Fresh Directions in Economics
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Presentation on growing interest in heuristics, networks and complexity in economic thinking. Designed for VI Form economists
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Fresh Directions in Economics
- 2. Happy to help with UCAS Advice and Support in your Economics G.riley@etoncollege.org.uk @tutor2u_econ
- 3. Economic Crisis The Crisis Has Lasted Longer Than WW1
- 4. Comfort in old ideas and theories Comfortable choices are hard to let go
- 5. Sunk Cost Fallacy at Work!Economists can suffer from the sunk cost fallacy!
- 6. What is taught often does not match reality
- 8. “I can’t understand why people are frightened of new ideas. I’m frightened of the old ones.” John Cage
- 11. • Humans are different from Econs! • Social animals • Emotional • Habitual • Satisficers • Lack self-control Domain 2: Domain of conscious, effortful thought System One– The domain of intuitive responses
- 13. “The world is full of complex products and services. Naive supply and demand analysis can only take us so far in understanding how their prices are set”
- 15. Heuristics
- 16. We use mental short-cuts all the time Many of them operate in our unconscious
- 17. “I normally find what I need without scrolling down”
- 18. How can I catch a ball as well as Fido?
- 19. 1/ Fix eye on ball 2/ Start running 3/ Adjust running until the angle of gaze remains constant The Gaze Heuristic
- 20. The Gaze Heuristic (2)
- 21. Heuristics for uncertain financial markets – asset allocations?
- 22. Heuristics for uncertain financial markets – asset allocations? asset allocation heuristic = 1/n i.e. allocate money equally to each of n fundsGerd Gigerenzer
- 23. Heuristics are designed to get us through life Most people and businesses SATISFICE!
- 24. “If nothing bad happened last time, do what I did last time.”
- 25. “If nothing bad happened last time, do what I did last time.”
- 26. “If nothing bad happened last time, do what I did last time.”
- 27. “from heuristics to habits”
- 29. “top brands play capitalism’s long game”
- 30. “the conscious brain is no longer listening”
- 31. “everything is contextual ..so change cues”
- 33. Networks are vital in understanding behaviour
- 35. Networks are vital in understanding behaviour A person can and often does decide to change his or her preferences simply on the basis of what others do
- 36. Networks are vital in understanding behaviour
- 37. Copying behaviour in networks is intuitive
- 38. Smart businesses mix economic & social incentives
- 39. Paul Ormerod
- 41. NETWORK SHARING Vodafone and Telefonica FUEL CELL RESEARCH Toyota and BMW Co-operative game theory in the real world
- 43. “The master-economist must possess a rare combination of gifts ... He must be a mathematician, historian, states man, philosopher – in come degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. No part of man’s nature of his institutions must lie entirely outside his regard. “ Macroeconomics is having a tough time of it
- 44. Most economists do not make forecasts! “Prediction is difficult - especially about the future.” Niels Bohr
- 45. Bank of England forecast errors (relative to forecasts made one year earlier) Over-estimating growth, under-estimating prices
- 46. Oil and Gas Prices Currency Fluctuations Political Surprises Volatile Weather Patterns Tough to forecast in turbulent times….
- 47. Oil and Gas Prices Currency Fluctuations Political Surprises Volatile Weather Patterns Deficiencies in Modelling Structural Economic Breaks More True Randomness? Interconnected economies – signals and noise
- 48. Wait and see before investing Lend to businesses with proven track record Save more now Stick to tried & tested value products With uncertainty .... Heuristics can take over ..... This poses big challenges for macro policy-makers
- 50. Riskier and more satisfying to try new directions! Follow your nose … leave the syllabus behind!
- 51. Kate Raworth Kalle Lasn Nate Silver Esther Duflo Paul Krugman Ha-Joon Chang Richard Koo Tim HarfordAl Roth Cesar Hidalgo Hal Varian
- 52. Happy to help with UCAS Advice and Support in your Economics G.riley@etoncollege.org.uk @tutor2u_econ
- 53. Cesar Hidalgo’s work focuses on improving the understanding of systems using and developing concepts of complexity, evolutio n and network science. “Capabilities” a cornerstone for development
- 54. Cesar Hidalgo’s work focuses on improving the understanding of systems using and developing concepts of complexity, evolutio n and network science. Hidalgo’s Map of Complexity reveals much
- 55. Plenty of New Thinking in Growth & Development Economics
- 56. Fresh Perspectives on Development & Growth Cesar Hidalgo Paul Romer Esther Duflo Kate Raworth Justin Lin Ed Glaeser Paul Collier Ha-Joon Chang
- 57. Doughnut Economics Re-designing growth Planetary Boundaries + Social Foundation - a safe and just space for humanity Stay within the edible part of the doughnut
- 59. Leave the Syllabus Behind! Really Ambitious Reading Student Blogs / Mag / You Tube Channel Enrol Students on a MOOC Student-run Working Walls Summer Schools Inter-School Debates Run a Symposium Student Society / Academic Visits Essay Competitions Skype Seminars Academic engagement with Twitter Academic Challenge and Enrichment Suggestions
Notes de l'éditeur
- Textbook economics dominates the syllabus taught at AS and A2 level but the assumptions that lie beneath the majority of this theory are simplifications that frequently close to capturing the choices and behaviours that we see around us every day. This presentation will look at a few of the ideas being developed outside of the mainstream. Ambitious students who want Economics to have a stronger connection with the real world might choose to leave the syllabus behind and explore areas of research that will take years to find their way into conventional courses.
- Students at AS will have covered some of the causes and consequences of recession in advanced economies such as the UK. The GFC that engulfed much of the rich world from late 2007 onwards has lasted nearly six years and is not over! One effect has been a fundamental challenge to the ideas of standard neo-classical economics upon which much of conventional macro is built. Modern macro has attached too little importance to the effects of uncertainty, complexity, network behaviour and systemic risk. Models of the economy have been found to be flawed.The Queen – on a visit to the LSE in 2007 – famously asked why no one had seen the crisis coming?“the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole”
- Once ideas and theories become embedded into the mainstream they can be very hard to let go – a form of loss aversion can take place
- When somebody's sacrificed or invested a great deal in a cause or project, they tend to become irrationally dedicated to it. This applies even (or perhaps especially) when the costs invested can't be recovered
- The AS and A2 syllabus is packed full of ideas drawn from standard neo-classical economics – generations of students have been taught it – and don’t expect that to change soon! You’ll need to know this stuff really well to score highly in exams – but this session is not about exams – it is about heading out into emerging areas of decision theory, behavioural and network economics. It is about challenging and dropping many assumptions.
- How many of these economists can you name?
- One of the positive spill-overs from the crisis has been a greater willingness to challenge assumptions – sadlymost policy-makers and conventionally trained economists are reluctant to change their models. This is not to say that heterodox ideas have their limitations, more work needs to be done in testing them – but the financial crisis is fast-forwarding new models of agent-based behaviour and acting as a cataylst for innovative business models to gain ground.
- It is unlikely that many of these words / concepts are taught in schools – but they are a better visualisation of real world economics that what you will find in any textbook!
- The heuristics through which System 1 makes many decisions are reinforced by affective memory structures; networks of neurons that are associated with things the brain recognises in the outside world, and with the emotions that it feels in response to them
- Many economists challenge standard theories of rational, maximising behaviour – Daniel Kahneman is not even an economist! He is a psychologist but his work in behavioural economics was recognised when he was awarded the Nobel Prize ten years ago. His major work is Thinking Fast and Slow – it remains a best-seller in bookstores around the world and is full of interesting examples of cognitive biases in our behaviour!
- Conventional economics assumes that we are rational, calculating, maximising agents who respond to incentives such as price and quality when making decisions. The reality is different. Emotions are crucial – for example the choices made under hot and cold states – Dan Ariely is a well known behavioural economist who has produced some superb work on this.
- We live in an incredibly complex world with billions of different products and genres of products available for us to buy. Simple supply and demand theory is not best suited to understanding resource allocation in markets – which can be everywhere! How does one construct the supply and demand conditions affecting equilibrium in the legal market for trading human organs? Or in the market for taking other people’s speeding points?
- In this short presentation we will look at a small number of behavioural ideas that try to capture the reality and complexity of modern markets and economies. These are:HeuristicsNetwork effectsHerd behaviourStructural breaks in economies
- A heuristic is a mental shortcut that allows people to solve problems and make judgments quickly and efficientlyAsk: How many people are in this room?Get a student to catch a tennis ball thrown at themAsk: When do go for a meal – how do you decide how the bill is paid?When there is uncertainty - you need smart rules of thumb and good intuitions based on theseThis is different from playing the lottery or going to a casino
- Heuristics give us a direction of travel when making a choice, habits inscribe it inpermanent marker
- Copying behaviour by agents is intuitive and widespread – it is often rational to copy the behaviour of others
- Co-operative and collaborative behaviour by businesses an increasing feature of many markets – survival and profitability in difficult times
- There’s a well-known joke about economic forecasting. Albert Einstein reaches the pearly gates of heaven and meets three people. He asks them all for their IQ. “190”, says the first. “Oh good,” says the great man, “we can talk about general relativity”. When the second says “140”, Einstein tells him he’s looking forward to debates about the pros and cons of the nuclear deterrent. The third, peering at his feet and mumbling slightly, says “mine’s only 50”. “What will the budget deficit be next year?”
- Uncertainty – many people and businesses fall back on heuristics
- In this short presentation we will look at a small number of behavioural ideas that try to capture the reality and complexity of modern markets and economies. These are:HeuristicsNetwork effectsHerd behaviourStructural breaks in economies
- My strong advice for ambitious students is to have the confidence to let go of the syllabus – you shouldn’t be mentioning it anyway when you are writing university applications. Adopt a critical and an ambitious approach and try to see the subject in a different context – it will surprise and delight you!