Sunday, September 28, 2014

Pseudoeconomics reading list: What's been read and what's next

I will be sporadically listing my economics/finance/business book recommendations on this website.

I recommend the e-book version.
The last book I read and posted about was Robert J. Shiller's and George Akerlof's book "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism".

The authors make a an excellent case for the irrationality that deeply affects the world economy at large, and how this cognitive deviation and its effects leads to the following conclusion: in economics, and all that it touches (markets, banking, finance, trade, etc.), psychology matters.

And while the term "animal spirits" was originally used by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money", it took more than half a century for these two economists to come along and write this book. Why was there more rational actor based economic theory in the past 50 years, and less behavioral economics related subject matter to countenance the former?

To be fair, decision theory and the psychological basis for decision-making has been taken into account since Adam Smith's time (note his book "The Theory of Moral Sentiments"). Common sense and experience can quickly make anyone discover how the economy, in its essence, is truly human. While the Invisible Hand has been purported to be the self-regulating magister behind every economy, there should be no doubt that this hand is anything but all-knowing.

What's always fun about these reads is how they lead to other interesting sources, and how the same questions posed by the authors become questions that engulf the reader. For example, how is it that some economists stand by their theories, the ones devoid of or that negate the human psychology behind them?

Shiller and Akerlof are great at laying out evidence to prod holes in their fellow economist's arguments, or to bring attention to the exception to the rule in popular and well-accepted economic theories. Sometimes, depending on one's own inclinations, reading about different economic takes on subjects starts to feel like being in a great restaurant the offers a vast number of dishes. There is no perfect way to choose, but some choices are healthier than others.

Some say economist's opinions should come from one-handed economists...that way the person looking for advice can avoid having two choices (on the one hand, and on the other...) for every problem. In other words, opinions and the theories behind most economic and social phenomena abound. There is no economic theory panacea.

Nonetheless, the authors provide sound advice for today's economic problems.

The following LSE (London School of Economics) video was recorded in 2009 and shows Robert J. Shiller discussing his book:

Confidence. Fairness. Corruption. Money Illusion. The persistence of poverty amongst minorities. Tradeoffs. People and how they misunderstand market realities, and their irrational choices about the financial challenges they face.

Fascinating to read about. Pursuing an investigation on the subject and digging deeper leads to further information for a more balanced opinion.

In comes my small discovery: Caltech's Colin F. Camerer and Carnegie Mellon's George Loewenstein, publication "Behavioral Economics: Past, Present, Future". The article starts off with a few headings that contribute to a general overview:

  • What Behavioral Economics Tries to Do
  • Evaluating Behavioral Economics
  • The Historical Context of Behavioral Economics
  • The Methods of Behavioral Economics

The references listed at the end of the article take up a total of 13 pages. The degrees of separation from the authors to their contemporaries are two degrees away or less. The opportunity to further investigate and find out more about the subject is practically infinite.There's even a reading guide from a website that's pretty useful to follow.These sources explain the subject fully and put everything neatly into context. 

Camerer and Loewenstein are leaders in the behavioral economics field. Their work structures the experimented underpinnings that make the case for the psychology behind economics at large. And much like Shiller and Akerlof in their own work, they do so with the utmost conviction.

A video where George Loewenstein talks about behavioral economics, and the role emotions play in decision-making:

What's next on the reading list?

Martin Wolf's "The Shifts and the Shocks: What We've Learned - and Have Still to Learn - from the Financial Crisis."

This choice was based other's recommendations, in this case leaders in the field.

Commentary on the book will soon follow.

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