[SystemSafety] Bounded rationality or ignorance?

[Peter Bernard Ladkin]

Spoiler (written after I wrote what is below): this is about econ, not SW! Sorry!

On 2018-10-11 15:35 , Olwen Morgan wrote:
> There are always political dimensions to these situations, which is another reason why I'm sceptical
> about behavioural economics helping very much.
I don't follow this reasoning. If there are always political dimensions, it follows that behavioural
economics (as opposed to Fama-type equilibrium explanations) is the only way to explain them, for
the politics is the "behavioural" bit.

Coincidentally, a couple of weeks ago I read Richard Thaler's Misbehaving (Penguin, 2015), written
before he won the Nobel Memorial Prize. Let me recommend it. (Bought at a great bookstore in the
Frankfurt train station, Schmitt&Hahn, which has been there for over a century, although maybe not
in the train station. They have one bookcase of English books, half fiction half none, and the
non-fiction includes some astute selections from history, anthro-politics of the
Acemoglu-Robinson/Fukuyama variety, business, pop science, pop psych, and economics. I almost always
find something good to read on the train home in a couple of minutes of browsing. German
train-station bookstores are much more like mini-Waterstones than they are like the station/airport
bookstores you find in the UK.)

Thaler explains many of the great debates (including those in which he was not successful) in simple
terms; as he puts it, telling a story. I find it an effective technique. He says where he was when
the question was asked, what he had had for breakfast, who else was there, and how they reacted, and
somehow all of that helps to recall the issue and the responses.

I also don't agree with your view on economists. The ones I read I mostly find astute (another way
of saying that might be that I am not that good an economist myself, but just good enough to
recognise one). They can tell you what the phenomena are; but they mostly can't tell you when they
are going to manifest.

For example, the subprime housing bubble in the US in the 1990's-2000's was apparent - everybody
knew real estate was being sold to people who couldn't afford it, and that that was happening
because there were no obvious medium-term consequences to the sellers of mortgages (because they
passed them on immediately). As Dean Baker points out in
http://cepr.net/images/stories/reports/housing-bubble-2018-09.pdf the figures over years were all
there to say so (although I hadn't realised there was a bubble in commercial property also). It had
to crash sometime. But, as usual, no one knew when. Also, no one had really groked how - that the
derivatives market had become so obscure since the LTCM debacle that, as soon as value became
questioned, it so rapidly turned out no one really knew any more what they owned and how much it was
worth.

BTW, Thaler points out in Misbehaving that merely correctly identifying a bubble and taking a
position on it does not suffice to make you rich. Servicing your position costs real resources, and
if you don't have those then you might well go bankrupt before the bubble bursts. He goes on to
point out that in some cases those resources will be enormous, such that only the very biggest
players can afford them. Which is why all the well-known names always make their profits from such
events, as well as substantiating the adage that, to make lots of money, you need lots of money to
start with.


PBL

Prof. Peter Bernard Ladkin, Bielefeld, Germany
MoreInCommon
Je suis Charlie
Tel+msg +49 (0)521 880 7319  www.rvs-bi.de





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