A theory of narrow thinking

I develop an approach, which I term narrow thinking, to break the decision-maker’s ability to perfectly coordinate her multiple decisions. For a narrow thinker, different decisions are based on different, non-nested, information. The narrow thinker then makes each decision with an imperfect understanding of the others. Formally, it is as if the decision-maker is a collection of multiple selves playing an incomplete-information game. The friction effectively attenuates the degree of interaction across decisions and can translate into either over- or under-reaction depending on the environment. Narrow thinking leads to a violation of the fungibility principle and a smooth model of mental accounting. Narrow thinking also reconciles other seemingly disparate phenomena in a unified framework, such as excess smoothness to taste shocks, the small wage elasticity of daily labor supply, and the label effect. Finally, I study an endogenous narrow thinking problem: the decision maker chooses optimally what information each decision is based upon, subject to a cognitive constraint.

That is the abstract of a new paper from Chen Lian, who is on the job market this year from MIT.  (That is not his job market paper but it does have a revise and resubmit from Review of Economic Studies.)


Tell me, bank regulators who believe that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe, are they engaged in some type of narrow thinking?

“I develop an approach, which I term narrow thinking, to break the decision-maker’s ability to perfectly coordinate her multiple decisions. “

Chen Lian meets the first two requirements for a successful career in economics:
- write incomprehensible abstracts of papers;
- solve problems that nobody knew existed.

Unfortunately, yes. Economics is circling the drain.

It's been far down the drain for decades.

But sadly, two things happened: (1) Paul Krugman proved you could become a millionaire doing nothing more than non-stop shilling for the Dems, if you have an Econ degree, and (2) the Freakonomics book made zillions, and deluded anyone with an Econ degree into thinking they could wisely opine on literally anything, and be on the path to riches.

No profession has a larger Ego/Talent discrepancy than economists.

I see your economists and raise you Gallic postmodernist gurus.

I understood it fine, and you have to be exceptionally arrogant to think that this aspect of decision-making is either obscure or parochial. Perhaps you should first contemplate your own inadequacies before arm-chair quarterbacking your own inane, uninformed criticisms.

I am not arrogant, just stupid. But I am sure you will explain this to a plain English speaker. Let’s start with two questions:
- What does “breaking” an ability mean?
- Who exactly has the ability to perfectly coordinate their multiple decisions?
(Since we are already at it, maybe you can also explain what “multiple decisions” means, because the plural already indicates “more than one.”

There seems to be a parallel to Jeff Hawkins Thousand Brains Theory of Intelligence

" The Thousand Brains Theory of Intelligence proposes that rather than learning one model of an object (or concept), the brain builds many models of each object. Each model is built using different inputs, whether from slightly different parts of the sensor (such as different fingers on your hand) or from different sensors altogether (eyes vs. skin). The models vote together to reach a consensus on what they are sensing, and the consensus vote is what we perceive. It’s as if your brain is actually thousands of brains working simultaneously. A key insight of our theory is based on an understanding of grid cells, neurons which are found in an older part of the brain responsible for navigation and knowing where you are in the world. "

That is to say, it's possible there is a direct map between the economic idea of "narrow thinking" and how the brain actually works.

I"d say the thousand brains theory is not well accepted, but I found the argument plausible and very rich in terms of opportunity if true, for both brain science and hints on better ways to create AI.

That was my reaction too. The article makes only glancing reference or citation of psychology research, where theories of multiple minds or multiple selves have been attracting attention. AFAICT, both these theories and behavioral economics are on theoretical foundations that are unsettled and disconnected. Researchers in each field could pay more attention to developments in the other and try to develop more coherent models and theories.

I'm not up to date on what researchers are doing, I imagine that some psychologists and economists are already doing exactly what I'm describing. But Lian does not. The vast majority of his citations of models of mind are written by economists.

Of course, one makes decisions based on the narrow thinking of her priors.

From the paper:

When she purchases food, she knows the food price, but does not have the gasoline price at the top of her mind. When she purchases gasoline, she knows the gasoline price, but does not have the food price at the top of her mind.
Not really.
The shopper knows the apple pie order got stocked and the line is short. The shopper is queue managing. At the gas stations the line is just as short, that is the Nash equilibrium, not price. I got zero or one person in line, fine. If I am third in line, I get fidgety, start to riot, cause chaos and revolution.

Everywhere, all the time, all people hate waiting in the in the same proportion; the unified law of economics. And there is a sharp break, there are basic quantum effects inside our abstract tree trunk. Like if your store routinely has three people in line, you are going to have a riot.

Watch your daily commerce. It all revolves around stable queues, in and out of the grocer, gas stations, stop and get bills paid, pick up the kids curbside, stop as a stop sign. Like little Lagrange points (L spots in gravity). We adjust our transaction rate daily so as to be guided by these ubiquitous queues, and they all obey they same Pauli Exclusion rule. At the optimum, there are zero to one clerks for each of one or two customers. On net they queues are sampled at the Shannon bandwidth, but it occurs asymmetrically and is always a bounded uncertainty. A characteristic of self sampled systems, a principle of operation inside our tree trunks and check out counters.

The basic formula is illustrated in 2D. We take a 2D uniform circle plus momentum and create a 3D hologram out in pace. Like a shotgun effect.

It happens via congestion, the flow is deliberately stymied at the tree trunk so the process can execute the commutative property and get the flow mostly aligned. In economics this is simply the logistics of inventory, Walmart does it all the time.

Today we can connect the math on this, that is all that is new. We can define these quantum rules at the interfaces.

At the top of my mind when I go shopping is my budget. Anybody who does different will get into trouble.

Your post exhibits quantum phenomena itself. It is somehow both asinine and profound at the same time.

Because I am no scientist, I have to ask:

does something come between "hypothesis" and "theory"? (and who articulates the prevailing standards these days?)

Granted, we face no shortages of theorizing: but what minimum data or measurement requirements go with proffering hypotheses?

Is "theory inflation" some unsung occupational hazard for academics and researchers?

I've always framed it as follows. Theory is the framework used to generate a hypothesis, i.e. a claim about the world. If the theory is worth a damn, then the hypothesis will be testable. If the theory is garbage, then the hypothesis is not.

Example: the New Keynesian framework is a theory that posits monopolistic competition, price stickiness, and optimizing, forward-looking agents. The model generates hypotheses about how the economy reacts to a monetary shock (among other things) through its impulse response functions. The shock response hypothesis can be tested empirically by using a VAR or a local projection.

Sometimes the word "hypothesis" is used to mean "guess"; other times it is derived from an articulated theory. Usually the former. :-)

Cf. Ronald Coase: "In my youth it was said what was to silly to be said may be sung. In modern economics it may be put into mathematics."

Keep rates low? USA wide average is about $0.1331 a kWh: in CA it is over $0.19, among the highest in the USA. A lot of this due to green energy contracts requiring PG&E to pay above market rates. Hopefully those contracts get axed in bankruptcy. Meanwhile, the best incentive is for people to keep buying back-up inverter generators. Increased demand for generators may spur continued improvement in these generators.

"...her multiple decisions..."

Stop reading here.

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