronald Reagan, many life-long Republicans active on the national level who had supported Ford or Bush had to quickly change their views to conform to those of the winner or find themselves completely cut off. Mavericks, who do not have any personal attachments to identified leaders, may be able to operate as gadflies, but can rarely build an independent power base. Since legitimacy in the Democratic Party is based on the existence of just such a power base, real or imagined, one does not lose all of one’s influence within the Party with a change in leaders as long as one can credibly argue that one represents a legitimate group.

While the importance of personal connections works against those Republicans who have the wrong connections it rewards those who spend years toiling in the fields for the Party and its candidates. The longer one spends in any organization the more personal connections one has an opportunity to make. These aren’t lost when one’s Party or leaders are out of power, and thus can be “banked” for future use. Occasionally a dedicated party worker can develop sufficient ties even to competing leaders to assure continued access, if not always influence, regardless of who’s in power. Those Democrats whose legitimacy derives from leadership of a coalition group find it is quite transitory when they can no longer credibly represent the group. The greater willingness of the Republican Party to reward loyalty and dedication to the Party in preference to any other group makes it is easier for the Party to discourage extra-Party attachments

… There are advantages and disadvantages to both operational cultures. “In the short run [Democratic political culture] appears disruptive,” Freeman argues, but in the long run “it is more stable. Once a consensus develops about the desirability of a particular course of action, whether it be programmatic or procedural, it is accepted as right and proper and is not easily thwarted by party leaders, even when one of them is the President.” In contrast, “the Republican Party is more likely to change directions when it changes leaders.”

Is there a better example than the ascension of Donald Trump? The GOP was once a party of full of men like J.D. Vance, eager to condemn Trump as the American Hitler. The GOP is now a party full of men… like J.D. Vance, eager to fête Trump as the savior of the Republic. How could this happen? The Republican Party offers neither power nor refuge to those who have not hitched their cart to its reigning star. A Republican Party that won in 2012 or lost in 2016 would look fundamentally different—much more fundamentally different than a Democratic Party helmed by Hillary Clinton or Bernie Sanders instead Obama or Biden. The ability of democratic presidents to reshape their party is limited unless, like FDR, they bring in a new suite of constituencies to the coalition…

… It is possible this structure may change in the future. From the 1860s forward Republican Party leaders governed secure in the belief that they defended the American mainstream. In the late 20th century that meant middle and upper-middle class white families. That demographic is not as aligned with the Republicans as it was in the pre-Trump era; the upper-middle class now defaults Democrat. Moreover, the relative share of the population occupied by the old American core is shrinking. In many states it is already a plurality demographic. Increasingly, Republicans see themselves not as defenders of the American mainstream but as the tribunes of the American outcasts.

Some on the right wing would prefer if the GOP adopted Democratic forms. This would mean framing itself as a coalitional party like the Democrats with formally recognized constituencies whose interests must be explicitly catered to. In this vision the white working class would become the most important of these constituencies.

Freeman’s analysis suggests why it will be difficult for the Republicans to follow this path. It will be hard enough for the GOP to abandon an operational culture a century and a half old. It will be harder still to restructure the party apparatus itself, building out caucus-like civic organizations to represent the interests of its constituencies. At the moment it simply is not clear which organizations or individuals might represent the white working class within party circles; with the exception of the evangelicals, most of the potential Republican constituencies lack the group-consciousness needed for Democratic style politics. No GOP leader would wish to create these groups himself—it would mean siphoning away his power. As long as power flows downwards in Republican politics there will be little incentive for Republican leaders to change the system.

It is not clear the party as a whole would benefit from doing so. The Biden succession drama points to the weaknesses of a bottom-up party structure. Unity is much more difficult to achieve in the Democratic Party. The structure and culture of the party encourages small disputes to metastasize. Democratic Party leaders do not want to abandon Biden for the same reasons no one wanted to run against him in the primaries: when fissures in the Democratic Party open, they are difficult to close again. After fighting, the Republicans get back in line; those who will not do so are sidelined. They lack an external base of power to keep up the fight. For Democrats things are different—only the threat of electoral defeat keeps them cohesive. “Ridin’ with Biden” is an easy Schelling point. Remove that point and the knives will come out. Few Democratic politicians imagine they will fare well in a late season knife fight. With a party structure this fissiparous, they are probably right…

Eminently worth reading in full: “Why Republican Party Leaders Matter More Than Democratic Ones,” from @Scholars_Stage.

Apposite (albeit from an orthogonal point of view): “Vance, Trump and the shifting coalitions behind Republican economic policy” from @adam_tooze.

* Will Rogers

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As we muse on mechanisms, we might send harmonic birthday greetings to John Hall; he was born on this date in 1948. After serving in the legislature of Ulster County, New York and on the Saugerties, New York Board of Education, he was the (Democratic) U.S. representative for New York’s 19th congressional district from 2007 to 2011.

Earlier in his varied career he co-founded and led the pop rock group Orleans (“Dance With Me,” “Still the One”), with whom he performed until his retirement in 2019.

Hall’s official Congressional portrait (source)

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“Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?”*…

Behavioral economics aims to accomplish exactly that. Its approach has been to catalogue the dozens of cognitive biases that stop us from acting “rationally.” Jason Collins argues that instead of building up a messier and messier picture of human behavior, we need a new model…

From the time of Aristotle through to the 1500s, the dominant model of the universe had the sun, planets, and stars orbiting around the Earth.

This simple model, however, did not match what could be seen in the skies. Venus appears in the evening or morning. It never crosses the night sky as we would expect if it were orbiting the Earth. Jupiter moves across the night sky but will abruptly turn around and go back the other way.

To deal with these ‘anomalies’, Greek astronomers developed a model with planets orbiting around two spheres. A large sphere called the deferent is centered on the Earth, providing the classic geocentric orbit. The smaller spheres, called epicycles, are centered on the rim of the larger sphere. The planets orbit those epicycles on the rim. This combination of two orbits allowed planets to shift back and forth across the sky.

But epicycles were still not enough to describe what could be observed. Earth needed to be offset from the center of the deferent to generate the uneven length of seasons. The deferent had to rotate at varying speeds to capture the observed planetary orbits. And so on. The result was a complicated pattern of deviations and fixes to this model of the sun, planets, and stars orbiting around the Earth.

Instead of this model of deviations and epicycles, what about an alternative model? What about a model where the Earth and the planets travel in elliptical orbits around the sun?

By adopting this new model of the solar system, a large collection of deviations was shaped into a coherent model. The retrograde movements of the planets were given a simple explanation. The act of prediction became easier as a model that otherwise allowed astronomers to muddle through became more closely linked to the reality it was trying to describe.

Behavioral economics today is famous for its increasingly large collection of deviations from rationality, or, as they are often called, “biases.” While useful in applied work, it is time to shift our focus from collecting deviations from a model of rationality that we know is not true. Rather, we need to develop new theories of human decision to progress behavioral economics as a science. We need heliocentrism… 

For a thoughtful critique of current thinking and a set of four “features” that might inform a new approach: “We don’t have a hundred biases, we have the wrong model,” from @jasonacollins.

* Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions

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As we dwell on decisions, we might spare a thought for someone who would probably have had little patience for ideas like these, Rose Friedman; she died on this date in 2009. A free-market economist, she was the wife and intellectual partner of Milton Friedman– a father of the “Chicago School” of neoclassical economic thought that underlies the neoliberlism so dominant of late [see here], of which behavioral economics is a corrective/critique– with whom she co-wrote papers and books (e.g., Free to Choose and Capitalism and Freedom) and co-founded EdChoice (formerly the Milton and Rose D. Friedman Foundation), with the aim of promoting the use of school vouchers and “freedom of choice” in education.

When her husband received his Medal of Freedom in 1988, President Ronald Reagan joked that Rose was known for being the only person to ever have won an argument against Milton.

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“There’s no idea in economics more beautiful than Arrow’s impossibility theorem”*…

Tim Harford unpack’s Kenneth Arrow‘s Impossibility Theorem (which feels a bit like a socio-economic “Monty Hall Problem“) and considers it’s implications…

… if any group of voters gets to decide one thing, that group gets to decide everything, and we prove that any group of decisive voters can be pared down until there’s only one person in it. That person is the dictator. Our perfect constitution is in tatters.

That’s Arrow’s impossibility theorem. But what does it really tell us? One lesson is to abandon the search for a perfect voting system. Another is to question his requirements for a good constitution, and to look for alternatives. For example, we could have a system that allows people to register the strength of their feeling. What about the person who has a mild preference for profiteroles over ice cream but who loathes cheese? In Arrow’s constitution there’s no room for strong or weak desires, only for a ranking of outcomes. Maybe that’s the problem.

Arrow’s impossibility theorem is usually described as being about the flaws in voting systems. But there’s a deeper lesson under its surface. Voting systems are supposed to reveal what societies really want. But can a society really want anything coherent at all? Arrow’s theorem drives a stake through the heart of the very idea. People might have coherent preferences, but societies cannot…

On choice, law, and the paradox at the heart of voting: “Arrow’s Impossibility Theorem,” from @TimHarford in @WhyInteresting. Eminently worth reading in full.

* Tim Harford

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As we contemplate collective choice, we might send grateful birthday greetings to the man who “wrote the book” on perspective, Leon Battista Alberti; he was born on this date in 1404.  The archetypical Renaissance humanist polymath, Alberti was an author, artist, architect, poet, priest, linguist, philosopher, cartographer, and cryptographer.  He collaborated with Toscanelli on the maps used by Columbus on his first voyage, and he published the the first book on cryptography that contained a frequency table.

But he is surely best remembered as the author of the first general treatise– Della Pictura (1434)– on the the laws of perspective, which built on and extended Brunelleschi’s work to describe the approach and technique that established the science of projective geometry… and fueled the progress of painting, sculpture, and architecture from the Greek- and Arabic-influenced formalism of the High Middle Ages to the more naturalistic (and Latinate) styles of Renaissance.

from Della Pictura

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