Aug

7

T CowenTyler Cowen's book, Discovering Your Inner Economist has an ambitious agenda. It purports to tell you such things as:

  1. How to control and improve the world
  2. How to possess all the great art ever made
  3. How to get along with your family
  4. How to read books and go to cultural events

The style of the book is to describe one of the important goals above, show how taking into account incentives and scarcities might give us insight into it, discuss various psychological studies that indicate where the usual tools of economics might be applied, give the references to these studies in the back of the book, and cite various sites on the web, back and forth from his own site MarginalRevolution that have covered the subject, and give personal anecdotes as to how he has applied these principles in his own life.

The book is accessible to every person with no formulas or diagrams, and plenty of s&xy anecdotes and stories to keep the principles in mind. Indeed, Mr. Cowen (as he likes to be called — the Dr. would be pretentious for a man of his accomplishments) often faults economists such as Steven Landsburgh, David Friedman,and Steven Levitt for paying too much attention to the usual elements of price theory economics such as diminishing marginal productivity and utility, movements along and shifts of supply and demand curves, gains of trade and specialization, fixed versus marginal costs, marginal rates of substitution, profit maximization, rational expectations, on the grounds that they don't take into account the psychology and evolution of human behavior, especially the need of humans to achieve self-esteem and control.

The main weakness of the book is that the psychological studies he cites are mainly constructed in laboratory settings. They don't take account of the many factors that humans actually consider when making real life decisions. Most of these decisions do involve gains and trade and the classical principles of economics to me provide a much sounder framework and foundation for making sound and measurable decisions than the often spongy connections in the studies he cites, including the many studies on the importance and prevalence of signaling. I believe in almost all the cases cited, the businesses, persons and institutions have developed profit maximizing and rational behavior that explains their actions and that they are not acting against their economic self interests.

Parking Ticket Mr. Cowen gives three stories that are helpful in navigating the world we live in. The Parking Ticket story explores the reason for the distribution of parking tickets by countries from diplomats at the UN. The idea is that those who come from a culture of honesty and trade have few violations, and those who come from corrupt countries don't. The Car Salesman story shows why it is good to use commissions as incentives in simple cases. The Dirty Dishes story tells why you can't get your kids to wash dishes by offering them rewards. I wish the author had used more parking ticket stories to explain the phenomena he adduces as the reader would end up with something more valuable than the hoped-for psychology that explains the other. There are valuable philosophic insights that provide the foundation for this book- namely that "the West has succeeds as much as it has because it embraced the values of self-criticism, individual rights, science, and the idea that government is the servant of the people not vice versa". He goes on to suggest that prudence, critical self-reflections, belief in higher values and wisdom in matters of ordinary life are the keys to a better future.

 The most interesting part of the book to me were the many markets that have developed in amazing areas like the market for making beggars really disabled, the market for writing love and breakup letters, the market for getting a guide who won't promote you in Morocco. I wish that the book had provided more economic principles that explain the structure of such markets. However, even if unsupported by empirical evidence or a framework of testable principles, the book contains many startling and useful ideas, e.g. ordering the menu items that sound and look the worst, and reading 10 books or movies at a time and finishing only two of them, stopping doing routine errands and do only the most important things, trying to deceive yourself into thinking you are worthy, that cry out for testing and practice. I can recommend this book to all market people as one that they will think about in many of their decisions.

John De Palma adds:

You wrote: "… The main weakness of the book is that the psychological studies he cites are mainly constructed in laboratory settings. They dont take account of the many factors that humans actually consider when making real life decisions…"

A study just came out with data based upon real world decision-making on whether to go to trial. It is an interesting data set compared to data generated by psychology experiments done on college classes and then generalized as if it's universal human behavior and not just an artifact of a contrived experimental backdrop. The New York Times wrote about the study on Friday:

"Note to victims of accidents, medical malpractice, broken contracts and the like: When you sue, make a deal. That is the clear lesson of a soon-to-be-released study of civil lawsuits that has found that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken that offer(…)Defendants made the wrong decision by proceeding to trial far less often, in 24 percent of cases, according to the study; plaintiffs were wrong in 61 percent of cases. In just 15 percent of cases, both sides were right to go to trial — meaning that the defendant paid less than the plaintiff had wanted but the plaintiff got more than the defendant had offered(…)the findings, based on a study of 2,054 cases that went to trial from 2002 to 2005, raise provocative questions about how lawyers and clients make decisions, the quality of legal advice and lawyers' motives (…) The findings are consistent with research on human behavior and responses to risk, said Martin A. Asher, an economist at the University of Pennsylvania and a co-author. For example, psychologists have found that people are more averse to taking a risk when they are expecting to gain something, and more willing to take a risk when they have something to lose (…)"

(Flashback: One of the co-authors, Blake McShane, had a post on your site here on an unrelated issue) .


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