Going Bananas

Torrens is reading Thinking, Fast and Slow – it’s a behavioural economics book by Nobel Prize winning psychologist Daniel Kahneman who won for his work showing that people don’t always think as rationally economists assume them to. Must say, this is a good book: its easy to read and just plain interesting. That siad, Torrens finds behavioural economics only somewhat interesting – it doesn’t really turn his crank. Well it didn’t until a friend emailed him and got him wondering if policy makers might not behave in predictably irrational ways. After all, they are human too.  See the review of the book by William Easterly here.

Before you go on, if you have never done it before, then you need to watch this video in which six people — three in white shirts and three in black shirts — pass basketballs around. While you watch, you must keep a silent count of the number of passes made by the people in white shirts. Do it now before reading on.

Now scroll down.

 

 
OK did you see it – the gorilla? Don’t worry if you didn’t, about half the people who watch it don’t notice that a gorilla – actually someone dressed as a gorilla — comes in and thumps his chest and wanders out of the picture.

The point here is well known to psychologists – people don’t always see the obvious even when it is staring them in the face. There are other “mistakes” that people make too – they often have time inconsistent preferences, which may entice them to worry excessively about the present at the expense of tomorrow. So after reading this blog on The Drum and Easterly’s review, TH can’t help wonder whether irrationality amongst Europe’s policy makers has led to an unjustified hardening of previous conclusions about the  currency union and how it should function.  Perhaps that aren’t seeing the gorilla.  TH reckons that the monkey in the room is the need to slim down the euro zone, and even if Europe’s policy makers recognise that a euro exit is inevitable, perhaps they are waiting too long to deal with that.

But who knows  — TH is just as hardened and irrational — he didn’t spot the gorilla the first time either!

7 thoughts on “Going Bananas

  1. Just to maintain a biological rigor to this blog, gorillas are not monkeys. Both are primates but the former is an ape and the latter is not an ape. Basically apes don’t have tails and are really good at swinging through trees because of the way their shoulders connect to their arms. Monkeys can climb but can’t swing through the trees like our gibbon-like relatives. Both monkeys and apes do like bananas though, exemplified by my favourite desert, the banana split.

    1. Thanks for the rigor, Mount. TH reckons there’s scope for more monkey business (or is that ape business) around here.
      Thanks for the reading material and idea too. Keep it coming.

  2. Torrens,

    Excellent post. I agree — to understand how Europe got into this mess requires as much psychology as economics and finance. Two years ago, euro zone contagion could have been contained by swift, decisive actions to deal with Greece. Yet, Europe’s economic and financial elite refused to contemplate such measures. Why? Because pride prevented them from seeing the gorilla. “This is Europe! We don’t restructure; we don’t need an IMF program. We can deal with it internally.” Sure, sure you can.

    Over to Shakespeare:
    Being so great, I have no need to beg.
    Richard II 4.1.309, Richard to Bolingbroke

    Ricardo

  3. It is amazing how pride, as you so rightly call it, manages to interfere with even those decisions that ee know are to be for the best.

  4. Is it pride or just the enormity of the situation? I know from personal experience that in really complicated decisions with no easy options I’m likely to just sit on my hands.

    1. Monut,
      Agreed, quite likley that Euopean policy makers are sitting on their hands. To an extent it is perfectly rational behaviour, when you do that you are doing so becuase there is an “option value” to waiting — so called becasue the decision is the same that finance guys make when they buy financial options. Anyway, the idea is simple, with complex risky decisions that are hard to reverse once you have committed to them, you wait because every day of waiting reveals more information which improves the quality of the decision. You make a decision when the option value of waiting an extra day just equals the cost of waiting the extra day.

      There are a few problems with this, but to TH the main one is that the EU gets all the benefits of waiting while the rest of the world shares in the costs. Coneqently Europe waits too long.

      Anyway, next time you have a risky complex irreversible decision to make, don’t be too hard on yourself for waiting — in part you will be exercising your valuable option to wait.

  5. Monut: I agree, the problem today could well be paralaysis induced by the enormity of the situation. But I reckon that two or more years ago, when it was a problem and not a crisis, it was pride.

    Ricardo

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