Tuesday, November 26, 2002

Things I don't understand: Economics

The other day at the 7-11 the man behind the counter laughed at me because I was sort of just throwing money out of my wallet. He said something about it and I said "Well, it's just paper. Right?" He answered "Yes! Philosophically, it is just paper."

The 7-11 guy (who is from Middle East or Southeast Asia or something and probably has a Ph.D. like most immigrants from there working crap jobs) was amused by my witty little joke. But I'm afraid I really meant it. Money means almost nothing to me unless I truly am on the edge of bankruptcy or imprisonment. As I've said before, I have no money over and above what it takes to pay my bills. This is a problem in my life since eventually charge card companies will figure out that I'm just not good for the money they seem to be giving me so that I can eat more than Goya black beans out of a can. No, OK. So that I can go to Europe and buy fur coats off Ebay.

To me, it's like 'free money!' I call it 'backwards saving.' Yet, the tiny bit of rationality left in my tiny and drug-damaged brain makes me realize: Hey, no one else is doing this. Or at least not in such a devil-may-care way. Hence, there must be a catch...somewhere.

I make thousands of bad economic decisions every day. No parking? Have to leave 15 minutes to take the bus? Hey! I know. I'll park in the no parking zone and use that fifteen minutes to blend my eyeshadow and read my junk mail. The amount of video late fines I incur could send a kid to college.

This blog attests to the fact that I am overly impressed by abstract concepts. So it isn't as if I can't understand anything abstract. However, money is just a little too abstract for me. It just doesn't seem real. I never keep track of it and often lose checks, etc. I get parking ticket after parking ticket. I realize many people run out to the meter to make sure they don't get a ticket. Unfortunately for me, I don't even remember that I brought my car or where it is parked. I live completely in the moment. (Actually, I started this blog to help me understand time--another abstract notion that I fail to grasp sufficiently to run my life well. So a parking meter is especially beyond me.)

I read today that the winner of the nobel prize in economics has finally brought economics a bit closer to how things appear to me.

Economic research often assumes that people are motivated primarily by material incentives and make decisions in a rational way. They are assumed to assess the state of the economy and the effects of their behavior by processing available information according to standard statistical principles. This approach has been formulated axiomatically in so-called expected-utility theory, which is the predominant economic theory for decisions under uncertainty.

The prevailing view in psychology in general, and cognitive psychology in particular, is to regard a human being as a system that codes and interprets available information in a conscious manner, but where other, less conscious factors also govern decisions in an interactive process. Such elements include perception, mental models for interpreting specific situations, emotions, attitudes and memories of earlier decisions and their consequences.

In extensive research on human behavior based on surveys and experiments, Daniel Kahneman and other psychologists have called into question the assumption of economic rationality in some decision situations. Real-world decision-makers frequently appear not to evaluate uncertain events according to the laws of probability; nor do they seem to make decisions according to the theory of expected-utility maximization. UNQUOTE

According to the Nobel website human beings use rules of thumb rather than accurate estimations based on probability theory. (No duh! They're just figuring that out now?. Oh well, I guess I'm glad someone with a Ph.D. noticed.)

Isn't the cog psy definition of human being classic? "[A] human being as a system that codes and interprets available information in a conscious manner, but where other, less conscious factors also govern decisions in an interactive process." Gee, I guess this explains why my childhood friend Chris lit those warehouses on fire. It must have been those 'less conscious factors.'

Here's what the newspaper said about Nobel winner: It said that he found that people made irrational economic decisions such as going 15 minutes out of their way to save $5 on a $25 calculator but not going 15 minutes out of their way to save $5 on a $125 coat.

Well, I guess that's better than spending an hour searcing local cafes for a free New York times while one's car gets a $25 parking ticket.

I guess economics always seemed like a bunch of crap to me for the following reasons (1) It assumes that people make decisions according to a very truncated and mathematical model of self-interest and then makes predictions about behavior on this faulty model. (2) It builds in values without arguing for or reflecting on those values. E.g., the coat. They can't explain why some people might say: I want THAT coat. Yes, it costs $5 more. But I just want THAT one. But there are worse examples.

And I came to this conclusion simply through a single argument I had with an economics graduate student at a party once! I may not understand many things but I do know that if you beat someone in an argument their discipline can't be all that great, right? Right?


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