Chutes and Ladders [UPDATED AGAIN]

May 12, 2009 at 10:03 pm (By Amba) (, , , , )

Okay, since economics is what we find ourselves talking about, I’ll bite:  here’s an aspect of economics, contentious and critical to economic policymaking, that strikes me as important and fascinating.

It’s the study of how impulses, incentives, and consequences shape human behavior.  I think it’s called behavioral economics:

Economic Man makes logical, rational, self-interested decisions that weigh costs against benefits and maximize value and profit to himself. Economic Man is an intelligent, analytic, selfish creature who has perfect self-regulation in pursuit of his future goals and is unswayed by bodily states and feelings. And Economic Man is a marvelously convenient pawn for building academic theories. But Economic Man has one fatal flaw: he does not exist.

When we turn to actual human beings, we find, instead of robot-like logic, all manner of irrational, self-sabotaging, and even altruistic behavior. […]

Nonetheless, neoclassical economics sidelined such psychological insights. As recently as 15 years ago, the sub-discipline called behavioral economics—the study of how real people actually make choices, which draws on insights from both psychology and economics—was a marginal, exotic endeavor. Today, behavioral economics is a young, robust, burgeoning sector in mainstream economics, and can claim a Nobel Prize, a critical mass of empirical research, and a history of upending the neoclassical theories that dominated the discipline for so long.

This new field doesn’t just pick the brains of psychologists (to whom, one senses, it could give a whole new useful life), but those of neurologists, and, implicitly, of sociobiologists, who view these hard-wired behavioral mechanisms as winners of the competition to survive:

“Economists specialize in taking really complex things and boiling them down to simple principles,” says David Laibson. “So, rather than treat the brain as billions of neurons, or trillions of neurotransmitters, we want to ask, what is the right level of analysis? It turns out that the brain has two key subsystems. One, the limbic and paralimbic system, rules the intuitive and affective parts of our psyches. It’s shared by all mammals and seems to do a lot of emotional cognition—how we feel emotionally, how we respond to other humans, or to being treated unfairly. This system seems to function unconsciously; we don’t have access to it and maybe can’t even control it. It’s experiential and rapid in function.

“Contrast that with the analytic system, centered in the frontal and parietal cortexes,” Laibson continues. “It controls a lot of the thought processes we learn to do: calculated, conscious, future-oriented thinking. It’s not based on past experience; you could have the rules of a brand-new game explained and the analytic system would be able to figure out how to play.”

Brain researchers have shown that an interaction of the limbic and analytic systems governs human decision-making. The limbic system seems to radically discount the future. While the analytic system’s role remains constant from the present moment onward, the limbic system assumes overriding importance in the present moment, but rapidly recedes as rewards move into the future and the emotional brain reduces its activation. This explains impulsiveness: the slice of pizza that’s available right now trumps the dietary plan that the analytic brain has formulated. Seizing available rewards now might be a response pattern with evolutionary advantages, as future benefits are always uncertain.

There it is right there:  the seat of no-tomorrowism!

Strangely, even more interesting to me than the study of human motivation (which is only going to end up proving what the wise have always known, verifying millennia of maxims and canny clichés) is the engineering angle:  the study of how to motivate humans.  It interests me, I think, because it’s what so much of the disagreement between right and left comes down to.  What optimizes motivation?  Struggle or security?

America, relatively speaking, lacks a social safety net.  There’s a feeling — I’ve felt it — that you have to succeed to survive.  It’s very starkly Darwinian:  there isn’t much middle ground.  Is it this anxiety that spurs us on to great heights as a nation?  Or does it actually sap creativity, condemning all but the entrepreneurially fierce and fit to waste their lives and gifts struggling to get by?  Does assuring people’s basic survival, at the root of Maslow’s hierarchy of needs, free them to climb that tree and be curious and creative?  Or does it take the edge off and make them lazy and dependent?  I don’t know the answer, but suspect it’s not totally either/or.  On the one hand, our nervous systems are tuned to peril and triumph.  On the other hand, beyond a certain degree of stress we lapse into “learned helplessness,” the depressed state of experimental animals that have learned there’s nothing they can do to predict, avoid, or prevent random electric shocks.  The Maslovian view posits way too much Rousseauian optimism about human nature.  The social-Darwinian view selects for manic extraversion, creating a bit of a one-note culture.  Introverts must medicate to keep up.

A related question is:  what is definitely in society’s collective interest to provide, overriding concerns about the effects on individual self-reliance and moral fiber?  The common defense, clearly.  The internal version of defense — law and policing, the maintenance of public order.  Sanitation, a no-brainer.  I think a strong case can be made for education:  not that the public sector should monopolize education, but that it should make it available to all as the default.  Very much in the collective interest — anyone care to count the ways?  Scientific competitiveness (from Sputnik to the new spur of globalization) is only one.

Far more controversial:  various forms of the basic income guarantee, and health care.  To many liberals it seems self-evident that providing single-payer health care is in the collective interest.  Conservatives say that market incentives make American health care, for all its problems, much more innovative and effective.  You saw the arguments that Natasha Richardson would not have died in the U.S.

Incentives and consequences are the most fascinating part of the picture, on every level.  The elusive preventive aspect of health care, for instance.  This is one of the areas where the limbic system presents a major stumbling block.  When the supermarket is packed with snacks and advertising issues perpetual siren songs for supersized this and that, how do you help the analytical forebrain override the impulse with remote concerns about longevity, economy, and even vanity, a limbic reward that requires an analytical abstinence?  The limbic brain doesn’t get the time lag between eating a pint of Ben & Jerry’s and gaining a pound.

And then, when there are penalties for good behavior, and rewards for bad behavior, what do you think you’re going to get?

Front page story of today’s NYT discusses the small, well managed, profitable, risk averse banks.

Indeed, as Chris Whalen has so frequently noted, the vast majority of banks in the United States are Triple A by his standards. Its just that these 6,500 banks hold a minority of the total deposits in the nation, with biggest dozen or so banks sitting on 65% or so.

Talk about burying the lead: The Times also noted — in the very last paragraphs — how the big incompetent banks and their very pricey bailouts are screwing these small healthy banks:

“At DeMotte [State Bank, an 11-branch operation in the northwest part of Indiana, Bank President] Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.

Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.

“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”

Thus, yet another reason why these bailouts are so absurd: They punish the risk averse and reward the irresponsible . . .

Why do we have different standards for large institutions and little guys?  I’ve long been fascinated by what I think of as “selective Darwinism” — applying the stringency of survival of the fittest to some categories while bailing out others.  (I guess you could argue that getting too big to fail is a form of fitness, a special case of the general point that mega-success is the surest path to survival.) Our thinking, both right and left, seems extremely muddled in this regard.  Incentives and consequences — chutes and ladders — are what it’s all about.  Both the sages and the neurologists will tell you that.

I wish I could do a better job of thinking this through, but I’ve already stolen too much time from work.  Please jump in.

UPDATE: And speaking of incentives, what do you think of paying kids to learn, promoted by Newt Gingrich?

[T]he Learning Makes a Difference Foundation […] focuses on innovative learning programs, such as Learn, Earn and Achieve, which offers students financial rewards for studying math and science.

[…P]reviously uninterested students not only improve their math and science scores but discover the thrill of learning for learning’s sake.

The pilot program is called Learn, Earn & Achieve.  It may not be idealistic — it turns my vestigial hippie stomach, sure — but it’s realistic, isn’t it?  Remuneration is one of the reasons why we do what we do.  Getting up, getting dressed, and “going to school” in the morning already trains you for getting up, getting dressed, and “going to work” in the morning.  School is a kid’s job.  It has the same structure.  For better or worse, it’s training for adult life in our society.  Why not teach them that good work brings good pay?  Instead of an allowance?  (And instead of the basic income guarantee?)  Of course, then parents would have to help them decide how much of it they should save for college tomorrow and how much they can blow on gear today.  That could be good training too.  What do you think?

I guess the part of it I might question is that last:  discover the thrill of learning for learning’s sake.”  Would kids who got paid for learning ever see any point in doing it voluntarily for free?  But then, school as it is today doesn’t exactly consistently convey the thrill of learning for learning’s sake.  Raise your hand if you enjoyed the Great Novels you had to read?  The thrill of learning for learning’s sake depends most on the quality of the teacher.

UPDATE II: @newtgingrich “Learning IS the most important civil right in the 21st century and it should apply to every american of all ages to compete with china”

And, as stated above, in society’s collective interest to provide, for many reasons, scientific competitiveness being only one.  Think of the advantages of having an informed, critically thinking populace — or more to the point, a populace with the skills to inform itself.  Or, even more to the point, think of the disadvantages of not having such a populace.

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