Broken Symmetry

Facebook and Ennui

Rick Bookstaber gives an interesting take on the alternative trajectories of society and Facebook over the next few decades:

I am not going to enter the discussion of how secure Facebook's position is, or how much advertising it can generate. Insread, I am going to discuss the implications of Facebook for our individuality as we increasingly embrace Facebook and similar systems that replace real interaction with the virtual, and the implications of this world for the success of Facebook.

The basic point is that either the world changes and Facebook become marginalized, or Facebook continues [to] thrive and we live in a world of existential alienation. ...

Interestingly, Facebook wins relatively few friends in Japan. I wonder how Bookstaber would interpret this in view of his thesis.

Henry Manne on the Limitations of Behavioral Economics

Here:

The problem in traditional economics style (I think “style” a more appropriate word here than “methodology”) is a general failure to keep separate that part of economic assumptions which pertains to individual behavior and that which properly pertains to aggregate behavior. About the latter, BE has very little to say (here I am talking exclusively abut microeconomics, as I am really not sure how much relevance BE, aka psychology, has to macro areas), and Alchian simply carries the day.

Part of a Truth on the Market Symposium on the same.

When Choice Architects Turn Evil?

From the Food Educate blog:

One of the most important pieces of information in a nutrition label is the serving size. Many people look at the calorie count, and are happy to see low numbers. But what they don’t notice is that they are consuming twice or more than the stated serving size. Which means twice the calories, twice the fat and sodium, etc.. (but on the bright side – also twice the minerals & vitamins.

See earlier post on choice architecture here.

Utility is Local and Ephemeral

From a commencement address by Ben Bernanke:

Your sense of how well off you are economically depends a great deal on your expectations and aspirations, which in turn are largely formed by the community in which you live.

Via Tyler Cowen. Not new to readers of B.S., but encouraging to see also is the reference to Csikszentmihalyi's theory of flow:

Another factor in happiness, perhaps less obvious, is based on the concept of "flow."12 When you are working, studying, or pursuing a hobby, do you sometimes become so engrossed in what you are doing that you totally lose track of time? That feeling is called flow. If you never have that feeling, you should find some new activities--whether work or hobbies.

Steve Randy Waldman's Pithy Wisdom on Investing

In responding to commenters at Interfluidity:

As an investor, one always should ask oneself the question, “why would taking this position be more beneficial to me than to a counterparty willing to escape or oppose it?” Here are three answers: i) Personal situation: the asset is more valuable to me than to others (I need wheat in two months!); ii) speculative: I simply know better than my counterparty. iii) hedging: I suspect the average counterparty is overweight this exposure, and is willing to offer what would be a decent value to someone whose portfolio is uncorrelated with the exposure. Unless one assumes both efficient markets and homogenous investors, all three of these things are reasonable to think about, and I think successful investors do think about them routinely. If an investor does not believe herself to have special information about the “fundamental” value of a contract or commodity, she still may believe that hedging demand for a product is one-sided, and that would tilt in favor of taking the other side of that trade at the margin. Obviously, suspecting that wheat farmers need to hedge wouldn’t be sufficient motivation for buying August wheat contracts. But when choosing between a menu of imperfect investments, the existence of imbalanced hedging interest can be important information. With standardized products, that is something one can try to learn and understand.

Read his series of posts on Goldman. Best commentary I've read so far.

What would Gene Fama say?

Since the last post happened to relate to Buffett's purchase of Burlington Northern, I couldn't help mentioning an investment opportunity that's had my attention of late:

A train ferry is a ship designed to carry railway vehicles. Typically, one level of the ship is fitted with railway tracks, and the vessel has a door at the front and/or rear to give access to the wharves. In the United States, train ferries are referred to as "car ferries". The wharf (sometimes called a "slip") has a ramp, linkspan or "apron", balanced by weights, that connects the railway proper to the ship, allowing for the water level to rise and fall with the tides. For an example of a specialized slip to receive railcars see ferry slip.

While railway vehicles can be and are shipped on the decks or in the holds of ordinary ships, purpose-built train ferries are much quicker to load and unload, especially as several vehicles can be loaded or unloaded at once. A train ferry that is a barge is called a car float.

Burlington Northern might or might not own a few of these. But given the investment Buffett is putting into railways, one can't help wondering why some rail ferry owners are selling at a discount.

From The Marketplace of Ideas by Louis Menand

I will almost certainly have more to say about this book, which represents extraordinary vision. The conceptual scheme fits very well within the ontology of systems theory -- "knowledge" is an evolving system of neural networks, social networks, and the phsyical objects used to mediate communication among them.

For now, try on for size this quote from the introduction:

In 1908, the Cambridge classicist F. M. Cornford, in his satirical guide for young academics, Microcosmographia Academica, advised that the basic rule of faculty governance is, "Nothing should ever be done for the first time."

Homophily and Mimetic Desire

From Rene Girard:

My work has often been presented as a discussion of archaic religion through comparative anthropology. Its goal is to shed light on the process of hominization: the fascinating passage from animality to humanity that occurred thousands of years ago.

In all of this, my hypothesis has concerned mimesis: Because humans imitate one another, they have had to find a means of dealing with contagious similarity, which could lead to the pure and simple disappearance of their society. The mechanism by which they have done that is sacrifice, which reintroduces difference into a situation in which everyone has come to resemble everyone else.

Seemed topical given the recent post on homophily and influence.

See also this earlier post relating mirror neuron's to Girard's theory of mimesis.

Remembering Douglas McGregor

From the Economist:

Close to Abraham Maslow, and greatly influenced by him, McGregor became a significant counter to the thinking and influence of scientific management. His central idea is that there are two fundamentally different styles of management. One of them he called Theory X and the other Theory Y (see article). Theory X is authoritarian, assuming that individuals only ever work reluctantly. Theory Y is liberating and assumes that people will do almost anything if they are committed to the overall goals of their organisation.

Weighing in on the EMH Debate: Does Behavioral Analysis Resolve the Problems?

See comments from the Economist, DeLong, Yglesias, and Hansen.

The problem with EMH is with its interpretation of the principle of revealed preferences. Unfortunately, the same problematic interpretation often applies to behavioral critiques of EMH. Here's an excerpt from an article I have forthcoming in Intellectual Asset Management:

There are two catches to using preferences "revealed" by market prices to measure individual preferences. The first catch is that one has to watch over a period of time to see the preferences revealed, which means assuming that the preferences do not change during the period of observation. The second catch is that in practice, no large data sets have recorded the revealed preferences of individuals. Only aggregate data, such as consumer price indexes and average household spending over several decades, has been available. Taken together, these catches mean that empirical tests of the rational hypothesis take as a given that preferences do not change in time and that only information about the average preferences of a group is necessary to measure and predict individual preferences.

But preferences do change over time. New books are written, new paintings are painted, new inventions are conceived and reduced to practice. Moreover, no actual person may exist who embodies the average preferences of a large group. Especially if there are outliers, the average preferences of the group may be quite different from the preferences of most individuals within the group.

Unfortunately, many advocates of “behavioral economics” and “bounded rationality” seem to have made the same mistake as the EMH by interpreting the rational hypothesis as a hypothesis about individual behavior. Although it is true that individual behavior often deviates predictably from what might (mistakenly) be called “rational” given certain individual preferences, observations of individual psychology cannot usually provide a proper test of the rational hypothesis. In practice, it has been difficult to verify clear violations of the rational hypothesis. There is often an argument over whether what might be called irrational behavior results instead from rational preferences specific to a particular time and place. For example, although it might seem irrational for a group to demand higher payment for a good already owned than the same group would be willing to pay for the same good not owned, this asymmetry might be explained as rational in view of the consumer surplus in ownership for the group. Because the mechanism traditional economic theory uses to measure preferences is the observation of group behavior, arguments about whether the behavior of a particular group is rational or irrational can quickly devolve into circularity.

This is not to say, of course, that psychology offers no insight to economics. In fact it seems quite likely now that evolutionary psychology and neurology will offer insights into the origins and explanation of observed group behavior. Such insights are not as relevant, however, to the problem of measuring and managing large groups over long periods of time. Systems theory takes a different approach to rehabilitating economic theory.

So the answer is not really. Theories of psychology are very useful and important for business people and leaders in general. But they are not the kind of theories designed to address large-scale, long-term behavior of groups. This is what economics and rational expectations theory has done for the past few decades. It has failed us because behavior that was once uncorrelated, and hence gaussian, has become more interdependent, and hence fat-tailed.

The way forward for us is to recognize that rational expectations are correct only at certain limits, namely, of ergodicity and uniformity in individual preferences. Rational expectations theory is a mean-field approximation. But when we have more granular data about individual dynamics, there's no reason for us to be content with mean-field approximations. Micro and macro theorists need to build nonequilibrium statistical models that are capable of producing both the gaussian and the fat-tailed dynamics that are observable in real markets. Systems theory represents the set of mathematical models that are most narrowly tailored to this goal.

Creating My Own Create Your Own Economy

On Saturday, I received my hard copy of Tyler Cowen's latest work of popular economics, Create Your Own Economy: The Path To Prosperity in a Disordered World. Although a work of popular nonfiction, which read easily over the course of a few hours this weekend, this book is chock full of creative insights into what might be called an alternative economic vision of social life. I say "alternative" because until recently most academic economists had confined their interests to finance rather than culture, although Cowen is careful to trace the threads of Adam Smith, F.A. Hayek, and Thomas Schelling (among others) from which his unique vision is woven together. In the sense of developing this alternative vision, this book is actually the continuation of his last, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. In both books, Cowen assumes the point of view of individual consumers; his data is drawn from individual stories and experiences; his understanding of group behavior and consumption are correspondingly richer with local and temporary detail than most economic analyses of culture. Read in conjunction with Schelling's Micromotives and Macrobehavior and Robert H. Frank's The Economic Naturalist, one can see how the methodologies of Thomas Schelling are facilitating a gradual evolution in economic thought among his students and (thanks to their attention to the needs of non-economists), the public at large. All are recommended reading.

A central premise in Create Your Own Economy is that technology is fostering a more "autistic" lifestyle. Cowen envisions "autism" as a superior ability to filter out particular bits of information from the barrage of stimuli we experience in everyday life, to absorb those filtered bits, and to imbue those disparate bits with meaning by ordering and re-ordering them into a collage of our own creation. John Milton would be proud. It is part of Cowen's project in this book to encourage a more positive definition of autism, a definition that focuses on the cognitive strengths of people who might otherwise be called autistic only because of their inferior ability to communicate in traditional social settings. We might even call this "positive abnormal psychology." Although this aspect of the book is interesting, and is sure to get attention from both the autistic community and the community of psychologists and clinicians who specialize in working with people diagnosed with autism, my focus as reviewer will be on how this vision of culture could be seen through the lens of science. More specifically, I'm going to explain how Cowen's vision of a more creative economy fits with the systems theory that has been the theme of Broken Symmetry. I think it would give Prof. Cowen pleasure to see somebody using his own work as a source of information to be re-ordered within the particular mental framework I bring to bear on understanding economics and culture -- i.e., to see me creating my own Create Your Own Economy. So here's how this book fits within my interior world.

I see Cowen's book as premised on a particular epistemology of culture. Although that epistemology is not quite laid out systematically, what is clear from his unique vision of autism, Hayek's Sensory Order, and his pyramid diagram is that culture is embedded in the neural networks of individuals. For Cowen, economics and culture emerge organically from a process of filtering, absorbing, and reordering information. This is an appealing vision because it promises the possibility that someday economic theories might be understood in terms of biology. And Cowen mentions neuroeconomics in passing, but again Cowen's focus is on culture.

What is interesting is what Cowen does not say about these neural networks and their process of development. Cowen's emphasis is on the largely individualistic process of ordering information that flows into our neural networks. What he does not emphasize is the activity -- especially the social activity -- required to obtain desired bits of information and (perhaps more importantly) to decide what bits should be given privilege in our internal ordering.

For example, in his Chapter on the contrast between autism and Buddhism, Cowen's vision seems heavily weighted in favor of the autistic approach to interior life. On Cowen's view, educational institutions are mostly about using social influence to encourage non-austistic young people to develop more autistic habits. The trouble with this view is that it does not seem to leave enough room for the possibility that some learning and information processing may occur at the social level -- i.e., that some ordering of information cannot be done autistically.

In that vein, I find another theory of learning interesting. According to psychologist Mihalyi Csikszentmihalyi, learning is an individual process, but one that alternates between modes of openness and closedness to external feedback. There is potentially a deep scientific basis for Csikszentmihalyi's theory, which is drawn from the science of networks and self-organized criticality. Given the right balance of external stimuli and internal constraints, networks can self-organize into structures that optimize the flow of information. Optimal flow through networks was studied by Mandelbrot in connection with Zipf's Law. But today it is known that the same self-organized critical structure can be found in an incredibly diverse array of networks in nature, including neural networks and even our economy. In each case, the network structure emerges from an evolutionary process whereby particular network structures persist over time only so long as they can accommodate the stable or unstable variations in flow through the network.

This theory of flow is complementary with Cowen's vision of autistic culture. In particular, the closed mode of operating corresponds directly with Cowen's vision of autism. What seems to be missing from Cowen's vision is the other phase, the phase of extreme openness to feedback and diverse stimulus. (Is this what zen meditation is designed to facilitate?) Within the theory of autism presented by Cowen, it would seem that such openness would be difficult for autistics. Yet it would seem equally important to the creativity and learning characterized by Csikszentmihalyi as "flow."

But why is it so important to maintain balance between openness and closedness? By the end, what becomes clear is that Cowen envisions a radically different structure for society in which individuals cluster into small units -- perhaps even as small as one. And perhaps Cowen is right that this is where current technology is leading us. But can that kind of culture survive?

Robert H. Frank, also a student of Schelling, provides an answer in a recent NYT editorial titled, "The Invisible Hand, Trumped by Darwin?":

By calling our attention to the conflict between individual and group interest, Darwin has identified the rationale for much of the regulation we observe in modern societies... Ideas have consequences. The uncritical celebration of the invisible hand by Smith’s disciples has undermined regulatory efforts to reconcile conflicts between individual and collective interests in recent decades, causing considerable harm to us all. If, as Darwin suggested, many important aspects of life are graded on the curve, his insights may help us avoid stumbling down that grim path once again... The competitive forces that mold business behavior are like the forces of natural selection that molded elk. In each case, we see instances of socially benign conduct. But in neither can we safely presume that individual and social interests coincide.

Technology has enabled us to take finer and finer control over the flow of information and goods that we access as individuals. But over very long times, the benefits of finer control over flow have tended to accrue to the most well-organized groups rather than the most well-ordered individual minds. So perhaps the most dramatic impact of technology will be in how it enables us to be more social, even as autistics.

Csikszentmihalyi on Flow

See here for an introduction to flow psychology written by Csikszentmihalyi himself:

A successful interaction involves finding some compatibility between our goals and those of the other person or persons, and becoming willing to invest attention in the other person's goals. When these conditions are met, it is possible to experience the flow that comes from optimal interaction. For example, to experience the simple pleasures of parenting, one has to pay attention, to know what the child is "proud of" or "into"; then to share those activities with her. The same holds true for any other type of interaction. The secret of starting a good conversation is to find out what the other person's goals are: What is he interested in at the moment? What is she involved in? What has he or she accomplished, or is trying to accomplish? If any of this sounds worth pursuing, the next step is to utilize one's own experience or expertise on the topics raised by the other person--without trying to take over the conversation, but developing it jointly. A good conversation is like a jam session in jazz, where one starts with conventional elements and then introduces spontaneous variations that create an exciting new composition.

For a particularly inspiring historical example of how flow can be achieved in even the humblest of lifestyles, see here.

Revisiting Robert Ellickson's Critique of Functionalism

An excerpt from Order Without Law:

[E]arly functionalists had a tendencey to consider a human group as a single organizm whose "health" could be examined. It was then easy for them to surmise that Darwinian evolutionary processes would help favor the survival of socially adaptive norms. In the following passage the libertarian scholar Friedrich Hayek lapsed into this sort of analysis:

It is not only in his knowledge, but also in his aims and values, that man is the creature of civilization: in the last resort, it is the relevance of these individual wishes to the perpetuation of the group or the species that will determine whether they will persist or change. It is, of course, a mistake to believe that we can draw conclusions about what our values ought to be simply because we realized that they are a product of evolution. But we cannot reasonably doubt that these values are created and altered by the same evolutionary forces that have produced our intelligence. All that we can know is that the ultimate decision about what is good or bad will be made not by individual human wisdom, but by the decline of the groups that have adhered to the "wrong" beliefs. [The Constitution of Liberty at 36]

(Before nonlibertarian scholars dismiss these thoughts, they should be aware that both Lon Fuller and Thomas Schelling have also harbored suspiciously functionalist sentiments.) [Citing Fuller's "Human Interaction and the Law," and Schelling's Micromotives and Macrobehavior at 124-133].

The difficulty with this sort of organic analysis is that evolutionary processes, as most biologists understand them, select either genes or individual organisms, not groups, for survival. [Citing Dawkins's Selfish Gene and E.O. Wilson's Sociobiology at 106-129; and noting V.C. Wynne-Edwards's dissent.] Assume, for example, that honesty is a functional norm in the sense that, if all the members of a group were consistently honest, they would each be better off than if everyone were consistently dishonest. Would the Darwinian struggle favor the survival of the groups of honest persons? Not necessarily. A dishonest individual living in an environment surrounded by honest people might especially prosper, surrounded by easy marks. As a result, the Darwinian process would tend to select dishonest people for survival. In short, to support a Panglossian scenario of group evolutionary progress, functionalists could not rely simply on the biological theory of natural selection. Instead, they had to develop theories to explain how social-control systems would evolve within groups to prevent successful invasions by deviants who would subvert group welfare.

The punchline is that group selection theory is now enjoying a resurgence among some evolutionary biologists, notably including E.O. Wilson, whom Ellickson cites in support of the proposition that the theory has been rejected by evolutionary biologists. Wilson and Holldobler recently published, The Superorganism, which lays out a group selection theory for how cooperation evolved among insects.

The other objections to functionalism raised by Ellickson are also moot now in view of the improved theoretical tools for being more quantitative about functionalism. In particular, associating a group with a network, and individuals with nodes therein, permits evolution of group behavior to be modeled using mathematical models for network growth and decay. Such models help to eliminate much of the conceptual circularity to which Ellickson objects in this passage.

What I learned from the Internet this week

Within academia, us/them distinctions are drawn based on precommitments to particular methodologies. Some of you in academia are smacking your foreheads and saying, "Well duh!" It takes some of us longer to catch on.

From a systems theory view, it would be better for people to organize around the problems to be solved. But given how complex and important some problems are, I guess that would require a group too large for most people to feel comfortable in psychologically.

Territorial behavior over metholodical approaches is very counterproductive to learning to say the least!

Why is our System of Executive Compensation so Broken?

Robert H. Frank has an answer:

When the strength of positional concerns differs across domains, the resulting conflict between individual and social welfare is structurally identical to the one inherent in a military arms race. To illustrate, consider rival nations faced with deciding how to apportion available resources between domestic consumption and military armaments. Each country’s valuations are typically more context-dependent in the armaments domain than in the domain of domestic consumption. After all, having lower domestic consumption than one’s rival might entail psychological discomfort, but being less well armed could spell the end of political independence. The familiar result is a mutual escalation of expenditure on armaments that does not enhance security for either nation. Because the extra spending comes at the expense of domestic consumption, its overall effect is to reduce welfare. Note that if each country’s valuations were equally context-sensitive in the two domains, there would be no arms race, for in that case the attraction of having more arms than one’s rival would be exactly offset by the penalties of having lower relative consumption.

So long as CEO pay performance is determined by what other CEOs are getting paid rather than by how much value the company creates during the CEO's tenure, CEO pay will be a positional good in Frank's terms, which draws value away from employees, customers, and investors.

How could CEO pay become less positional? By giving other stakeholders (but especially investors) more transparency into the cash-flows in and out of the firm. Boards and shareholders are forced to compete with other boards and shareholders because those measurements of CEO performance are right now more reliable than more direct measurements of company growth.

Best Four Sentence Summary of the Crisis and How to Fix It

From Shiller and Akerlof in today's WSJ:

Commercial and savings banks used to have reason to be careful initiating mortgages -- they would most likely hold the debt for years. But banks would increasingly sell the mortgages they initiated to others. And regulation did not adapt to reflect this change in the financial structure. The regulatory failure led to a profound systemic instability in our economy, which accounts for the severity of our economic crisis. Devising new regulatory structures that will allow financial innovation to proceed and yet prevent new such systemic problems is the major challenge to our creative capitalism today.

Group Learning is Unstable Without Feedback

Via Overcoming Bias I found this paper on "inductive biases in cultural learning." In the study, one person was asked to estimate the height and width of a successive series of boxes. Together, the series of height and width coordinates constitute a one-dimensional function. As shown in column (i) in the Figure, four different functions (a), (b), (c), and (d) were selected.

After the first person had estimated the function by looking at the series of boxes (column i), a next person was shown a series of boxes with dimensions equal to the first person's estimate of the height and width (column ii). Then a third person did the same thing using the second person's estimates (column iii). Basically, a sophisticated game of "telephone." But look at what happens when the function of height and width varies from the very simplest function of y=x (i.e., square):

Without direct access to the information, except for the square, estimates of the funciton radically departed from the original measurements after four iterations, and then converged after that to a square.

Sort of gives new meaning to the idea of the square as a platonic form, no? But there are all sorts of interesting implications here. What a brilliant experiment.

Donald T. Campbell on Multiple Inventions

From Evolutionary Epistemology available here:

A major empirical achievement of the sociology of science is the evidence of the ubiquity of simultaneous invention. If many scientists are trying variations on the same corpus of current scientific knowledge, and if their trials are being edited by the same stable external reality, then the selected variants are apt to be similar, the same discovery encountered independently by numerous workers. This process is no more mysterious than that all of a set of blind rats, each starting with quite different patterns of initial responses, learn the same maze pattern, under the maze's common editorship of the varied response repertoires. Their learning is actually their independent invention or discovery of the same response pattern.

Sociologists could have just checked with the Patent & Trademark Office, where multiple simultaneous inventions have been a way of life since way before Darwin.

But is Campbell right here about there being no difference between blind rats in a maze and inventors tackling the same problem? Maybe. But doesn't the "pattern of initial responses" matter in terms of how fast a particular rat runs the maze? And if some rats run mazes faster than others, then don't we want to reward those rats?

In fact, the "initial pattern of responses" of an experienced inventor may take on the characteristics we more typically associate with artistic or mathematical genius after a lifetime of inventing. But who will devote a lifetime to inventing without inventions being protectible as property? Rats in a maze indeed.

Poincare on Inventing Mathematics

Poincare wrote an extraordinary book called The Foundations of Science, which is now in the public domain and available through Google Books here:

In fact, what is mathematical creation? It does not consist in making new combinations with mathematical entities already known. Any one could do that, but the combinations so made would be infinite in number and most of them absolutely without interest. To create consists precisely in not making useless combinations and in making those which are useful and which are only a small minority. Invention is discernment, choice.

What did Poincare mean by "useless" and "useful"? Poincare goes on to describe some of his experiences with mathematical discovery. Solutions often came to him while he was engaged in other activities, such as a geological expedition for the School of Mines: (my italics)

Most striking at first is this appearance of sudden illumination, a manifest sign of long, unconscious prior work. The role of this unconscious work in mathematical invention appears to me to be incontestable, and traces of it would be found in other cases where it is less evident. Often when one works at a hard question, nothing good is accomplished at the first attack. Then one takes a rest, longer or shorter, and sits down anew to the work. During the first half-hour, as before, nothing is found, and then all of a sudden the decisive idea presents itself to the mind. It might be said that the conscious work has been more fruitful because it has been interrupted and the rest has given back to the mind its force and freshness. But it is more probable that the rest has been filled out with unconscious work and that the result of this work has afterward revealed itself to the geometer just as in the cases I have cited; only the revelation, instead of coming during a walk or journey, has happened during a period of conscious work, but independently of this work which plays at most a role of excitant, as if it were the goad stimulating the results already reached during the rest, but remaining unconscious, to assume the conscious form.

For every successful new business model in an economy, there are many failed companies that packaged the wrong combination of capabilities. As an economy, we are less conscious of these failures than we are of the successes, which tend to explode on the scene when they are hit upon.

The similarities between the processes of mathematical creation and economic innovation were well-known to F.A. Hayek.

Douglass North on What We Don't Understand

"Economics, political science, sociology ... are static disciplines... [that] assume[] away all of the interesting things we want to understand... What's missing? Belief. Time. Culture."

Broken Symmetry readers should take note that "non-ergodicity" is a characteristic of dynamical systems with spontaneously broken symmetries.

You can download a powerpoint presentation in which North makes similar points here.

And here is an academic paper on the same subject.

For more on these topics, see an earlier post on The Three Laws of Performance here.

Would it be fair to call an "open access" state a manifestation of Csikszentmihalyi's flow at the level of organizations and organizations of organizations?

Hive Psychology?

From the Journal of Legal Studies, Hive Psychology, Happiness, and Public Policy by Jonathan Haidt, J. Patrick Seder, & Selin Kesebir:

Economists care about preference satisfaction, but where do these preferences come from? Evolutionary psychology offers what is arguably the most comprehensive explanation: we want things that helped our ancestors succeed at leaving surviving offspring in the environments in which the human mind was shaped by natural selection (Barkow, Cosmides, & Tooby, 1992). Our love of sweet and fatty foods, even when we know that we now eat too much of them; the desire for prestige and our concern for the opinions of others, even when we wish not to care; the desperate passion to protect our own children and the rapidly declining concern we show for more distantly related children; all of these human preferences flow readily from an analysis of the preferences that led early hunter-gatherers to succeed as individuals. David Buss (2000) has even offered a catalog of evolutionarily-informed methods for increasing human happiness in the modern environments we now inhabit. But nearly all analyses of happiness from evolutionary psychology, like those from economics, focus on individuals and their preferences. Might there be group-level preferences too? Might individuals be happiest when their groups are doing things that led, over eons of evolution, to group success?

Csikszentmihalyi and Flow

Over at the Volokh Conspiracy, Eric Posner links to published conference proceedings on applying positive psychology to behavioral law & economics. At the moment, my sense is that the general public is burned out on behavioral law & econ / finance much as I was about three or four years ago. The surprise that one has upon first encountering the results on the endowment effect, the ultimatum game, &c., tend to fade and even turn into frustration as one attempts to draw instrumental hypotheses from the hodge podge of empirical results.

As Justice Holmes grasped early on, economics is the fire of Prometheus for lawmakers. We spent many centuries groping around in the dark for theories that would permit a reasonably accurate forecast of how laws were likely to affect future behavior. The rational hypothesis was more than an incremental step forward.

The rational hypothesis is not a theory of psychology. Nonetheless, it cannot be denied that any theory of human behavior -- whether individual or social -- should be consistent with our most accurate understanding of individual and social psychology. It may be the case that while lawyers and economists were busy applying the insights of the rational hypothesis, other fields of scientific endeavor have caught up and even surpassed law and economics in their understanding of the human condition. Perhaps law and economics could be improved by incorporating some of the lessons learned in positive (i.e., empirical and non-abnormal) psychology over the past few decades. Afterall, someday we do want our theories of the world to be fully integrated, from mathematics and physics to economics and law.

The positive psychologist whose work I've been enjoying the most lately is Mihaly Csikszentmihalyi, who began publishing work on optimal experience (or what he calls "flow") many decades ago, after engaging in exhaustive interviews and surveys of people all over the world. Csikszentmihalyi's theory is that people are happiest when engaged in activities that are well-matched to their skills (not too challenging, not too easy), activities that also provide relatively clear and quick feedback.

Translating C.'s flow theory into an instrumental tool for policymaking is not easy. This is, afterall, a theory of psychology and not of economics or politics. Nonetheless the theory suggests certain instrumental goals to policymakers who have it as their ultimate goal to promote life, liberty, and the pursuit of happiness. Consider the following quote from C.'s book Flow: The Psychology of Optimal Experience at 81:

Cultures are defensive constructions against chaos, designed to reduce the impact of randomness on experience. They are adaptive responses, just as feathers are for birds and fur is for mammals. Cultures prescribe norms, evolve goals, build beliefs that help us tackle the challenges of existence. In so doing they must rule out many alternative goals and beliefs, and thereby limit possibilities; but this channeling of attention to a limited set of goals and means is what allows effortless action within self-created boundaries [i.e., flow]."

It is in this respect that games provide a compelling analogy to cultures. Both consist of more or less arbitrary goals and rules that allow people to become involved in a process and act with a minimum of doubts and distractions. The difference is mainly one of scale. Cultures are all embracing: they specify how a person should be born, how she should grow up, marry, have children, and die. Games fill out the interludes of the cultural script. They enhance action and concentration during "free time," when cultural instructions offer little guidance, and a person's attention threatens to wander into the uncharted realms of chaos.

When a culture succeeds in evolving a set of goals and rules so compelling and so well matched to the skills of the population that its members are able to experience flow with unusual frequency and intensity, the analogy between games and culture is even closer. In such a case we can say that the culture as a whole becomes a "great game." Some of the classical civilizations may have succeeded in reaching this state. Athenian citizens, Romans who shaped their actions by virtus, Chinese intellectuals, or Indian Brahmins moved through life with intricate grace, and derived perhaps the same enjoyment from the challenging harmony of their actions as they would have from an extended dance. The Athenian polis, Roman law, the divinely grounded bureaucratcy of China, and the all-encompassing spiritual order of India were successful and lasting examples of how culture can enhance flow -- at least for those who were lucky enough to be among the principal players.

Law is the highest stakes game that we play in a culture. Is it going too far to say that the rule of law has been salutary for its flow-inducing effect on culture?

Perhaps. But few are eager to embrace the rules of law and cultural norms that got us into the economic and cultural mess in which we now find ourselves. It couldn't hurt to entertain a different theory about what kinds of rules will make for a better game, even if an incremental rather than radical approach may be called for in applying different theory.

Here are some links to earlier posts I wrote on what I called a "synchronized flow theory of the firm." Incidentally, I was quite ignorant of C.'s work when I chose that name. But I see so many affinities to his work, that I would be foolish not to latch myself to him.

Last, I note that in The Problematics of Jurisprudence, Judge Posner suggests that "[a] better analogy to rules of law may be 'rules' of how to win a game." For Judge Posner, law is not a game because "paradoxical as it may seem, the duty to play by the rules is more imperative in games than in law; for in law the rules may be up for grabs." Perhaps it's better to say that the law is a game, but like most games it's not enjoyable when the rules change in the middle of play.

The Need for Group Identity: Judge Posner, Conservatives, and Evolutionary Psychology

Last week Judge Posner, assuming his habitual pose as provacateur, caused a bit of a stir among conservatives with an entry on his blog, which he shares with Nobel laureate Gary Becker. At bottom, his argument is that political parties are not based on ideologies, but rather on coalitions of ideologies, and that the affinities that have held such a coalition together for the Republican party over the past few decades are disintegrating. None of this seems wrong to me, although it's a very difficult argument once one gets to the details.

To wit, that's where Judge Posner manages to offend nearly every important conservative group in his post:

The financial crisis has hit economic libertarians in the solar plexus, because the crisis is largely a consequence of innate weaknesses in free markets and of excessive deregulation of banking and finance, rather than of government interference in the market. Believers in a strong foreign policy have been hurt by the protracted and seemingly purposeless war in Iraq (the main effects of which seem to have been discord between the United States and its allies, increased recruitment of Islamic terrorists, and the strengthening of Iran and of the Taliban in Afghanistan and of al Qaeda in Pakistan) and the Bush Administration’s lack of success in dealing with Iran, North Korea, Afghanistan, Pakistan, and the Arab-Israeli conflict. And social conservatives have been hurt by the stridency of some of their most prominent advocates, who all too often give the appearance of being mean-spirited, out-of-touch, know-nothing deniers of science (e.g., evolution, climate change).

Yikes! Only an Article III judge would dare. In response, a few bloggers including one of my favorite conservatives Tom Smith and his colleague Mike Rappaport have understandably expressed irritation at the sweeping generality of these accusations.

Among the several reactions I have to this are that nobody who's actually been reading his books would have confused Judge Posner with a conservative anytime recently, although I will admit that I went along with that conventional wisdom until I started reading the Becker-Posner blog regularly. Somewhere in the comments on that blog over a year ago I remember expressing consternation at Judge Posner's willingness to adopt fairly radical changes to some regulatory regime. But should any of us be surprised at this point? Clearly he is comfortable with the idea of a radical reform of government into his favored form of "pragmatic" (i.e., wealth-maximizing consequentialist) rule by elites. If that's compatible with conservatism in any sense, then it's more of a national socialist sense than a Burkean one. Fortunately for us, the judiciary is still the least dangerous branch. But I've given up on trying to pin him down to any one ideology. On his blog, Judge Posner has also damned with faint praise both Milton Friedman and F.A. Hayek -- pushing right off any map of coherent ideology that I am capable of drawing.

But that's not the point I want to make about these posts. In fact, I happen to agree with something like the larger point that Judge Posner is trying to argue in this post about conservatism. In particular, he is making an under-appreciated point about the role of political parties in the United States and other modern democracies, and that is that political parties have actually supplanted the role of ethnic or racial identity in constituting political conflict and cooperation. In other words, whereas before the Enlightenment we used to identify ourselves with people of our "race," nowadays the notion of race carries less currency than a more inclusive yet intangible (and so often more ambiguous) notion of "conservative" and "liberal."

Evolutionary psychologists have recognized the power of so-called us/them distinctions in fostering in-group cooperation, especially in conflict with other groups. As individuals, we each feel a strong need to identify with and be accepted among a group. That need probably evolved because it conferred an advantage to us by reducing the (economically rational) desire to defect against a group when it would be in our immediate self-interest to do so.

At some level, what Judge Posner is arguing is that conservatives and liberals need to get beyond ideology. Beyond the valid point that Judge Posner has not presented any coherent alternative to having an ideology (isn't "pragmatism" really an atheistic form of scientism? isn't that why Brian Leiter loves Posner?), Judge Posner has missed an even more basic point about human psychology: People need some way to identify themselves in order to form groups. The responses others have made to his swipes at various conservative groups is Exhibit A.

In writing this post, I've noticed that even as I write I fall into the habit of thinking in terms of us and them (or, in this instance, him). It's nearly impossible to escape this mode of thinking. In a nutshell, I believe this is the biggest obstacle with establishing a post-ideological form of politics. At the end of the day, there probably is a somewhat coherent ideology that strikes a middle ground between pro-state and pro-market ideology. But there is not an obvious way to constitute political cooperation without an enemy. As I suggest in the comments on his post, if there is one it may be religion -- a notion that I'm sure would annoy followers of the atheistic scientism that he favors. Yet what can we say about religion in the United States if not that it is a means for constituting cooperation among people without resort to political ideology?

Where does thirst for knowledge fit within our preference functions?

Via Peter Klein at Organizations and Markets I found the recent paper by Paul A. David on the emergence of norms of openness among scientists during the Renaissance, along with an accompanying comment by Kenneth Arrow, which includes these extraordinary passages:

It seems to me that that there is a motive for action not taken account of in standard economic models. It is a motive that operates in a social context and cannot fully be discussed in the terms standard in “methodological individualism.” I refer to what appears to me to be a tendency for individuals to exchange information, to engage in gossip at all levels. There is some form of satisfaction not only in receiving information but also in conveying it. Currently, this is exemplified by the curious phenomenon of Wikepedia, where individuals spend time and effort to convey information without pay and without fame. Probably, there is even an evolutionary basis for this phenomenon, though explanations of social traits (other than those involving kin) on the basis of natural selection have proved to be difficult.

* * * snip * * *

No doubt, consumer demand in the form of practical implications played some role in the acceptance of mathematicians. We all recall the story of Archimedes’ determination of density by weighing in water, and its use in detecting fraud in the making of a royal crown. I have heard no such stories about Euclid or Apollonius of Perga. A major accomplishment of Renaissance mathematicians was the solution of algebraic equations of the third and fourth degree--that is, expressing the solution in terms of repeated taking of roots. But this is and was not a practical way of solving these equations. It was of purely theoretical and, if I may put it so, aesthetic interest, only appreciated by cognoscenti.

Like any modern follower of William of Occam, I hate to multiply causes. The desires for economic success and for reputation are important and basic for the understanding of the growth of scientific knowledge. But I find it hard to understand the developments without the additional desires to acquire and to distribute information, above and beyond the values of economic reward and fame.

What do we consume when we learn new mathematical truths? How might such a good fit within preference function that includes traditional goods? Should we call it a violation of the rational hypothesis if certain groups will forebear traditional goods in order to satiate a thirst for knowledge?

The Snowball by Alice Schroeder

Like many folks in business, Warren Buffett is a personal hero of mine.  I love reading the annual reports of Berkshire-Hathaway, and pay close attention whenever Mr. Buffett speaks about current events. Thus, it was a pleasure to read this comprehensive, authorized account of Buffett's life, including both his career as an investor and as a father.

There are many lessons that could be learned by vicarious study of Buffett's life. I will mention only one because it ties in with an earlier book review I wrote about Carol Dweck's excellent book Mindset.

Buffett started working at a very young age, selling packs of gum door to door, and even buying stock before he was yet a teenager. And he kept at it, even as he experienced a number of serious, potentially career-limiting setbacks along the way. Carol Dweck would say that Buffett is a primo exemplar of the "growth mindset." While Buffett says that he "tap dances in to work everyday," it is not true, of course, that he does no hard work. In the aggregate, he's probably spent more hours, days, months, and years studying financial statements and meeting with people on the frontlines in a given industry than any other investor alive today. What his attitude reveals, however, is that he probably also enjoys these activities more than any other person alive today. Where most of us hit our point of diminishing marginal utility reading financial statements and stock analysis after a few hours, Buffett had them stacked up in the backseat of his car on his honeymooon.

It takes sacrifices, however, to cultivate an interest so unilaterally. And Buffett's personal life has not been a picnic at times, although he has largely succeeded in the Herculean effort to keep it all together. Would Buffett have diversified more in how he spent his time had he to do it all over again? It's a pure hypothetical, but I wonder how he feels about things now looking back.