Grand Unified Theories

Remember? I'm no longer a scientist. This isn't about physics.

When I was young, I thought people were fundamentally the same. But I didn't really understand well why people did what they did. So, through some classes and independent reading, and with the passion of a lonely only child, I devoted some of my life to trying to figure people out. Why do people do what they do? Why do we feel what we feel? Or, screw everyone else -- why the hell do I do the things I do?

I think, at some point, the allure of the questioning wears off. It stops feeling deep. It stops feeling meaningful. Instead of feeling like thoughtful scholars in a college lounge, contemplating existence over some wine (or other substances), it starts seeming like, well, something drunk or high wastrels do when they are drunk or high.

But more than that, we decide what people are. Experiences, positive and negative (but especially negative), shape our beliefs on human nature. That, in turn, shapes our beliefs about our social, political, economic, sexual, and religious lives. We decide what we are, and who we are -- and more than that, we decide who everyone else is, too.

We decide people are inherently good, or inherently evil. We decide whether those on welfare need it, or are moochers. We decide whether people of other traditions are an opportunity for growth or a threat, or both. We decide, more or less, how much to worry about the past, the present, and the future. We decide whether obstacles make people stronger or are discriminatory. We decide whether or not men and women and unborn babies deserve death.

And we decide that it is true for everyone, or at least enough people, for it to guide our behavior.

I've been looking for that grand unified theory of human behavior. It started with a bit of religion and philosophy. Then a bit of history. Economics was a key component. I stumbled across some sociology and psychology.

But it didn't get more simple. Unlike what we expect for good theories in the natural sciences, sociological theories don't get more elegant, more predictive, more powerful. They get diffused in detail and case-based evaluations. It's not because human behavior is endlessly complicated -- I sincerely doubt that. A

nd I have no idea why the hell it isn't like that.

For whatever reason -- complexity, some mathematically chaotic process, or shitty analysis -- we don't have a grand unified theory of humans.

And I don't think we're going to get one.

Even more importantly, I don't think we need one.

The belief that there is a unified theory is literally killing us.

It is the belief in the existence of universal truth, and the need to enforce that truth above others, that is the root of our religious and ideological warfare. It is the belief in a commonality that ignores different environments, and the potential for simple unpredictability, that have led us to make horrible foreign policies, often, in America's case, based on what is empirically false assumption that all all of us -- leaders and citizens alike -- are essentially after the same things, and that any gaps are due to misunderstanding that is bridgeable by better communication, empathy, or argument.

It is the belief in a universal truth -- simplicity where there is none -- that has caused our economic policies to be dictated by ideology than empiricism. If the free market is right, it has to be right all the time. If Keynesianism is right, it has to be right all the time.

That's total nonsense, especially when we look at the assumptions -- stated or implied -- that have to work. For example, neoclassical economic policies work given certain conditions that preclude market failure -- information, zero transaction costs, negligible barriers to entry, etc. Even if the conditions aren't perfectly met, they work pretty well a lot of the time (assuming the goal is, say, total GDP, instead of equally shared wealth -- another assumption). Keynesianism economic policies work pretty well when markets aren't working like "normal", or when labor has information about wages of coworkers (and fear of losing the job is less than fear of falling behind). Behavioral economics builds in even more psychology -- though, as it acknowledges itself -- there are different regimes for human thinking and analysis that make a universal model problematic. (You can throw in more coefficient weightings, but at some point it becomes an empirical model, not a theory.)

The absence of a theory doesn't excuse ignorance. We should all know neoclassical AND Keynesian AND Behavioral and perhaps even Hayekian economics -- the assumptions, the implications, and limitations of each "school". We should be able to articulate why we cling to one view or another, and be honest whether our preferred perspective of human nature might not be confirmed in a given situation.

Most of us might not have the time and inclination to carry around nearly innumerable bits of knowledge about cognitive biases, biological-behavioral relationships, sociological models, persuasion tactics, and religious traditions and send some observationally/empathetically derived metaphorical punchcard into the poorly-coded mess of our own minds.

Even if we actually did all this, it might not be worth it. Life is meant to be lived, and some mistakes are a lot more fun than we think. (See: Shitty Dates).

So maybe most of us don't have to. And that makes us no different than where we were, except for one thing:

We embrace the humility that we don't have a grand unified theory, that there might never exist one, and that it's toxic and maladaptive to even believe that one exists.

In other words, go ahead and worry about why your partner/friend/relative/boss is so fucked up and different. But, even if you figure them out, don't count on getting much stuff to be used elsewhere.

You're welcome to try -- especially if you're a therapist, pastor, forensic psychologist, politician, or someone else for whom, I suppose, it's important to see patterns in human behavior. I know I'll keep playing armchair economist and sociologist, just because it's fun and makes me feel like I've got stuff to say that is worth listening to (despite considerable evidence to the contrary).

But I suspect we'd be a lot happier and better at life if we just worked on our relationships with specific individuals, and assume whatever successes or patterns we discover work only for them. That just might keep us out of trouble, and make us better human beings to each other.

MegaMillions Lottery - Team Hater vs Team Dreamer

The comments I see about the lottery today fall in two camps: haters and dreamers. As a dreamy hater, let me try to bridge the gap.

The haters indicate that the probability of winning the MegaMillions lottery is infinitesimally small. How small? Well, this graphic, via Businessweek, compares it to other improbable events.

Note that, once the lottery is won, the chances of dating a supermodel remarkably improve. As experienced mathematicians know, one must be careful to distinguish between independent and dependent probabilities.

I won't show the precise calculation here, but those of you know how to calculate combinations and permutations, it's pretty straightforward.

Haters might also point out that the dreamers are especially delusional to believe that, because the headline amount is actually larger than the odds of winning, some ticket buyers are deluding themselves into thinking that it actually represents a better bet than, say Vegas. The haters say that the dreamers are fools, for they are neglecting the possibility that multiple tickets will have the winning numbers. Even if a person wins, they could find out their winnings are much, much lower than expected if the jackpot is shared, either via a pool or through coincidental tickets. This is actually the plot of an entire Martin episode.

The haters strongest argument is that the expected value for a ticket, even with a jackpot this size, is most likely negative. A Time Magazine article indicates that the expected value estimates vary - one economist says that the expected value is actually positive ($1.23 payoff per $1 ticket), while a computer scientist claims that, based on simulations, the maximum expected payoff for a Mega Millions ticket is $0.69 (for a lottery of about $420 million). Assuming the computer scientist's figures are more correct, then Mega Millions tickets have a strongly negative payoff.

In fact, one of the strongest critiques of state lotteries are that they are a tax on the poor and ignorant. One study even claims the poor spend 9% of their income on lottery tickets. It is true that the vast majority of the revenue that feeds the lottery comes from the poor - the poor play more in both percentage and absolute terms.

Haters also claim that it promotes the belief that one can become rich through anything other than hard work, (or a lucky womb, or ridiculously clever tax attorneys).

The dreamers basic defense is that it's a combination of fun and hopeful.

It's fun to think about being wealthy, and even joke about the whole mania with others. It's fun to go to a store and chat in line with other people waiting for a ticket. It's fun to watch people and their "systems". It's fun to suspend disbelief - if it's not for you, then you must not like books, novels, or the 2012 Republican primaries.

Proponents of the premise of The Secret-- the premise of the Law of Attraction, if not the book itself--say that aspirational thinking can help clarify goals and enrich life now. Even if a person doesn't win the lottery, dreaming about what they would do with one, two, or ten million dollars is one step closer to actually planning and implementing it.

My behavioral econ is rusty, but I suppose it boils down to our ability to magnify certain low probability events (while marginalizing others). It's evolutionarily adaptive - seeing someone get killed by eating a funky mushroom might turn off the entire tribe from them.

More fundamentally, there's also the fact that the utility function of money doesn't necessarily need to be continuous. There are life-changing changes in wealth, and not-life-changing changes. The lottery, especially this one, has the potential to be life changing.

One final quantitative note: the rule of thumb for lotteries is that the lump sum is usually half. However, it looks like the lump sum offered is about 1.26%. This is pretty damn low, and reflective in general of low interest rates. Almost nobody takes the annuity anyway, but, when one considers the likelihood of inflationary pressures sometime in the next decade, rising interest rates, and higher taxes in the future, it's a particularly good time to be a lottery winner. Not that it's ever really a bad time. But if you win, send Ben Bernanke and the inventors of the mortgage-backed security and credit default swap some chocolates. The 2008 financial crisis made you considerably richer than you would have been otherwise.

Good luck folks! If you don't hear from me in the next couple weeks, that means I'm living on my own island somewhere.

Daily Show Interview with Jim Cramer

Ok, I'm going to blog about the Daily Show interview with Jim Cramer, because I hate to feel left out.

It was a great interview. But Jon Stewart didn't win. And Jim Cramer didn't lose.

We all lost, some time ago. And we continue to lose.

Roland Fryer on the Colbert Report

Roland Fryer, economist at Harvard, talks with Stephen Colbert about cash incentives for good grades in schools.

It's a hilarious interview - unlike a lot of people who come on this show, he is absolutely ready for Stephen's antics. He's too cool for school (Harvard, anyway). I'm starting to believe the observation that Harvard never tenures its assistant professors, thereby preserving its competitive advantage in stodginess and ossification. (Not really - I'm just mad they rejected me twice.)

More seriously, the question of incentives for good grades touches upon the idea of incentives in general in areas where the primary social structure is based on norms and not free-market capitalism (at least on the face of it). It's an interesting idea, and I hope it works. I'll be writing more about this later - in particular, when you attempt to create a bonus incentive scheme, there is a presupposition that the principal-agent relation is limited by motivation on the part of the agent. Is this an issue of motivation, or of capacity? To what extent can the added motivator effectively change capacity over any reasonable time period? What are the lessons to be learned from areas in the service sector where financial incentives are applied in situations where actors may be governed by social-welfare utility functions? And finally, what are the potential implications for the parent-child relationship - if external actors are seen as providers of material well-being, will this further erode the family, or simply offer a superior alternative and success model for children in families with failed parents?

One Reason Why Psychology Matters: $BILLIONS$

The most recent edition of the Atlantic (January/Feburary 2008) included a brief blurb about a curious result from a Cornell Johnson Business School research paper. This paper found that sellers can make buyers perceive that a cost is smaller than it is by replacing zeroes with numbers. The authors suggest that this comes about because we use precise numbers to measure small quantities, and rounded numbers to measure large quantities - consequently, a number like 391,534 will seem smaller than 390,000. Examining 27,000 real-estate transactions on Long Island and in South Florida, they found that having at least one zero lowered the sale price by about 0.72% compared to houses listed at a similar price. Three zeroes lowered it by 0.73%, and each additional zero lowered it by 0.39%.

I can think of a couple other reasons that might be the case (For example, buyers might understand that sellers would likely round up rather than round down. Or, sellers might believe that the more precise number reflects careful pricing and analysis and is more reliable than the rounded number.) Whatever the reason, this result is an example of the success and value of behavioral economics.

Behavioral economics is a recent effort spearheaded by psychologists and economists to incorporate the results from social psychology into microeconomics models. in turn, features these microeconomic models are being incorporated into macroeconomic theory.

The recent wave of foreclosures provides another example of behavioral economics at work. The NYTimes has an article titled "A Reality Check for Home Sellers" (Sept 23, 2007, available at http://www.nytimes.com/2007/09/23/business/yourmoney/23view.html). Home buyers experience loss aversion ; that is, they feel losses more strongly than gains.

One consequence of this is that they will leave homes on the market at or above the price they paid for it, even after it is clear that their home is no longer worth as much. This is deemed "irrational" by classical economics, which states that the price a rational consumer offers ought to simply be whatever the market price is for the home. Another consequence is that an unsold home can prevent an individual from moving and taking a better-paying job elsewhere. (This may be particularly important if the drop in housing prices is in part due to the closure of a local employer.)

Studies show that individuals typically feel losses more strongly than gains by a factor of 2 to 2.5 to 1. This means that, all other things being equal, the average person would wager $100 on a coin toss only if she would win $200-$250 if she called it correctly. The ancients were right when they said, "A bird in the hand is worth two in the bush."

The strength of Behavioral Economics is growing, as evidenced by another NYTimes article ("Calculating the Irrational in Economics, Jan. 14, 2008) http://query.nytimes.com/gst/fullpage.html?res=9407E1DC1F3BF93BA15755C0A9659C8B63) and the popularity of the book Freakanomics. It was by far one of the most interesting and valuable courses I have taken in my life (and I've been in school for 19 of my 24 years). Check it out - even if it doesn't make you a fortune, it might explain why you aren't socking away money in your 401(k), or why you waste so much money on gym memberships, or why procrastination hurts so good.

Speaking of which, I've got some work to do...