Tuesday, June 29, 2010

How large a role does luck play in our lives?

‘Let’s return to our touchstone: identical twins growing up together. They share their genes, they share their family environments, and they share their peer groups, at least on average. But the correlations between them are only around 50 percent. Ergo, neither genes nor families nor peer groups can explain what makes them different’ Steven Pinker, ‘The Blank Slate’, 2002, p.396.

The correlations that Pinker is referring to relate to intelligence, personality and life outcomes.

I read that passage for the second time a week ago and I have thought about it a few times since. The first time I thought about it was not long after I put my last post, Does parenting make a difference?, on my blog. In that post I neglected to mention that Pinker ended his discussion of parenting by talking about the important role that luck plays in our lives.

The next time was when I stumbled across a post I wrote last year, What determines whether we have successful lives? , in which I discussed Malcolm Gladwell’s book, ‘Outliers’. Gladwell seems to be arguing that exceptional performance can always be attributed to something other than good luck. I think he is probably wrong about that, but his book is a good read in any case.

The most recent time I thought about Pinker’s paragraph about identical twins was when I read Bill Easterly’s post, ‘How skill beats luck in the world cup of development’. Easterly’s point is that the World Cup uses a tournament of five matches to make skill beat luck. He calculates that the probability that a weak team that only wins 15 percent of the time will win the tournament is only 0.0076 percent. By contrast, a strong team that wins 85 percent of the time has a 46 percent probability of winning the tournament. I find it reassuring that despite the large random element in outcomes of low-scoring games (at least that’s how it appears to me as a fan of Aussie rules football) there is a high probability that one of the stronger teams will win the tournament.

Easterly translates his observation to economic policy as follows:
‘As this blog likes to frequently point out, economic growth has a lot of random variation. Over a short period of time (metaphorically equivalent to one game), a country with bad policies and bad institutions still might have a good growth rate. But over a long period of time (equivalent to playing many successive games), the consistent winners are very likely to be countries with good policies and good institutions. So in deciding whether a particular set of policies and institutions are good or bad, you need to look at long periods (tournaments) and not at short ones (single games). How long the long periods have to be will depend on how important luck is in the short term; the evidence we have on economic growth is that short term luck is very important, and the periods have to be pretty darn long for proper analysis.’

I thought that was well worth quoting, but patient readers who have got this far might wonder how it relates to the finding that luck plays a large part in determining outcomes at an individual level. The link that occurred to me is that whereas the ancients saw everything as being in the lap of the gods, these days there is a tendency to say that just about everything that happens at both individual and society levels is a result of human action.

When I hear people say, "You make your own luck", I tend to nod in agreement. But what does this mean? A glance at some of the things personal development professionals write about this on the internet suggests that it involves adopting strategies that tend, on average, to produce better outcomes. When countries make their own luck they adopt economic strategies that tend, on average, to produce better outcomes. In neither case does this eliminate the strong influence of luck on short-term outcomes. Making our own luck just moves the odds in our favour.

Wednesday, June 23, 2010

Does parenting make a difference?

Bryan Caplan wrote a provocative article in The Wall Street Journal a few days ago (‘The Breeders’ Cup’, June 19, 1010) in which he presented some selfish reasons for people to have more children. In brief:

• While happiness research suggests that modern parents are less happy than their childless counterparts, ‘happiness researchers rarely emphasize how small the happiness gap is’. Beyond the first child, ‘additional children are almost a happiness free lunch’.
• The costs of having kids are front-loaded and the benefits are back-loaded. The more kids you have the more grandchildren you can expect.
• There is some evidence that few people who have children regret that decision. Gallup poll data suggests that most childless adults over the age of 40 say they would have children if they had to make the same decision over again.
• Parenting can be less work and more fun than many people think. The long-run effects of parenting on children’s outcomes are small. Once you realize that your kids’ future largely rests in their own hands you can give yourself a guilt-free break.

Most of Bryan’s article is about the last point. Before discussing this, however, I want to comment briefly on the relevance of happiness research to the decision to have children. Bryan seems to be implying that happiness researchers argue that if having kids doesn’t make people happier, then they shouldn’t have kids. I have read a fair amount of the happiness research literature but I haven’t ever actually seen any researcher put that view. Researchers seem to be almost silent on this issue. I hope this is an embarrassed silence in the case of those happiness researchers who have been quick to suggest that people are making poor decisions when they do other things that do not make them much happier such as working longer hours to earn more income. The point that needs to be remembered, as I have discussed in previous posts (e.g. Do well-being surveys measure utility? and Do good decisions always make us happy?), is that happiness surveys measure current emotional well-being (or something similar) and people often sacrifice some happiness in the short term in order to have greater happiness in future, or to pursue other objectives.

I think that Bryan is probably right that in the modern world there may be a tendency for people to limit the size of their families because they believe that the quality of parenting has a huge impact on children’s futures and they assume that there is no way that parenting could be less work and more fun. He points to fairly strong evidence from research on twins and adoption that supports the view that parenting makes little difference to the way kids turn out.

However, I think Bryan may be at risk of under-stating the importance of good parenting. It seems to me that there are a lot of people whose parenting is so poor that it does damage the future prospects of their children. I don’t claim to know much about this topic, but it is hard to accept that there are no important links between child neglect and antisocial and criminal behaviour.

The Blank Slate: The Modern Denial of Human NatureSteven Pinker discusses some relevant research by Judith Rich Harris in ‘The Blank Slate’ (2002). Harris argues that the main environmental shaper of personality is the child’s peer group. In Pinker’s words:
‘Children do not spend their waking hours trying to become better and better approximations of adults. They strive to become better and better children, ones that function well in their own society. It is in this crucible that our personalities are formed’ (p. 390).

I imagine that would appear as a blinding insight to very few parents. Most people would know already that it is important for their children to choose their friends wisely, but they would also know that they can’t choose their friends for them. Perhaps the most important way that parents can make a difference is through decisions about where they live and what schools their children attend.

Wednesday, June 16, 2010

Is there a crisis of capitalist democracy?

The Crisis of Capitalist Democracy
Richard Posner’s recent book, ‘The Crisis of Capitalist Democracy’, is mainly about the global financial crisis, how it came about in the US, the lessons that the author thinks we should have learned from it and what governments should do to prevent similar crises in future. According to this distinguished author the crisis came about because of lax regulation; we have learned from it that the financial system is inherently fragile and that Keynes is still relevant; and the way to avoid similar crises in future is to introduce regulatory reform in the financial sector.

To be fair, Posner condemns some of the knee jerk responses of governments introducing tighter financial regulation and acknowledges that he is not entirely happy with his own suggestions for regulatory reform. He views the only ambitious proposal that he discussed sympathetically – the separation of commercial banking from other forms of financial intermediation – as ‘fraught with problems’ (p.362).

It is arguable that the global financial crisis was a crisis of capitalism. A milder financial crisis might still have occurred if central banks had not previously acted in ways that led major financial institutions to expect that they would be bailed out if their excessive risk-taking resulted in major losses. It is even possible to entertain the idea (as I did here) that the financial crisis has highlighted a fundamental problem in that laws governing the financial system currently permit financial intermediaries to make promises that they can’t always keep. But why view this economic crisis as a crisis of democracy?

The title of the book arises from Posner’s view that while the American political system can react promptly and effectively to an emergency, it ‘tends to be ineffectual’ in dealing with longer term challenges:
‘The financial collapse and the ensuing depression (as I insist we must call it) have both underscored and amplified grave problems of American public finance that will not yield to the populist solutions that command political and public support. The problems include the enormous public debt created by the decline of tax revenues in the depression, the enormous expenses incurred by government in fighting the depression, and the boost the depression has given to expanding the government’s role in the economy. These developments, interacting with a seeming inability of government to cut existing spending programs (however foolish), to insist that costly new programs be funded, to limit the growth of entitlement programs, or to raise taxes, constitute the crisis of American-style capitalist democracy’ (p.387-8).

Unfortunately, the quoted passage appears in the final paragraph in the book rather than the introduction. There is not much discussion in this book about this supposed weakness of the US democratic system. The author implies that it is largely a problem of political culture. Republicans favour low taxes but they have been reluctant to reduce government spending. Democrats favour high levels of government spending but they have been reluctant to raise taxes. As a result:
‘From the standpoint of economic policy we have only one party, and it is the party of profligacy’ (p.384).

As a person living in a democratic country in which a large part of the electorate has come to equate responsible economic management with budget surpluses and minimal public debt (to the dismay of some left wing economists who would like to see more public sector investment) I find it difficult to take seriously the idea that the current political culture in the United States involves a crisis of capitalist democracy. I am confident that before too long Americans will insist that their governments balance their books in order to avoid the problems currently being experienced in Greece and other European countries.

However, the picture might look a lot different from within the US. Before a change in political culture can occur in the US it will be necessary for a lot more Americans to become concerned about the future implications of current fiscal policies. Richard Posner claims that he has no idea how to solve the problem of America’s political culture (p.385) but I think he is contributing to the solution by merely raising awareness of the problem.

Friday, June 11, 2010

Does history give undue prominence to scribblers?

I imagine that history does tend to give excessive prominence to writers because historians have to rely heavily on written material. Historians probably spend a lot of time discussing this subject but, not being an historian, I don’t claim to know much about it. What this post is actually about is a minor historical incident in which I think undue prominence has been given to my role because I was editor of a student newspaper. I’m not objecting to the way I have been portrayed. I just think that other people deserve more credit for the contributions they made.

A Spirit of True Learning: The Jubilee History of the University of New England‘A Spirit of True Learning, the Jubilee History of the University of New England’ by Matthew Jordan, was published by UNSW Press in 2004. I confess that I have only just now read the book at the urging of Jim Belshaw, a fellow student at UNE in the 1960s, and now a fellow blogger. Jim referred me, in particular, to a few pages about the history of the room visiting issue (pp 187-191).

At the beginning of the 1960s nearly all students at UNE lived in single-sex residential colleges on the university campus. As Matthew Jordan records, in 1963 the University Council decided to cut back room-visiting between the sexes and then to abolish it altogether from the beginning of 1964. The decision to ban room visiting was taken against the advice of the heads of colleges (which were supposed to be largely self-governing) and was, of course, strongly opposed by students.

My recollection is that before I became editor of ‘Neucleus’, the student paper, the stage had been set for the first issue of 1964 to protest against Council’s decision on the room visiting issue. I was more than happy to go along with that idea and to accept editing responsibility, but at the time (November 1963) I was just completing my first year at UNE and would not have been viewed by other students as a leader of the protest movement. (I can’t recall why the editorship of Neucleus became vacant at the end of 1963. I agreed to edit just one issue to be published at the beginning of 1964 with help from the previous editor and other students who had more experience working on the paper. As it happened, early in 1964, I became joint editor with Jim Belshaw, but that is another story.)

Matthew Jordan writes:
‘Winston Bates led the way. On the one hand, he said, Council talked of moulding students into responsible adults, while on the other, by “imposing blanket restrictions on everyone”, it issued “an insult to the maturity of students and an utter denial of personal freedom”.

The quoted words are (almost) correctly attributed to me but in suggesting that I ‘led the way’ I think Matthew is under the impression that I was also the ‘special correspondent’ responsible for the page one article. Since I was defending the anonymity of the ‘special correspondent’ it isn’t surprising that people might think I was responsible, but the special correspondent knew a lot more than me about Council deliberations. Among other things, the special correspondent wrote:
‘It would seem that the real reason for Council’s action was the fear that certain rumours circulating in North-Eastern N.S.W. about the immorality supposedly rife in the university would lead to a decline in student enrolments’.
My recollection is that the special correspondent was only using the words ‘it would seem’ to further hide his identity.

While I think Matthew’s history gives me undue prominence, 47 years later I am still rather proud of one of the passages in my editorial:
‘Perhaps the concept of freedom in a university needs further explanation. It is not a freedom to do what you want to, full stop; nor is it a relentless search after personal happiness. The college regulations in the “free” university would be framed by members of college with a view to restricting violation of the rights of others.
Surely this is an ideal worth working for. ...’

That could have done with some further editing, but it wasn’t too bad. I hope regulations applying in residential colleges at UNE today have been framed with a view to restricting individual freedom only to the extent necessary to protect the rights of other residents.

Thursday, June 3, 2010

How bounded is rationality?

Herbert Simon’s concept of ‘bounded rationality’ captures the idea that although individuals intend to behave rationally, they are constrained by limited cognitive abilities. The concept was put forward as an alternative to the assumption of neoclassical economics that individuals make decisions by maximizing utility functions.

It seems to me that maximizing utility is best viewed as a metaphor, akin to the charioteer, elephant and plane metaphors discussed in a previous post, rather than a description of actual human behaviour. It can be a useful metaphor. (I have used it on this blog to suggest that some seemingly irrational behaviours may in fact be rational.) Nevertheless, as James Buchanan has argued:
‘The modern economist who models the individual as choosing among feasible alternative bundles of goods to maximize a utility function that does exist independently of choice itself presents no evidence that such functions actually exist, and if pushed, the economist would agree that “utility” is little more than a rhetorical artifice that is introduced as an aid in explaining choice behavior within an imposed rational choice reconstruction’ (‘The Economics and the Ethics of Constitutional Order’, 1991).

It is possible to argue that all human action is rational in the sense of being purposeful, but once we acknowledge that humans have limited cognitive abilities then we have to acknowledge that they make mistakes. Economists have often recognized that people make systematic cognitive errors by incorporating arbitrary behavioral assumptions reflecting such errors (e.g. money illusion) in some of their models. This raises the question of whether efforts by economists to obtain a better knowledge of the bounds of rationality will enable them to build better models.

Jonah Lehrer’s book ‘How we Decide’, provides a highly readable discussion of the ways in which limited cognitive abilities can affect decision-making in different contexts. I decided to read the book after reading some comments by Peter Boettke on the Coordination Problem blog.

Lehrer’s main message seems to be: ‘The mind is full of flaws, but they can be outsmarted’ (p.250). He implies that a major source of error is failure to think about the kind of decision being made and the kind of thought process it requires. Insufficient reasoning can obviously result in poor decisions when the mind is strongly influenced by emotional urges and impulses. But it is also possible for the mind to choke on excessive reasoning.

It is common to hear of instances when sporting champions choke at a crucial point in a game because they suddenly become self-conscious and interfere with their performance by consciously trying to avoid mistakes. It is also possible, however, for too much analysis to lead to poor decisions in relation to choices that might be thought likely to benefit from analysis. For example, in considering a trade-off between size of home and time required to commute to work some research has suggested that there may be a tendency for people to give to give greater weight to the size of the house the more time they spend deliberating, even if the additional space is superfluous (p.144). People may often make better choices when they use their conscious minds to gather information and then trust their emotions.

Everyone knows that inexperience is a common source of error but many of us fear the unpleasant symptoms of making mistakes. One of the crucial ingredients of successful education is encouragement of children to learn from their mistakes by praising them for their efforts rather than their cleverness (p. 51-3).

The book contains a chapter on our tendencies to be fooled by feelings – loss aversion, the perception of patterns that don’t exist, the tendency to over-value immediate gains relative to longer term costs etc. Attention has previously been drawn to such problems by Dan Ariely in ‘Predictably Irrational’ (discussed here) and Richard Thaler and Cass Sunstein in ‘Nudge’ (discussed here). Lehrer suggests that the best way to avoid such errors is to be aware of them and to check feelings with a little arithmetic (p.244).

It seems to me that one of the most important contributions of ‘How we Decide’ is to draw attention to the errors that result from our tendency to surrender to ‘shoddy top-down thinking’ because self-delusion feels better than uncertainty. This is reflected, for example, in the influence of party affiliations when voters consider complex political issues. Even expert advice can be biased by adherence to frameworks that are at variance with reality. Lehrer’s suggested remedy is to embrace uncertainty, entertain competing hypotheses and to remind yourself what you don’t know.

The Economic Institutions of CapitalismDifferent readers may see different implications for economics coming out of this book. The book has reinforced my support for Oliver Williamson’s view that modes of contracting that make large demands against cognitive competence should be disfavoured (‘The Economic Institutions of Capitalism’, 1985, p.46). Governance structures will fail if they require managers to have unlimited cognitive capacities. Humans tend to be strongly influenced by moral instincts and conventions, but they are also susceptible to temptations. Another implication is that decision-making skills are likely to vary greatly among different individuals. Modellers should be wary of assuming that everyone is equally susceptible to cognitive distortions or that they have equal abilities to learn from experience. Finally, while the book provides plenty of support for the view that the rational voter is a myth rather than a useful metaphor, it suggests to me that the worm – reflecting immediate emotional responses to what politicians are saying – is unlikely to be a good predictor of voter behavior. Focus groups initially gave the thumbs down to some of the most successful shows on television.