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
12.
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”
22. Heuristics for uncertain financial markets – asset
allocations?
asset allocation
heuristic
= 1/n
i.e. allocate
money equally
to each of n
fundsGerd Gigerenzer
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
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
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
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
Notas del editor
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!