Showing posts with label Book reviews. Show all posts
Showing posts with label Book reviews. Show all posts

Sunday, July 24, 2011

The Believing Brain



Michael Shermer talks about his theory of the brain as a ‘pattern believing machine’.  Put simply, we first believe in patterns subconsciously, then add logical explanations post hoc. This partly explains why debating passionate people on their topic of choice often leads each person more entrenched in their beliefs than afterwards, since logic doesn’t govern our already held subconscious beliefs.

He has a book exploring the idea in more detail, and if you want another brief take on his theories you can read one of his articles here.

And the conclusion from one reviewer -

Having presented the case that we form beliefs on the basis of unconscious, often irrational processes, and that all our argumentation in support of these beliefs is then added post hoc and subject to a wide range of cognitive biases which he lists and explains, Dr. Shermer leaves us in a near-hopeless state. The human condition, according to this perspective, is one of deep-rooted, biased subjectivity and perpetual, unresolvable conflict between believers with different sets of beliefs.

Wednesday, May 4, 2011

Economics, Real Estate and the Supply of Land

As a general rule, economists relying on supply and demand curves without properly discussing the assumptions that sit underneath their graphs can be ignored.

Alan Evans' book Economics, Real Estate and the Supply of Land is an effort to refute Ricardian notions of land supply and rent, and offer an alternative neoclassical theory of land supply. The arguments in this book are taken by many who believe that reducing government involvement in town planning will decrease the price of housing. Evans’ reasoning is questionable to say the least, and supported by elaborate graphs with often biased assumptions and interpretations.

One of Evans’ aims is to refute the Ricardian proposition ‘that the price of land is high because the price of corn [read: houses] is high, and not vice versa’.

To do this he constructs a model economy with a fixed land supply where two agricultural uses compete for land – potatoes and corn. In the figure below we see his construction of this economy on the left, with demand for corn inverted so that the intersection of corn and potato demand determines the equilibrium share of land devoted to each crop, and the equilibrium rent of land at point A.

He then proceeds to add a demand shock to potatoes ‘for some reason’. The new blue line represents the new increased demand for potatoes which enables potato growers to bid up prices for land previously grown for corn and reduce the amount of land used to grow corn. He concludes with the following -

Now it is quite clear that the increase in the rent of land is not caused by the increase in the price of corn. Exactly the reverse is true. The price of corn has risen because the price of land has risen.
...
The rent for land is not solely determined by the demand for the product.


His conclusions are wrong.

First, it is still quite clear that at the new equilibrium the price of land for corn is still determined by the new higher price for corn. You could just as easily argue that every time a potato grower buys land from a corn grower he decreases the output of corn and the price of corn rises, thereby leading to an increase in the rents of land available for growing corn.

Second, he fails to notice that all he has done with the model is to demonstrate the inflation mechanism following an increase in money supply for one purpose. He increases total demand (potatoes plus corn) but shifts preferences towards potatoes so that corn demand is constant. The end result of his demand increase is to increase all prices in the model economy – potatoes, corn and rent.

Followers of Say would jump straight to this conclusion. You can’t simply increase total demand in the economy – demand is comprised of supply.

An actual demand shock, which models a change in preferences from corn to potatoes, is shown in the right hand side figure. You will notice that total demand remains constant and therefore the rents for this fixed quantity of land also remain constant.

So no, land rents do not determine prices. Prices determine rents.

Another example of poor reasoning is when Evans argues against a 100% land value tax. He argues that a tax of that nature would ‘freeze’ land development because there would be no incentive for a owner of agricultural land to sell his land to a developer for housing development, since he would not capture any of the value uplift. The rent achieved by the owner of the land will remain the same as when it is rented to the farmer – zero.

Yet in chapter 8 he argues that the value of land grows in anticipation of future higher value uses. In these cases, when the site is genuinely worth more as housing, the tax would be at a rate that reflects that higher value, and not the agricultural value. Therefore, the owner of the land will be facing a tax on the land value for housing while only receiving rents at agricultural values. As the city expands and the value of his land for housing surpasses the value for agriculture, he has a great incentive to sell or develop immediately to avoid losses.

Although I don’t support a 100% land value tax, I do support shifting the tax burden towards land and fixed rights to natural resources.

What we do learn from this book is that even the experts are prone to bias that affects their ability to apply objective logic and reason.

Monday, June 14, 2010

The Big Short: Inside the Doomsday Machine

Lewis's book provides a fascinating insight into the minds and mischief of the characters shorting the sub-prime mortgage market during the US real estate bust and general GFC calamity.

I found the unintentional insights into herd behaviour eye opening. The players shorting the market almost couldn’t believe that the price to insure sub-prime mortgage backed securities was so low when by their analysis, they carried so much risk. They spent an achingly long time trying to figure out if there was some critical piece of information missing from their analysis. If there was, it might explain the apparently irrational behaviour of the counterparty to the bets.  But the more they searched, the more they realised that it was a simple matter of ignorance that kept the sub-prime security holders in the game.

It took a strong will to bet such grand sums against the markets, and for those behavioural economists looking for insights into our predictable irrationality this book offers a thorough exploration of the personality differences amongst the characters in this ill-fated market.

Wednesday, June 9, 2010

The Noble Lie?

In his book The Noble Lie: When Scientists Give the Right Answers for the Wrong Reasons, Gary Greenberg challenges conventional wisdom to suggest that many social vices have become labelled as diseases, without evidence, but for the betterment of society.  His book delves into the grey areas of science, politics and philosophy, conveying a line of reasoning that presents a picture of positive self-delusion on a grand scale.

This review summarises some of the challenging points in the book.

For instance, Greenberg explains how alcoholism's transition from vice to disease was a welcome one, especially following Prohibition. It was long viewed as an allergy, though the specific allergen persistently failed to appear. Even today, neither its disease-nature nor any possible cures have manifested themselves. Regardless, people are happy to accept the idea that addiction is a medical illness, perhaps, Greenberg suggests, because of our ambivalence towards the role of pleasure and our uncertainties about free will and self-determination. “With the disease model we have an answer,” he writes, “one that has the imprimatur of science; addiction isn't wrong, it's sick.”

In the absence of scientific proof that addiction is a disease, is it wrong for medical professionals to perpetuate the idea? Not necessarily, Greenberg says – there are times when what is scientifically wrong, or at least uncertain, is morally right. “There can be no doubt that the disease model has helped millions of people. If a made-up disease can be of such immense value, then we must consider the possibility that the truth is not what it's cracked up to be. Perhaps, in the republic of medicine, the fiction that addiction is a disease is a noble lie.”

Sometimes the noble lie works the other way round. In a chapter on homosexuality, Greenberg shows how humane concerns first led people to prefer a medical to a criminal definition, but conflict followed concerning the disrespect a medical definition implied toward what should perhaps be viewed as a free life choice. In 1973, following the Stonewall riots and the start of the gay rights movement, the American Psychiatric Association deleted homosexuality from the Diagnostic and Statistical Manual of Mental Disorders (DSM), a move decided not by scientific facts but by political and moral attitudes. “It may be the first time in history that a disease was eliminated by the stroke of a pen,” Greenberg writes.

Tuesday, April 13, 2010

The plastic brain: a theory of human experience

Norman Doidge has written a book that encapsulates the latest research in neuroplasticity and delivers it to the curious mind in an intellectually stimulating and satisfying read. The Brain that Changes Itself: Stories of personal triumph from the frontiers of brain science, is a book that had me raving to family and friends after each chapter. I could only put it down to ponder the significance of the subject matter to human society before reading on.  I want to take this opportunity to highlight a few titbits that stuck with me.

Friday, March 19, 2010

Book review: Embracing the Wide Sky

Autistic savant Daniel Tammet wrote this gem, and yes that means he has ‘rainman' like mental skills.  In fact, he learnt Icelandic (his 11th language) in the week prior to being interviewed for an Icelandic television program. 

Sunday, December 20, 2009

Summer Reading


The past few weeks I’ve somehow found time to read.  Here are a few interesting titles that I would recommend.

Thursday, November 12, 2009

Unthinkable

I read a book that opened my mind recently. It is probably not on the best seller lists (is #53,525 rank in Amazon a best seller?). It is called The Unthinkable: Who survives when disaster strikes – and why.

This book examines the human response to fear in crisis situations and is presented in a very easy to read, non-scientific, yet analytical way.

Monday, November 2, 2009

Business stripped bare

This book is Richard Branson’s latest eye opener into the world of Virgin. The one man publicity machine takes the reader on a tour of his business philosophy and how the philosophy actually works in the realms of the Virgin empire.

I am a fan of Branson and the Virgin empire, for the most part because the company seems to bring competition to formerly uncompetitive markets. Virgin Blue is a classic case study – it revolutionised air travel in Australia. The budget carriers in Europe had already been vigorously competing for some years, and it was only a matter of time before the same thing happened down under. But without Virgin, would we have waited another 5-10 years for air travel competition?

Sunday, September 20, 2009

Live anywhere and join the new rich

Timothy Ferriss’ book, The 4-hour Work Week, is definitely motivational, is full of practical ideas and tips. But after taking me on an exciting journey, it somehow it left me back where I began.

The premise of this book is there is no need to be trapped in the 9 to 5 drudgery, and that the life we want is waiting for us to come and grab it. We can stop wasting our precious time on menial tasks by becoming extremely efficient, and outsourcing much of our time consuming routine. By making your work ultra efficient, and mobile, you develop the freedom to see the world and fulfill your dreams. Simple.

I am economist, so the idea of maximising utility is no stranger to me. Timothy Ferriss, in my mind, is the ultimate homo economicus. He designs his life to fulfil his own goals, and ignores the need for social convention and traditional work routine – he should really be on the cover on of economic text book! But before I get into my thoughts on particular parts of the book, let me present some of my favourite quotes.

Retirement is worst-case scenario insurance
Less is not laziness
The timing is never right
Ask for forgiveness, not permission
Emphasise strengths; don’t fix weaknesses

And that’s all by the second chapter. One point I would like to develop is the distinction Tim makes between effectiveness and efficiency. Effectiveness is doing things that get you closer to your goals. Efficiency is performing a given task in the most economical manner. This idea resonated with me (I had never heard this distinction made before), as I believe I naturally think in terms of effectiveness.

Two other little gems from this book the 80/20 rule, and Parkinson’s Law. The 80/20 rule is a restatement of the non-linearity of our inputs and outcomes. For example, 80% of our output might come from 20% of our time, while 20% of sources might cause 80% of my problems. It allows one to optimise by isolating and eliminating (another key point of Tim’s) wasteful use of your time.

Parkinson’s Law dictates that a task will swell in (perceived) importance and complexity in relation to the time allocated for its completion. Just like those university assignments, a long deadline give too much time to think about the unimportant parts and delay hitting the key tasks in the head. Combining these two principles is the secret to heightened productivity. As Tim states:

Limit tasks to the important to shorten work time (80/20)
Shorten work time to limit tasks to the important (Parkinson’s Law)

Couldn’t agree more - but I've never been able to express it like that. As well of these little gems of advice, the book is packed with actual practical advice, such as email templates, examples of courteous phone messages explaining how you won’t be answering y our phone much anymore, and phrases to use when negotiating remote working arrangements with your boss. Oh, and there’s plenty of links to website dealing where particular issues covered in more detail.

In the end, I feel like I am already living the 'lifestyle design' mentality of the new rich espoused by Ferriss. While his advice is extremely helpful, and quite motivating, it leaves me back to the existential conundrum I had at the beginning. If we can have anything we want out of life, and I believe we can, what is it that I want?

Tuesday, April 28, 2009

On Andrew Bolt

I must say that until recently I have had little exposure to the writings of Andrew Bolt. A short snippet of him on telly once seemed to highlight for me that this guy was a headline grabbing voice of the extreme ‘right-wing’ (whatever that is anyway) political agenda. However in the past few days I have been reading his blog, and now finally have read his book Still not sorry. And I must say, although he can fall into the trap of making illogical assertions, just as can the left on many occasions, he writes quite a bit of commonsense that seems to raise much less publicity. His book provides snippets of his basic opinion on particular issues, so let me please take the time to highlight this commonsense on various issues.

1. Australia is divided into the ‘elites’ who get much of the air time, and whose opinions are out of step with the average Aussie. The elites believe that people need such things as racial sensitivity training, and as a group give a disproportionately loud voice to left wing agendas. The majority of us think things are pretty good and we just like to get on with enjoying life.

I must say that the more exposure I’m having to many academic and intellectual types trying to make a difference to policy, the more I am beginning to see the total disconnection with reality of many of these said ‘intellectuals’.

2. Australia is a great country, and we shouldn’t sacrifice our fundamental freedoms and opportunities for fringe issues of minority interest groups.

Many of the problems we face in Australia today are, in comparison to the rest of the world and to recent history, very trivial. Economic research is a good guide. These days economists can theorise about happiness coefficients, gender implications of armed conflict. If there were real issues to tackle, economists would not get sidetracked like this. Compared to historical standards we are living in a utopia. The message from Andrew Bolt is that we should get some perspective and be thankful for the opportunities provided to us in our society.

3. Racism is not the issue it is made out to be, and we could do much better if we didn’t promote policy based on race, gender or any other ‘ist’ feature.

Along these lines, there has been further frustration for me this week. The Wild Rivers Act allows the government to protect the natural flow of waters courses if they meet certain criteria for being natural environments. No problems there, it is the type of policy I think delivers tangible benefits. But Indigenous leader Noel Pearson had now started complaining that the legislation will lock up land from development, taking away opportunities for local indigenous communities. But most indigenous groups surveyed by the department found widespread support. So what is the real opinion of indigenous people in the Cape?

I think our mistake here is to segregate people by race. Can’t they just be two opinions of groups in the Cape? Why should race imply a set opinion about a policy?

In France it has been illegal for quite some time to classify people by race. The government does not even collect statistics about racial identity (since gathering that data is illegal). This, I believe, should be the target for us. If we can’t classify people by race, we can’t write racist policies.

The French elite are typical targets of Bolts critique. They say such things as, ‘Every time we want to study the divisions of society we are accused of dividing society’. That is exactly the point.

Bolt also stole my idea about irrational women in positions of power – about 7 years before I had it! I have recently attended a workshop with Australian academics and experts on environmental economic assessment, and was shocked at the illogical and often conflicting theories that underpin sociology – a discipline, that from my experience, is populated with highly ‘educated’ middle aged women who believe in astrology and alternative medicine. Are these ‘elites’ the people we want advising our decision makers?

4. Help people help themselves.

Bolt also repeatedly claims that handouts are not long term solutions to poverty. There is nothing controversial here. While we as a society have decided that in times of need people who cannot support themselves will be supported by the rest of us, no one believes that this support CAUSES, or provides incentives to, those who are provided with it to begin to look after themselves again. Economists know that such support inadvertently provides incentives to not return to work. So why should we continue to throw good money after bad in supporting communities such as Palm Island?

Where Bolt gets himself into strife is when he allows himself to effortlessly drop his evidence-based critical line of argument and get down in the gutter, spruiking pro-Howard pro-liberal rhetoric, when there are obvious flaws in both Green and LIberal sides of the argument. He lets fly with ‘facts’ without citations, which actually quite bugs me, as it is easy enough to find ‘reliable’ evidence both ways in the world of grey that is politics.

Thursday, October 9, 2008

Flow

Contemporary economists know that money doesn’t buy happiness. I take that back. Economists have trouble even defining money or happiness. But they can use stone-age tools (aka the art of regression) to ‘prove’ to us what most societies have known for millennia.

This, however, is a problem. Traditional economic thought has at its core the concept of utility - the thing that individuals try to maximise, and that we as a society should also strive to maximise. In effect, it is their best attempt at defining happiness. Economists are now struggling to get past this fundamental happiness contradiction. I would like to add some thoughts from psychology that may help our understanding, and reveal the underlying evolutionary explanation of how happiness is achieved.

I will preface this blog by saying that the majority of the views I am sharing actually come from a book called Flow: The psychology of optimal experience, by Mihaly Csikszentmihalyi. He breaks down happiness into to components – pleasure and enjoyment. Pleasure by itself will not provide us with happiness. It is the type of experience we have when we do not invest psychic energy in an activity. It is passive. Pleasure may come from watching a movie, walking in the park, admiring a work of art, listening to music. Enjoyment on the other hand requires the investment of psychic energy. The flow experience is how one gains enjoyment, and it comprises eight components:
1. Confronting tasks that we have a chance of completing
2. Concentration
3. Clear goals
4. Immediate feedback
5. Removes awareness of worries and frustrations
6. Provides a sense of control over one’s actions
7. Concern for the self disappears
8. The sense of time is altered

Clearly, a life without confronting tasks and clear goals is inherently unrewarding. But this is exactly the goal of much of societies development in the past century. The goal has been to make life easy, with no confronting tasks, and give us more choice, and as I have suggested earlier, this ‘choice-overload’ leads to less clear goals.

Surprisingly, Csikszentmihalyi found that people experience flow more often at work than during leisure time. It is easy to imagine many working environments where the first 4 components of flow are readily available. Other places people experience flow is when playing computer games. In fact, the game design field is probably the greatest user of the principles of flow. You know how you start with easy levels. You acquire greater skills, and are then confronted with more challenging tasks. All the way, there is plenty of feedback, and two hours have gone by in a flash. Edward Castranova has written about how people are shifting from their real lives, into online gaming worlds in search of flow.

One of the most interesting parts of flow is that to continue to have flow experiences, you need increasing complexity of challenges, and of skills to meet them. As a society , we have basically taken away much of the challenge of living, and also taken away many of the skills necessary to learn in order to live. Many people cannot cook themselves a meal from fresh ingredients. They cannot mend their own clothes, repair their houses, cut their own hair, clean their own house – what skills do we have?

I would to propose an evolutionary explanation for this desire for flow. In essence, those who sought more challenges, and reached them, were rewarded. You can imagine a tribe of early humans seeking out new lands in the face of increasing numbers of predators. The reward for this desire to rise above challenges, and persevere until new lands are found, would be greater reproduction and survival rates. Those early humans who did not have this desire to confront challenges, would ultimately perish before they could reproduce.

The ironic part of all this, is that flow often occurs in the times of most hardship. Csikszentmihalyi found that many prisoners of war, and people who have were faced with major physical disabilities, actually experienced flow more often than those of us living cushy urban lives in the 21st century. While we may find much pleasure in our comforts, this will not bring us happiness.

So what can we do to increase flow? We need to acknowledge that the most vital part to this story is that flow actually is self-determined. You can actually learn to be happy. External factors play no role. It is how you interpret your external environment that determines your happiness.

With all this great detail about human motivation and happiness, I still wonder why economists seek explanations use outdated concepts like utility to explain our actions. By sticking with this underlying theory they are stuck with trying to see whether factors such as wealth, number of children, marital status, age or any number of external circumstance or events can provide happiness. They pursue this even though they know can never prove a casual link. I guess reality and economics don’t mix sometimes.