Neuroeconomics and trust

Today’s Financial Times runs a feature article on neuroeconomics, an offshoot of experimental economics.

Why do people cooperate in experimental games?

…during the games, Prof Smith’s team scanned players’ brains using functional magnetic resonance imaging. The FMRI scan showed that players who co-operated were using parts of their brain called Brodman’s areas 8 and 10. These areas had previously been associated with thinking about the mental activities and the motivations of others, and of delaying gratification to receive higher rewards later. Non-cooperative players did not use these parts of the brain, and neither did those who knew they were playing against computers instead of human opponents.

This, argues Prof Smith, is consistent with the reciprocity explanation: players are thinking about the likely responses of other players and deciding to trust them.

Brain scans are not the only tool of neuro-economists. Other approaches include measuring pulse rates, skin conductivity and hormone levels. And as a result of such experiments, neuroeconomics boasts an eclectic collection of findings – one of them being that ovulating women are less trustworthy than the rest of us…

Would you like to hear more about ovulating women?

Prof [Paul] Zak has also found that women who take part in the trust game while they are ovulating send back substantially less money to their fellow player than other women or than men – crudely, they are less trustworthy. He explains: “The physiological reason is that progesterone suppresses the effect of oxytocin. The evolutionary biological reason is that is that if you’re about to get pregnant, you should be very careful about overreacting to the social signals you receive. In addition, you don’t want to be giving away resources.” Prof Zak points out that since trust is fundamental to economic development, a better understanding of the oxytocin and the physiology of trust could be fundamental for promoting development. The Bangkok Post has already picked up on his work: the newspaper says that since the oxytocin stimulants massage, food and sex are much beloved of Thais, Thailand’s economic development is assured.

For those interested, GMU researcher Kevin McCabe has started a fledgling neuroeconomics blog.

Economic freedom indices

Niclas Berggren offers a very useful survey of the economic freedom indices, what they show, and their limitations. The piece just appeared in The Independent Review. The introductory blurb states:

Although not without limitations, the EFI [economic freedom index] supports Adam Smith’s contention that free-market processes, more than any alternatives, can advance wealth and welfare.

If you are interested in another point of view, here is a left-wing critique of the Fraser index, suggesting that economic freedom is not positively correlated with the real quality of life.

My take: Even economists, much less the general public, underestimate the long-run value of economic growth for human welfare. Today’s poor have a higher standard of living than the upper middle class of a century ago. While it makes good sense to discount the dollar returns on investments, there is less of a good normative argument for the positive temporal discounting of human welfare. So we should care greatly about the standard of living in the distant future, which suggests investing in economic growth today. For a lengthy presentation of the argument on discounting, click here.

A movie in your book

A piece of paper can now play video images:

A single sheet looks pretty much like ordinary paper. But the ink can be rearranged electronically fast enough to show video movies.

Its devisers, Robert Hayes and Johan Feenstra, have also figured out how to create full-colour displays. Their colour screens would be four times brighter than the flat devices currently made from liquid crystals, they reckon.

The invention is the latest version of ‘electronic ink’. Researchers hope to combine the convenience, robustness and readability of printed material with the vast and flexible information content of laptop computers.

In principle, a plastic sheet covered with electronic ink could display an entire library, page by page. The information would be stored in a portable chip, and the display would be powered by a slimline, lightweight battery. Harry Potter and the Order of the Phoenix would weigh no more than a feather.

Read more here from Nature magazine.

What is a dance worth?

As dance relies more on corporate support, the question has arisen who owns a dance. Is the choreographer the owner as an independent creator, or are the choreographers mere employees of a larger organization?

Martha Graham left her dance work in her will to an heir, but a federal district court ruled against the will; she had sold her dance school and its name to other parties, arguably selling the dances as well. The ruling is now under appeal. Joffrey Ballet faces similar issues. See this discussion of the “work for hire” doctrine in the context of music.

“This is definitely a success problem,” says one dance director, “These problems would never have existed 50 years ago, because the concept of a penny being made by a choreographer or from a dance was unheard of.”

The dilemma again shows how far copyright law is behind the times. An economic approach would suggest rewarding the rights to the parties whose contributions create the most value at the margin. If dance geniuses are especially scarce, and responsive to monetary incentives, this would argue for granting the rights to the dance creator.

From “Dance and Profit: Who Gets It?”, The New York Times, September 20, 2003, click here to buy the article.

How to spread the wealth

The [Marshall] Field chronicles tell us that it is not taxes or mismanagement that erode family fortunes, but multiple marriages. While it is often difficult for siblings to amicably take over the running of a huge enterprise, the situation becomes more challenging when divorce introduces half-brothers and stepsisters. Marshall Field’s 22,000-word will was an extraordinary document, the longest ever probated in Chicago. He left the bulk of his fortune to his two underage grandsons, but stipulated that most of the money be kept in trust until they turned fifty…

What Marshall Field did not foresee was his male offspring’s high turnover of wives. Of the six generations bearing the name Marshall Field, only Marshall II and, as of the present, Marshall VI (married in 1992) had one wife. Marshall Field III and IV each had three wives; Marshall Field V married twice and his half-brother Ted three times. The founding father’s will that for sixty-five years carried the fortune forward collapsed in 1982 when Ted demanded his share of the Field Enterprises.

From the recent book The Marshall Fields, by Axel Madsen.

All Oil to the People!

In an economy based on labor, leviathan government faces an inherent, albeit weak, constraint – tax and regulate too much and you will kill the goose that lays the golden eggs (or the goose will run away). But in an economy based on oil the goose can’t run away and is almost impossible to kill. As a result, natural resource based economies tend to be corrupt, war-stricken, and slow growing. After 35 years and some 350 billion dollars in oil revenues the people of Nigeria, for example, have had no increase in per-capita GNP.

Iraq is another case in point, which is why it’s crucial that we not squander the opportunity to create new institutions for getting oil wealth away from governments and into the hands of the people. Norway and Alaska distribute revenue from “stabilization funds” but these appear not to be very effective, especially in countries that begin with weak institutions. Economists Xavier Sala-i-Martin and Arvind Subramanian argue in favor of direct payments of revenues to citizens but I think Vernon Smith, our colleague and recent Nobel prize winner, offers the best approach – distribute shares, real ownership, in the oil producing lands to every citizen.

Aside from the benefits to the Iraqi’s can you imagine what a great public relations boost this would be to the United States? In one swoop, we would credibly demonstrate to the Muslim world that the war was not about our rapacity, provide for a thriving domestic economy in Iraq, and lay the foundations for a stable democracy.

How well can we measure performance?

Imagine Cass Sunstein and Richard Thaler writing a co-authored book review for The New Republic. The book is Michael Lewis’s Moneyball, which pretends to be about baseball but is in fact a profound meditation on behavioral economics, management science, and how hard it is to measure value. An obvious question: if it is so hard to measure the performance of first basemen, when there is a slew of publicly available statistics, how about the rest of the economy?

Thanks to Will Baude for the pointer.

The Dumbing Down of Safety

Under the federal No Child Left Behind Act, parents are supposed to be allowed to transfer their children from “persisently dangerous” to safer schools. But, according to this article in the NYTimes, “44 states have set the legal threshold for persistently dangerous schools so high that no schools in those states fit the definition.” Consider Locke High School in Los Angeles which in the last three years has had “33 assaults with a deadly weapon, 116 beatings, 66 robberies and 17 sex offenses.” But these crimes resulted in only 11 (!) expulsions and CA requires a school like Locke to have 30 explusions before allowing parents to transfer their kids to a safer school.

The fact that the standards qualify virtually no schools is accidental, say state officials in CA and elsewhere. Nonsense. It would be easy enough to write the standards in terms of percentages. Define any school in the top x% of schools for violence as qualifying. (We can then argue whether, for example, x should be 5, 10, or 25 percent.) A percentage standard would always qualify the worst schools even if they were pretty safe but remember that all we are talking about is giving parents the option of moving their children. Is it too much to ask that we err on the side of child safety?

Brazil accepts genetically modified foods

The decision was made by a left-wing government, read Chris Mooney for some astute commentary. I have read a few books lately on genetically modified foodstuffs, Peter Pringle’s Food, Inc. was the most balanced. I’ve yet to see a case that the potential risks come close to outweighing the potential benefits. Remember the Green Revolution in agriculture? It saved millions of lives and elevated living standards around the world.

Does Milton Friedman believe in free will?

“In a sense we are determinists and in another sense we can’t let ourselves be. But you can’t really justify free will.”

So spoke Milton Friedman in a recent interview. Read here for the full account.

I have long felt that this whole issue poses great difficulties for the merit-based argument for the market. If people don’t “deserve” the value they create, the moral case against redistribution becomes weaker.

The usually crystal-clear Friedman also says the following about luck:

“My wife and I entitled our memoirs, ‘Two Lucky People.’ Society may want to do something about luck. Indeed the whole argument for egalitarianism is to do something about luck. About saying, `Well, it’s not people’s fault that a person is born blind, it’s pure chance. Why should he suffer?’ That’s a valid sentiment.”

So what are the implications of luck for public policy?

“You’ve asked a very hard question,” he said. In part, he added, because it’s not clear that what we think of as luck really isn’t something else. “I feel,” he said, “and you do, too, I’m sure, that what some people attribute to luck is not really luck. That people are envious of others, you know, `that lucky bastard,’ when the truth of the matter is that that fellow had more ability or he worked harder. So that not all differences are attributable to luck.”

How to improve our schools

William Ouchi, the well-known management theorist and consultant, just put out Making Schools Work. His more substantive recommendations include the following:

1. The school principal is an entrepreneur and fully in charge.

2. The school, not a central office, controls its own budget.

3. Everyone is accountable for student performance and for budgets.

4. Families have school choice.

Plus all the usual rhetoric of caring about learning.

Ouchi and co-author Lydia Segal claims that these principle are found in the (successful) public school districts of Edmonton, Seattle, and Houston, plus they are used by Catholic schools in Chicago, New York, and Los Angeles, again successfully. There is some fluff in this book, but it also offers a no-nonsense account of some practical value.

Facts about Prohibition

When browsing Nathan Miller’s recent New World Coming: The 1920s and the Making of Modern America, I came across the following nuggets:

1. Prohibition was originally a popular policy.

See this link for more background:

Temperance was not, as is sometimes thought, the campaign of rural backwaters; rather, temperance was on the cutting edge of social reform and was closely allied with the antislavery and women’s rights movements. Always very popular, temperance remained the largest enduring middle-class movement of the nineteenth century (‘Leaven 1978, 1984; Tyrell 1979; Gusfield 1986; Rumbarger 1989; Blocker 1989).

2. At first Prohibition advocates did not think enforcement would be very costly. The Anti-Saloon League estimated a sum of $5 million a year, Congress provided slightly more than this to hire 1500 agents.

3. A major setback came when a federal judge rule that physicians could prescribe whiskey for medicinal purposes. By the end of Prohibition, there were 10 million such prescriptions each year.

Vernon Smith

Newsweek magazine is running a feature article on last year’s Nobel Laureate and father of experimental economics (and our colleague) Vernon Smith. The most interesting part is toward the end, when the article discusses how experimental economics is improving real world business practices, such as allowing people within a firm to bet on which ideas will prove successful.

Kissing Cousins (More)

A John Tierney article in today’s NYTimes argues that the Iraqi tradition of cousin marriage and consequent clan loyalties make it difficult to establish democracy. (See Tyler’s earlier post for a map and some other links.) Most interesting claim is that the Western taboo against cousin marriage was promoted by the church explicitly in order to reduce loyalty to the clan and promote universal love. Key quote:

Cousin marriage was once the norm throughout the world, but it became taboo in Europe after a long campaign by the Roman Catholic Church. Theologians like St. Augustine and St. Thomas argued that the practice promoted family loyalties at the expense of universal love and social harmony. Eliminating it was seen as a way to reduce clan warfare and promote loyalty to larger social institutions – like the church.

By the way, recent genetic research indicates that cousin marriage does not lead to dramatically higher abnormalities in children.