And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

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2015
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Re: Taleb believes Thaler is an Intelectual Yet Idiot

Post by 2015 » Wed Oct 11, 2017 9:55 pm

VictoriaF wrote:
Wed Oct 11, 2017 5:22 pm
2015 wrote:
Tue Oct 10, 2017 6:48 pm
How nice that you got to meet him in person! For the opportunity to have lunch with Taleb, he could be as mean to me as he wanted to be.
I have not had lunch with Taleb, but I talked with him over refreshments before his lecture at the DoI.

If you want to see him in person, according to BobK, there will soon be an opportunity:
bobcat2 wrote:
Wed Oct 11, 2017 9:06 am
In September of last year Nassim Taleb published online an excerpt from his forthcoming book, Skin in the Game.
...
BobK
When Skin in the Game is out, Taleb will go on a book tour and come to a bookstore near you.

Victoria
Only reason I want to have lunch with the persons I named is there are particular questions I would like to ask them. For Taleb, for example, I might ask "what scares you personally and churns in your mind when you're lying on your pillow at night?" It's not meant to be a personal question, but rather a window into his thinking on how ordinary people like me can best mimic how he uses his own material.

I've come to the conclusion that I want the big picture material, stuff that helps explain and associate across different fields. A perfect example would be Andrew Sullivan's recent piece on tribes in The New Yorker. Personally, it blew me away how it made associations between what is presently occurring in politics, power, and society.

We will see if Taleb's new book measures up to massively useful (for me at least) Black Swan or if it will be the equivalent of a Hollywood "Return of the..." movie.

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Re: Taleb believes Thaler is an Intelectual Yet Idiot

Post by bobcat2 » Wed Oct 11, 2017 10:09 pm

VictoriaF wrote:
Wed Oct 11, 2017 4:15 pm
I am guessing that Taleb has not read Nudge and Misbehaving and possibly misunderstands Thaler.
Hi Victoria,
I am not buying that Taleb has not read Nudge or misunderstands it. Taleb is talking about people that are what he calls IYIs - Intellectual Yet Idiots. And of all the people in the world he picks Thaler as his prime example of an IYI. Why would he pick as his primary example someone whose work he is not familiar with? That doesn't make any sense.

Furthermore, Taleb goes on to explain why he believes "nudge behavior modification" is so wrong. Taleb doesn't believe that academics like Thaler, who have very little gritty "real world" experience, should be telling those with "real world" experience that their behavior should be nudged back to some protocol Thaler approves of. Taleb goes on to suggest that many people are tired of being nudged by elitists (like Thaler) to do what these IYIs think are best for other people, who apparently don't know what is best for themselves.

I don't agree with Taleb on this, and I doubt if you do either, but he seems very familiar with nudge behavior modification and believes that people who believe others should be nudged are "Intellectual Yet Idiots".

BobK
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by cinghiale » Thu Oct 12, 2017 4:05 am

Taleb is a flame thrower

Taleb is essential reading.

In both his non-conformist style and his thought-provoking substance, Taleb’s posts are like the great dissents written by the late Supreme Court Justice Antonin Scalia. It isn’t a matter of liking or disliking, or of essential agreement with the underlying philosophy or methodology. But Taleb’s flaming arrows, like Scalia’s, identify inconsistencies and, rather than just thinking outside the box, question if the box holds anything of value. And Taleb does so with rich imagery and out-of-the-ordinary syntax. His use of language nudges the reader to slow down and read carefully. It was once said that the role of the prophet was to “comfort the afflicted and afflict the comfortable.” Taleb dead lifts with the hoi polloi and seeks to draw blood in his disagreements with elitists. Say what you will... he is unique.

I find his targeting of Thaler perplexing. How can he be such best buds with Daniel Kahneman and yet hold Thaler in contempt??? I appreciate seeing Victoria sharing her own cognitive dissonance on that score and for bobcat2’s responses and insights.
"We don't see things as they are; we see them as we are." Anais Nin | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by TomatoTomahto » Thu Oct 12, 2017 7:56 am

patrick013 wrote:
Tue Oct 10, 2017 6:20 pm
Well congratulations to them all. It seems very rare still a
candidate from a state university has won. Don't know. Like
the Big Ten for example. But several of those schools are not
state university's.
I usually do not pay much attention to emails from my kids’ old high school, but I am pleased to learn that Richard Thaler attended Newark Academy in Livingston, NJ.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Thu Oct 12, 2017 9:16 am

cinghiale wrote:
Thu Oct 12, 2017 4:05 am
His [Taleb's] use of language nudges the reader to slow down and read carefully. It was once said that the role of the prophet was to “comfort the afflicted and afflict the comfortable.” Taleb dead lifts with the hoi polloi and seeks to draw blood in his disagreements with elitists. Say what you will... he is unique.

I find his targeting of Thaler perplexing. ...
While Taleb's florid writing style is certainly unique, I don't believe the substance of IYI is very unique. Putting aside the wildly different modes of expression, the nub of Taleb's economic argument in IYI could have been written by Steve Bannon. The targeting of Thaler is perfectly consistent with Taleb's overall thesis in IYI.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Taleb - Why" Nudge" and much of Behavioral Econ is bullsh*t science

Post by bobcat2 » Thu Oct 12, 2017 9:50 am

Why" Nudge" and much of Behavioral Econ is bullsh*t science - Nassim Taleb
Behavioral economists tend to produces biases that are not biases; these are almost always stemming from the lack of knowledge of risk and probability by the "scientists". They lead to "nudges" and recommended actions that are dangerous to individuals and societies.
Link to Taleb complete argument against nudges and behavioral economics in general.
- https://twitter.com/nntaleb/status/883689826335281153

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Thu Oct 12, 2017 10:58 am

cinghiale wrote:
Thu Oct 12, 2017 4:05 am
And Taleb does so with rich imagery and out-of-the-ordinary syntax. His use of language nudges the reader to slow down and read carefully.
Yes, you have to read Taleb slowly and carefully. I have to reread. :)

Richard Thaler fell into the trap of not reading carefully when he responded on Twitter to Taleb's criticism of Nudge and Thaler in the IYI article.

When Talib posted IYI on his website in September of last year Thaler countered by tweeting, "if there are any non-idiots not named Taleb they are kept a secret."
Link to Thaler tweet - https://twitter.com/r_thaler/status/777 ... 18?lang=en

Taleb jumped on this in a postscript to IYI, because Taleb is not calling the vast majority of people idiots. Instead he is criticizing what he sees as the busy body minority that want to nudge everyone else's behavior. These are the people Taleb is calling idiots. And Richard Thaler is a classic example of this type of idiot as Taleb sees it.

BobK
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Thu Oct 12, 2017 5:37 pm

2015 wrote:
Wed Oct 11, 2017 9:55 pm
Only reason I want to have lunch with the persons I named is there are particular questions I would like to ask them. For Taleb, for example, I might ask "what scares you personally and churns in your mind when you're lying on your pillow at night?" It's not meant to be a personal question, but rather a window into his thinking on how ordinary people like me can best mimic how he uses his own material.
I have a guess at what Taleb might answer. And it's related to the discussion of Taleb and Thaler.
bobcat2 wrote:
Thu Oct 12, 2017 10:58 am
cinghiale wrote:
Thu Oct 12, 2017 4:05 am
And Taleb does so with rich imagery and out-of-the-ordinary syntax. His use of language nudges the reader to slow down and read carefully.
Yes, you have to read Taleb slowly and carefully. I have to reread. :)

Richard Thaler fell into the trap of not reading carefully when he responded on Twitter to Taleb's criticism of Nudge and Thaler in the IYI article.

When Talib posted IYI on his website in September of last year Thaler countered by tweeting, "if there are any non-idiots not named Taleb they are kept a secret."
Link to Thaler tweet - https://twitter.com/r_thaler/status/777 ... 18?lang=en

Taleb jumped on this in a postscript to IYI, because Taleb is not calling the vast majority of people idiots. Instead he is criticizing what he sees as the busy body minority that want to nudge everyone else's behavior. These are the people Taleb is calling idiots. And Richard Thaler is a classic example of this type of idiot as Taleb sees it.

BobK
Bob,

I am taking back my speculation that Taleb may have not read Nudge. And I am replacing it with a new speculation.

Recently, I have been listening to Russ Roberts discussions with Nassim Taleb on EconTalk. Yesterday, I also read a couple of chapters from Taleb's upcoming book. (Thank you for the links!) I think I have figured out the reason for Taleb's anger against Thaler.

In one of the discussions with Roberts, Taleb is passionately critical of genetically modified food and discusses the precautionary principle as a risk response. Taleb is a humanist. He wants the humanity to survive. He is a risk professional. And thus he anticipates great potential risks in activities that most people consider normal.

Somewhere in his Skin in the Game chapters Taleb comments on Cass Sunstein, Thaler's co-author of Nudge, supporting Monsanto. And so my current guess is that Taleb's all-out fight to save the planet sets him against Sunstein, and by association against Thaler.

Taleb also makes a disparaging comment to Roberts about behavioral economics and its emphasis on biases. His point is that cognitive biases have evolutionary justification, that people who had them have survived in ancestral environments, and that calling these biases irrational is an ivory tower malaise. Thus, we should not nudge people away from their natural propensities.

I agree with Taleb about the origin of cognitive biases, and that in ancestral environments they served our ancestors well. But the biases nudged in Nudge are specific to the modern society. The very problem is that we have carried our neurological adaptations into a radically new reality, and now we have to understand where they serve us well and where we need to nudge them away, or even erect some barriers.

I still admire both Taleb and Thaler. I am still having cognitive dissonance about their conflict. But my dissonance is much reduced now that I came up with my theories.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by 2015 » Thu Oct 12, 2017 8:15 pm

cinghiale wrote:
Thu Oct 12, 2017 4:05 am

...

I find his targeting of Thaler perplexing. How can he be such best buds with Daniel Kahneman and yet hold Thaler in contempt??? I appreciate seeing Victoria sharing her own cognitive dissonance on that score and for bobcat2’s responses and insights.
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go. Reminds me of the many threads here arguing endlessly re tips/no tips, the perfect AA, the true meaning of risk, Bogle's latest prediction, international/no international, bonds or cd's, etc.

I agree with Munger that we really only need a handful of important mental models to navigate life effectively. The rest is just people trying to lasso your eyeballs. As I've stated before, your time is your money is your life.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Thu Oct 12, 2017 9:01 pm

2015 wrote:
Thu Oct 12, 2017 8:15 pm
cinghiale wrote:
Thu Oct 12, 2017 4:05 am
...
I find his targeting of Thaler perplexing. How can he be such best buds with Daniel Kahneman and yet hold Thaler in contempt??? I appreciate seeing Victoria sharing her own cognitive dissonance on that score and for bobcat2’s responses and insights.
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go. Reminds me of the many threads here arguing endlessly re tips/no tips, the perfect AA, the true meaning of risk, Bogle's latest prediction, international/no international, bonds or cd's, etc.

I agree with Munger that we really only need a handful of important mental models to navigate life effectively. The rest is just people trying to lasso your eyeballs. As I've stated before, your time is your money is your life.
One man's weeds are another man's helicopter. And with Taleb, it's hard to get him without getting into the deepest of the weeds, and doing it more than once. A summary of The Black Swan is short: BS happens. But reading, and rereading, and listening to, and internalizing his vignettes does you a lot of good. You start anticipating Black Swans and choosing your risks. The chances of your survival, your biological imperative, increase.

Similarly, Sullivan's article on tribalism can be summarized in one-two sentences. But it's an engrossing read with gems in every paragraph.

Using Sullivan's concept, I want to belong to both tribes: Taleb's and Thaler's, and mediate between them.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by 2015 » Fri Oct 13, 2017 12:56 am

VictoriaF wrote:
Thu Oct 12, 2017 9:01 pm
2015 wrote:
Thu Oct 12, 2017 8:15 pm
cinghiale wrote:
Thu Oct 12, 2017 4:05 am
...
I find his targeting of Thaler perplexing. How can he be such best buds with Daniel Kahneman and yet hold Thaler in contempt??? I appreciate seeing Victoria sharing her own cognitive dissonance on that score and for bobcat2’s responses and insights.
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go. Reminds me of the many threads here arguing endlessly re tips/no tips, the perfect AA, the true meaning of risk, Bogle's latest prediction, international/no international, bonds or cd's, etc.

I agree with Munger that we really only need a handful of important mental models to navigate life effectively. The rest is just people trying to lasso your eyeballs. As I've stated before, your time is your money is your life.
One man's weeds are another man's helicopter. And with Taleb, it's hard to get him without getting into the deepest of the weeds, and doing it more than once. A summary of The Black Swan is short: BS happens. But reading, and rereading, and listening to, and internalizing his vignettes does you a lot of good. You start anticipating Black Swans and choosing your risks. The chances of your survival, your biological imperative, increase.

Similarly, Sullivan's article on tribalism can be summarized in one-two sentences. But it's an engrossing read with gems in every paragraph.

Using Sullivan's concept, I want to belong to both tribes: Taleb's and Thaler's, and mediate between them.

Victoria
I have close to 200 catch-up books which I was supposed to have completed reading by the end of this year (admittedly, 50 have been added to the list during the year). Since I have adopted Shane Parrish's approach to not only absorb, but to capture the relevant information read that is directly applicable to life, my reading has slowed to take time to regularly review in order to capture the information so as to apply it more fully. These catch-up books are in a variety of fields containing vital information that will in fact increase my chances of survival, my biological imperative, and most importantly, my decision making. They will also increase my anti-fragility, optionality, agility, and focus, competencies without which no one can thrive in this day and age.

3 books I'll be picking up tomorrow are:

The shallows : what the Internet is doing to our brains
Intuition pumps and other tools for thinking
The sovereign individual : how to survive and thrive during the collapse of the welfare state

Books on order are:

Everybody lies : big data, new data, and what the Internet can tell us about who we really are
The people's almanac presents the Book of predictions
Scale : the universal laws of growth, innovation, sustainability, and the pace of life in organisms, cities, economies, and companies

Two game-changing books I read this year were:

The New Urban Crisis: How Our Cities Are Increasing Inequality, Deepening Segregation, and Failing the Middle Class
Bobos in Paradise: The New Upper Class and How They Got There

Both books did much to explain the many privileges I've had over the course of my life as a result of choices made, and to ensure that I now continue to make those same choices, only consciously.

It's impossible to make associations across concepts if one falls into and remains in the crevice of a few domains only. It's probably my biggest issue with the BH forum, with the largely narrow focus on personal finance, economics, and investing, at the expense of a universe of information directly applicable to human decision making which affects everything in life, including these very fields.

This is one of the things I like about Buffet and Munger. These two gentlemen have been steadily adding to their broad-based knowledge for years, slowly increasing their circle of competence over time in the process.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by cinghiale » Fri Oct 13, 2017 2:32 am

2015 wrote:
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go.
I do not see the discipline over which Taleb is attacking Thaler as “weeds.” Looking again at Thaler and Sunstein’s Nudge, Thaler’s excellent chapter on cognitive biases leads into important “so what?” policy prescriptions.

Let’s assume that Victoria is onto something when she infers certain directions and priorities in Taleb’s writings and speeches. Let’s agree that Taleb is, in fact, in an all-out fight to save the planet. OK, there’s the GMO issue. But then there’s pollution, water poisoning, and the use of renewable resources. Thaler and Sunstein suggest nudges toward greater amounts of recycling. Here in Europe, recycling has been elevated to a social and economic imperative. How about low level sticks and carrots that nudge folks in the US to recycle? A return to deposits on glass bottles? How about nutrition? (Another topic Taleb seems quite revved up about.). The US public schools that have pushed fresh fruits to the front of the cafeteria line and subsidized their sale— allowing fresh produce to compete with the Burger King and Taco Bell concession— have worked. The fast food companies, with gobs of money to spend on PR, have squacked loudly and criticized these policy changes. But they have worked. And then how about the ever-so-reasonable nudge of making participation in a retirement plan the default option at places of employment? You can always opt out, but that takes the effort of going to HR and signing a form. The easy option, the do-nothing option, the nudge, is to participate. Granted, that may not save the planet, but it may improve the lives of a significant number of workers.

Perhaps individuals do not need to master the definitions and applications of dozens of cognitive biases. But the application of behavioral economics to social and economic policy can have broad, and positive, effects on the lives of the many. I think Nudge provides clear evidence of this.
"We don't see things as they are; we see them as we are." Anais Nin | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by cinghiale » Fri Oct 13, 2017 7:11 am

2015 wrote,
3 books I'll be picking up tomorrow are:
The shallows : what the Internet is doing to our brains
This is off-topic, but Carr’s book The Shallows is the enlargement of an excellent essay he published in The Atlantic in 2008 titled “Is Google Making Us Stupid?” With all respect to the author, the book doesn’t add that much to the essay. Since it was mentioned that one’s time is one’s money is one’s life, this may save you a few hours of reading that you can devote to the other books on your list.

See: https://www.theatlantic.com/magazine/ar ... id/306868/
"We don't see things as they are; we see them as we are." Anais Nin | | "Sometimes the first duty of intelligent men is the restatement of the obvious." George Orwell

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by SGM » Fri Oct 13, 2017 7:58 am

The equity premium puzzle during accumulation has always intrigued me. If the market goes low, there are opportunities to buy low. From 1925 to 1995 the equity premium for a $1000 invested in treasuries vs. stocks is a difference of $880,000. I am not cherry picking the numbers but the author who quotes them and refers to Thaler may have. So why would a young person with a long term outlook only buy treasuries? Confession: I was in the market 100% through thick and thin for many years prior to retirement.

The nudge to automatically enroll people in a 401k has little downside. Except one may stick with the initial contribution level when a higher contribution level would be more advantageous. I am not a fan of government intrusion, but with the ease of ending contributions this is not too much of an intrusion. I never needed a nudge. I paid myself first, but I see so many people who do not take advantage of tax deferral.

As for Taleb, I am hoping that he writes more clearly in his next book. Black swans have added to my awareness that I need multiple sources of income not related to stock market valuations. His ad hominem arguments are not helpful.

Thaler's work on behavioral life-cycle theory explains to my satisfaction why some still accumulate wealth in retirement.

I have few heros except maybe VictoriaF for her joie de vivre and Bobcat2 for his knowledge of economics.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Valuethinker » Fri Oct 13, 2017 12:11 pm

cinghiale wrote:
Fri Oct 13, 2017 2:32 am
2015 wrote:
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go.
I do not see the discipline over which Taleb is attacking Thaler as “weeds.” Looking again at Thaler and Sunstein’s Nudge, Thaler’s excellent chapter on cognitive biases leads into important “so what?” policy prescriptions.

Let’s assume that Victoria is onto something when she infers certain directions and priorities in Taleb’s writings and speeches. Let’s agree that Taleb is, in fact, in an all-out fight to save the planet. OK, there’s the GMO issue. But then there’s pollution, water poisoning, and the use of renewable resources. Thaler and Sunstein suggest nudges toward greater amounts of recycling. Here in Europe, recycling has been elevated to a social and economic imperative. How about low level sticks and carrots that nudge folks in the US to recycle? A return to deposits on glass bottles? How about nutrition? (Another topic Taleb seems quite revved up about.). The US public schools that have pushed fresh fruits to the front of the cafeteria line and subsidized their sale— allowing fresh produce to compete with the Burger King and Taco Bell concession— have worked. The fast food companies, with gobs of money to spend on PR, have squacked loudly and criticized these policy changes. But they have worked. And then how about the ever-so-reasonable nudge of making participation in a retirement plan the default option at places of employment? You can always opt out, but that takes the effort of going to HR and signing a form. The easy option, the do-nothing option, the nudge, is to participate. Granted, that may not save the planet, but it may improve the lives of a significant number of workers.

Perhaps individuals do not need to master the definitions and applications of dozens of cognitive biases. But the application of behavioral economics to social and economic policy can have broad, and positive, effects on the lives of the many. I think Nudge provides clear evidence of this.
My problem w libertarian paternalism is old fashioned paternal paternalism works better! See Singapore.

Maybe banning indoor smoking was a "nudge" but it was also paternslism. So are high cigarette taxes. And they both work.

I think the atomistic individualistic approach championed in American intellectual life and society is past it's historical sell by date. Older forms will subsume it. I for one will miss it, but democracy is in great peril and so is western civilization. The individual will be sacrificed to the collective good in the times ahead. Once more we are moving to crisis.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by garlandwhizzer » Fri Oct 13, 2017 7:01 pm

VictoriaF wrote:
A summary of The Black Swan is short: BS happens. But reading, and rereading, and listening to, and internalizing his vignettes does you a lot of good. You start anticipating Black Swans and choosing your risks.
Agreed. The problem however is that you don't know beforehand where the black swan or risk in general for that matter is going to come from. By definition these events are not predictable in advance which is why they're so unexpected. For a market collapse or deflationary financial crisis, the safe asset that bails you out is Treasuries or options if you are clairvoyant about the future. For an inflationary crisis or hyperinflation nominal bonds like Treasuries get killed. You need an entirely different portfolio to be prepare for this type of crisis: TIPS and real assets like commodities and real estate or again options if you happen to know the future in advance. No one, however, is consistently clairvoyant about the market or the economy's future. So most of your costly option protection expires without being used. For a natural crisis like Houston floods, Santa Rosa Fires, or Caribbean vacation homes, the thing that bails you out is not concentrating your assets geographically, no matter how safe and attractive they seem prior to the disaster.

I believe but am not sure that Taleb's black swan strategy, designed to be fully prepared for black swans using options and other tools, kept him largely out the equity during our recent massive 8+ year bull market. That's a lot of lost opportunity cost. I have also read that he was caught by the SEC in 2009 for exaggerating his fund's results. He does not routinely report his investment performance results but instead issues a press release when he strikes it big with options. The last such big announcement was in 2008. His earlier hedge fund, Empirica LLC, closed after 5 years in 2004. In the tech collapse of 2000 it made 60%, but that was followed by losses in 2001, 2002, and small gains when the market skyrocketed in 2003 and 2004. I think it's fair to say that although he may be brilliant, his investment record is spotty.

How to explain this? Quote from Time Magazine article on Taleb Aug. 2012 regarding his outlook:
But the implicit lesson of his (Taleb's) paper, for investors, is this: Past performance really, really isn’t indicative of future results. Don’t chase performance, because chances are good that this performance is driven by luck, not skill, and that the performance of the “hot” manager of today will ultimately revert to the mean.
In short, he believes that luck trumps skill as the driving force of outperformance in active management and warns us that past performance does not guarantee the future. There's something I can totally agree with. One more observation: black swan strategies cushion black swans but likely do so by substantially decreasing expected future investment returns unless you prepare in advance for the right kind of black swan and you don't have to wait 20 years for it to happen. These events are rare and protection from them shouldn't IMO dominate a portfolio unless you're already very, very rich.

Garland Whizzer

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sat Oct 14, 2017 2:24 pm

garlandwhizzer wrote:
Fri Oct 13, 2017 7:01 pm
VictoriaF wrote:
A summary of The Black Swan is short: BS happens. But reading, and rereading, and listening to, and internalizing his vignettes does you a lot of good. You start anticipating Black Swans and choosing your risks.
Agreed. The problem however is that you don't know beforehand where the black swan or risk in general for that matter is going to come from. By definition these events are not predictable in advance which is why they're so unexpected. For a market collapse or deflationary financial crisis, the safe asset that bails you out is Treasuries or options if you are clairvoyant about the future. For an inflationary crisis or hyperinflation nominal bonds like Treasuries get killed. You need an entirely different portfolio to be prepare for this type of crisis: TIPS and real assets like commodities and real estate or again options if you happen to know the future in advance. No one, however, is consistently clairvoyant about the market or the economy's future. So most of your costly option protection expires without being used. For a natural crisis like Houston floods, Santa Rosa Fires, or Caribbean vacation homes, the thing that bails you out is not concentrating your assets geographically, no matter how safe and attractive they seem prior to the disaster.
You are right that without knowing the nature of the next Black Swan, you can't prepare for it. Multipurpose defensive measures, such as TIPS, reduce returns of your portfolio. In my opinion, a workable strategy is continuous balancing between your human capital and financial capital. When you are young and have a large human capital in terms of your education, career prospects, and potential earnings--you take market risks and possibly lose everything. As your earning potential diminishes, you reduce your portfolio risks and focus on the capital preservation.

Geographic diversification works for real estate. I don't own real estate and try to build some cultural diversification. For example, I have friends in the Czech Republic and I am learning the Czech language. If I had to, I'd move to the Czech Republic.
garlandwhizzer wrote:
Fri Oct 13, 2017 7:01 pm
I believe but am not sure that Taleb's black swan strategy, designed to be fully prepared for black swans using options and other tools, kept him largely out the equity during our recent massive 8+ year bull market. That's a lot of lost opportunity cost. I have also read that he was caught by the SEC in 2009 for exaggerating his fund's results. He does not routinely report his investment performance results but instead issues a press release when he strikes it big with options. The last such big announcement was in 2008. His earlier hedge fund, Empirica LLC, closed after 5 years in 2004. In the tech collapse of 2000 it made 60%, but that was followed by losses in 2001, 2002, and small gains when the market skyrocketed in 2003 and 2004. I think it's fair to say that although he may be brilliant, his investment record is spotty.

How to explain this? Quote from Time Magazine article on Taleb Aug. 2012 regarding his outlook:
But the implicit lesson of his (Taleb's) paper, for investors, is this: Past performance really, really isn’t indicative of future results. Don’t chase performance, because chances are good that this performance is driven by luck, not skill, and that the performance of the “hot” manager of today will ultimately revert to the mean.
In short, he believes that luck trumps skill as the driving force of outperformance in active management and warns us that past performance does not guarantee the future. There's something I can totally agree with. One more observation: black swan strategies cushion black swans but likely do so by substantially decreasing expected future investment returns unless you prepare in advance for the right kind of black swan and you don't have to wait 20 years for it to happen. These events are rare and protection from them shouldn't IMO dominate a portfolio unless you're already very, very rich.

Garland Whizzer
I don't know anything about Taleb's financial performance. If he applies Black-Swan strategies to the funds he manages and fails, it only shows that even he cannot predict Black Swans. My interest in Black Swans and Antifragility is strictly philosophical. Once I became familiar with these concepts I see them everywhere, and, I think, I benefit from them by leading the life I have, apart from any financial implications.

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by 2015 » Sat Oct 14, 2017 10:00 pm

cinghiale wrote:
Fri Oct 13, 2017 2:32 am
2015 wrote:
With the greatest of respect to both Thaler and Taleb, this is exactly the kind of weeds I don't have time for. When you're attempting to get a helicopter view of what really matters in life, landing in the street is not the way to go.
I do not see the discipline over which Taleb is attacking Thaler as “weeds.” Looking again at Thaler and Sunstein’s Nudge, Thaler’s excellent chapter on cognitive biases leads into important “so what?” policy prescriptions.

Let’s assume that Victoria is onto something when she infers certain directions and priorities in Taleb’s writings and speeches. Let’s agree that Taleb is, in fact, in an all-out fight to save the planet. OK, there’s the GMO issue. But then there’s pollution, water poisoning, and the use of renewable resources. Thaler and Sunstein suggest nudges toward greater amounts of recycling. Here in Europe, recycling has been elevated to a social and economic imperative. How about low level sticks and carrots that nudge folks in the US to recycle? A return to deposits on glass bottles? How about nutrition? (Another topic Taleb seems quite revved up about.). The US public schools that have pushed fresh fruits to the front of the cafeteria line and subsidized their sale— allowing fresh produce to compete with the Burger King and Taco Bell concession— have worked. The fast food companies, with gobs of money to spend on PR, have squacked loudly and criticized these policy changes. But they have worked. And then how about the ever-so-reasonable nudge of making participation in a retirement plan the default option at places of employment? You can always opt out, but that takes the effort of going to HR and signing a form. The easy option, the do-nothing option, the nudge, is to participate. Granted, that may not save the planet, but it may improve the lives of a significant number of workers.

Perhaps individuals do not need to master the definitions and applications of dozens of cognitive biases. But the application of behavioral economics to social and economic policy can have broad, and positive, effects on the lives of the many. I think Nudge provides clear evidence of this.
Let me put it this way. Just 16 years ago, in 2001, the movie Artificial Intelligence came out which ended with intelligence in the future recovering a frozen robot child who had known humans before they went extinct. Today, there is evidence that actually supports the case for this actually occurring at some point in the future, maybe sooner, maybe later. We are in an Age of Great Discontinuity, where traditional sources of power are dissolving on a massive scale, living in a time immediately after a great disruption in how humans think and live, and in a transition where traditional paradigms are being sucked into a black hole with no replacement in sight (at least for now). All of this is having a great impact on our decisions, our everyday lives, on everything we sense. In light of all of this, two economists bickering over the twitter fence with their hands on their hips saying "I"m right", no "I'm right" is something I don't have a nanosecond for. In complex systems systems such as the ones you and I are embedded in everyday, there's no usefulness in it.

From Trev Griffin (I think):
The limit on achieving desired outcomes is not nearly about having as much knowledge as it was in the past. The limit is on being able to use that knowledge in a way that lets people achieve their desired outcomes in a complex system. Everyone Gets x+y=z. That’s what we’ve all been trained to understand in the modern education system. We all know how to figure out the “right” answer. The problem is that there isn’t a right solution to most problems facing the modern world. Particularly the problems people are willing to pay to have solved.

Access to KNOWLEDGE is no longer limited. It’s access to RESULTS from complex systems that are limited.
Back when I read Charles Hugh Smith, he would often use the phrase "Cui bono?", or to whose benefit, when questioning a situation. It's to the benefit of authors, bloggers, academics, economists, experts, authorities, publishers,etc. to engage in all kinds noise in the interest of monetizing our eyeballs. After all, they got mortgages to pay (or perhaps some other agenda). In an age where we have transitioned from your time is your money is your life to your attention is your money is your life, we had best be strategic where we allocate that attention.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by 2015 » Sat Oct 14, 2017 10:05 pm

cinghiale wrote:
Fri Oct 13, 2017 7:11 am
2015 wrote,
3 books I'll be picking up tomorrow are:
The shallows : what the Internet is doing to our brains
This is off-topic, but Carr’s book The Shallows is the enlargement of an excellent essay he published in The Atlantic in 2008 titled “Is Google Making Us Stupid?” With all respect to the author, the book doesn’t add that much to the essay. Since it was mentioned that one’s time is one’s money is one’s life, this may save you a few hours of reading that you can devote to the other books on your list.

See: https://www.theatlantic.com/magazine/ar ... id/306868/
I would read the book, as it delves deeper into how changes in communication throughout history changed humankind. It weaves nicely with Yuval Noah Harari's Sapiens. IMO, one's time is best spent creating larger picture views of concepts that can be applied to everyday life. Nothing has changed humanity to the extent the internet has since the invention of the Gutenberg press, due to the liberation of knowledge. The implications are profound and reading the book might have some people questioning time spent in social media use.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Dandy » Sun Oct 15, 2017 7:57 am

What amazes me is that an educated body of economic thinkers had a hard time accepting that people don't always make rational economic decisions :oops:

People go for a free dinner and end up buying a timeshare they don't need and can't afford, people who are thrifty their whole life and then send all their money to someone who calls them and convinces them that gold is the only answer. Interest rates are at historic lows and people give their life savings to someone who guarantees them a 15% return. People invest in active funds with poor track records that have outrageous fees. The beat goes on. Oh and I have made some irrational decisions so I know from personal experience. While people can make irrational decisions all on their own, we often get a lot of help with sales pressure that is geared to play on our ego, dreams, or fears.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Tycoon » Sun Oct 15, 2017 8:11 am

This is an interesting thread. It reinforces what I already knew. People behave like sheep.

I very strongly agree with Taleb's IYI article.
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by suewolf » Sun Oct 15, 2017 8:24 am

So I have a question to all of you Thaler fans (of which I'm one. I also love anything by Daniel Kahneman - brilliant stuff).

Thaler recommends a Lazy investment approach of making saving automatic and buying target date retirement funds. (see this link for his own words: http://www.marketwatch.com/video/sector ... A486A.html)

While there are certainly many Bogelheads that are advocates of this advice, there's so many that advise a 3 or 4 fund portfolio approach. This requires the owner to rebalance themselves. The heart of Thaler's research says that people won't (or at best have a hard time with) rebalancing - which involves buying stocks when they are low (and out of favor) and selling when they are high. Very hard to sell stocks when looking at very excellent recent returns.

So why isn't the go to advice from Bogleheads a "set it and forget it" strategy (ala Target date funds)?

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Valuethinker » Sun Oct 15, 2017 8:54 am

Dandy wrote:
Sun Oct 15, 2017 7:57 am
What amazes me is that an educated body of economic thinkers had a hard time accepting that people don't always make rational economic decisions :oops:

People go for a free dinner and end up buying a timeshare they don't need and can't afford, people who are thrifty their whole life and then send all their money to someone who calls them and convinces them that gold is the only answer. Interest rates are at historic lows and people give their life savings to someone who guarantees them a 15% return. People invest in active funds with poor track records that have outrageous fees. The beat goes on. Oh and I have made some irrational decisions so I know from personal experience. While people can make irrational decisions all on their own, we often get a lot of help with sales pressure that is geared to play on our ego, dreams, or fears.
[EDIT: my original response was too harsh and didn't directly address your point -- my sincere apologies if you caught it before I edited it for an intemperate post.

I happen to agree with you that people do behave irrationally, and that is why we have advertising etc.

I wanted to consider though the assumption that economists assume that is not the case. Actually most economists do believe as individuals that we are flawed decision makers-- however they assume that in aggregate that that does not matter. I would suggest that it depends very much which markets we are considering-- financial markets for example are pretty efficient]

The famous quote is from (George Stigler? It might be Milton Friedman) "to drive your car home you solve a complex system of dynamic differential equations, but that's not how we experience driving".

So economics has assumed that, on average, we are rational. Even though we all have biases, and make mistakes, on average the market behaves rationally. If it does not, then there would be systematic biases which could be exploited-- in other words, arbitraged away. Hence the famous (apocryphal?) line between Stigler and Friedman "there's no point picking up that $20 bill, it will be arbitraged away by the time you get to it".

This Forum is in fact dedicated to that proposition. Because we believe in efficient financial markets-- there are no $20 bills just lying around. You don't get higher returns without higher risk. And, most importantly, if you beat the markets you were just lucky, and you are just as likely to underperform for the next arbitrary sub period. Therefore the rational investor uses low cost mutual funds which minimize costs (which you can control) and taxable distributions (another cost that can be reduced).

Besides Vanguard, ishares (Blackrock) and to some extent DFA have built whole businesses on that assumption (Donald Mackenzie has some academic studies of how DFA manages dealing, for example, to reduce liquidity costs).

If irrationality was so pervasive that it prevented arbitrage, we'd see it in financial markets- -there would be people out there making billions at everyone else's expense. The best evidence (short of a few hedge funds like Renaissance, and it is estimated that if they lose a tax case, all of those billions of outperformance are lost) is that no one is doing that-- asset prices really do follow a random walk.

It's a decent bet, though, that not all markets are so rational. Hence events like the US housing bubble. There are quite significant limits to arbitrage. And product and labour markets are much more complex, and characterized by limited information/ informational asymmetry, and that has a huge impact on whether the markets are efficient (and for which George Stiglitz and George Akerlof got their Nobel Prizes). Note though that informational asymmetry does not mean irrationality-- it can be quite rational to behave in an "incorrect" way if there is significant uncertainty.

https://krugman.blogs.nytimes.com/2017/ ... egion=Body

Paul Krugman's blog introduces the concepts quite well.

Where you are coming in is Modern Macroeconomics, where the "rigorous microfoundations" approach (aka "the Freshwater School" after U of Chicago, Carnegie Mellon, Rochester, Minnesota where it is most prominent) that dominates the academic journals (and determines any chance of getting tenure) has taken root. There, the assumption of ultrarationality and the generalization from individual microeconomic agents (firms and individuals) has led to a series of depictions of the real world that seem stretched, and have not really stood up.

As international economists have long known, and most economists should know post the 2008 Crash, the assumption that the causes of recessions are "sunspots" i.e. exogenous fluctuations in things like technology or preference for leisure time, has not held water.

Do we really believe that the recession of 2008 and after, the worst of the postwar years, and the weakest recovery, was really caused by American workers seeking more leisure time? Or by some technology change?


That tradition inherited from Milton Friedman (Permanent Income Hypothesis, Adaptive Expectations -- and hence the U of Chicago roots) but took it much further than Friedman was ever willing to go. It emerged in response to "stagflation" and the crisis of Keynesian economics in the 1970s-- it's seminal contribution to economics has been the role of expectations in forming behaviour (Robert Lucas, Thomas Sargent, Robert Barro - another Nobel Prize).

So in summary and conclusion:

- economists assume on average individuals are unbiased estimators - i.e. that they, on average, lead markets to behave as rational (otherwise arbitrage opportunities would emerge)

- in financial markets the lack of investing strategies and individuals who sustainably outperform and whose past performance is a guide to future performance (consider Bill Miller at Legg Mason) suggests that that's not a bad assumption

- other markets, which are more informationally inefficient (labour & product markets) this is less clear and in fact in some areas (such as exchange rates) it's absolutely clear that the markets don't behave "rationally"

- we don't have a good explanation of financial bubbles and crashes, and the best ones (Hyman Minsky) are Keynesian ones

- we need structuralist interpretations (that look at how financial markets are constructed) to explain the link between financial bubbles and crashes and subsequent recessions and depressions-- again the best evidence for that is various Emerging Market crises, and Japan

- the best applications of Behavioural Economics, for Bogleheads who are devoted to market efficiency as a key concept, is in terms of understanding our own biases (towards undersaving, overtrading etc.) and in particular the use of precommitment devices to control our behaviour and overcome our irrationality (Kahneman's 2nd "Slow system" beating our 1st "Fast system").

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Sun Oct 15, 2017 10:00 am

Valuethinker wrote:
Sun Oct 15, 2017 8:54 am
So in summary and conclusion:

- economists assume on average individuals are unbiased estimators - i.e. that they, on average, lead markets to behave as rational (otherwise arbitrage opportunities would emerge)

- in financial markets the lack of investing strategies and individuals who sustainably outperform and whose past performance is a guide to future performance (consider Bill Miller at Legg Mason) suggests that that's not a bad assumption

- other markets, which are more informationally inefficient (labour & product markets) this is less clear and in fact in some areas (such as exchange rates) it's absolutely clear that the markets don't behave "rationally"

- we don't have a good explanation of financial bubbles and crashes, and the best ones (Hyman Minsky) are Keynesian ones

- we need structuralist interpretations (that look at how financial markets are constructed) to explain the link between financial bubbles and crashes and subsequent recessions and depressions-- again the best evidence for that is various Emerging Market crises, and Japan

- the best applications of Behavioural Economics, for Bogleheads who are devoted to market efficiency as a key concept, is in terms of understanding our own biases (towards undersaving, overtrading etc.) and in particular the use of precommitment devices to control our behaviour and overcome our irrationality (Kahneman's 2nd "Slow system" beating our 1st "Fast system").
I agree. I have often wondered why at Bogleheads so many stress behavioral finance, since index funds only work well if capital markets are reasonably efficient. In finance, behavioral economics (BE) only works around the edges to modestly improve things. To the extent that BE encourages people to believe markets are inefficient and can routinely be beaten, it makes things worse. I also agree with VT that in other areas of economics, such as macro, the concepts of behavioral economics are much more important.

The paramount issues in financial illiteracy are not issues of behavioral economics, but rather not understanding basic concepts in finance.

A few examples -
- Not understanding that risk in finance simply means that future outcomes are not certain.
- Believing that risk in finance can only be reduced by diversification.
- Not understanding TVM concepts.
- Money illusion
- Not understanding that holding cash,money market funds, and/or T-bills in many situations is high risk, but holding LT bonds is often very low risk.

Unfortunately, mastery of even these relatively simple core concepts of finance requires a solid understanding of basic math (TVM problems) and statistics (risk). IMO it is unlikely that most people will become markedly more proficient in math and stats skills in the foreseeable future, and it therefore follows that the problem of financial illiteracy will not be solved anytime soon. Most people will need help with their finances. I believe the best way to help them is to offer simpler financial products that focus on the outcomes people are interested in achieving; rather than requiring them to solve complicated input problems such as portfolio construction.

BobK
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sun Oct 15, 2017 10:15 am

I'd like to put another slant on excellent comments by Valuethinker:

1. Standard Economists (in contrast with Behavioral Economists) assume that people's deviations from rationality are random and in aggregate balance out and converge on rationality. Behavioral Economists have shown that many deviations are slanted ("biased") in certain direction, and in aggregate they show a noticeable bias.

2. BE findings have many implications including investing, policy, and personal finance. I agree with Valuethinker that arbitrating biases in the investing domain is quite impossible. Hedge funds that try to do it do not show outperformance. Thaler describes in his book Misbehaving how even obvious cases of mispricing that were begging for arbitration, could not be arbitrated because "markets remained irrational longer than the potential arbitrators could remain solvent."

3. In policy, SE implies that markets take care of everything. BE suggests that some government intervention is needed. Thaler advocates libertarian paternalism, where policy makers make suggestions but allow an individual to choose differently.

4. In personal finance, BE knowledge is the most useful for the Bogleheads. As individuals, we can introspect into our decision making through the lens of cognitive biases, notice situations in which our decisions detract us from our long-term goals, and impose some constraints ("commitment devices") to protect ourselves from ourselves.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sun Oct 15, 2017 10:26 am

bobcat2 wrote:
Sun Oct 15, 2017 10:00 am
I have often wondered why at Bogleheads so many stress behavioral finance, since index funds only work well if capital markets are reasonably efficient.
Much of behavioral finance is now promoted by financial advisers. It is becoming ever more difficult for FAs to demonstrate their value to customers by selecting winning funds and charging AUM for this service. And so they position themselves as "commitment devices" to hold customers' hands during market declines and prevent panic selling.

In my opinion, creating an Investment Policy Statement and training oneself to consult the IPS before making any changes in one's investments is a much cheaper and effective way to avoid panic selling. The Bogleheads Forum itself also acts as a mitigating device, similarly to Kahnemant's water-cooler discussions.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by sabhen » Sun Oct 15, 2017 10:53 am

What amazes me is that an educated body of economic thinkers had a hard time accepting that people don't always make rational economic decisions :oops:


+1

It seems odd that so much research and arguments and reasoning efforts are expended to validate the axiom that mostly people do not make rational economic decisions.

E.g,: Buying a car (or a watch) is largely based on emotions and very little to do with rational calculus - i.e: going from A to B (or knowing just what time it is).

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by itstoomuch » Sun Oct 15, 2017 11:17 am

In and around late 2007 and 2008, I read Taleb. I knew something was happening but didn't really know what but I began looking for a way to put the Market. I am really not sophisticated in Market strategies, basically a farmer. Looked at puts/calls/shorts and tried to plow thru older Bros' Seldon Natenberg book, edition1, on options, seemed to be expensive and complicated. Eventually bought deferred GLWB VA annuities in Nov 2008. In 2007 I told bro to go to our local banks on Friday afternoons and see who was doing the retail deposit banking. I had the feeling that the decision makers and their advisors were too isolated in their offices and immersed in too statistics. Hindsight, 2007 was already too late and Bro already looked worried.

So the annuities have done OK and not complaining because it is insurance (my put). I surely would have done much better had I stayed in the 60/40 or my trading style. Often, really everytime the Market hits a new milestone, I look at my increasing VA valuations; But I really want the Market to tank so that the VAs will really pay off, Income wise; One of these day's :x :twisted: .

So, First Foundationers, talk all you want, the near term is already set. The mid term outlook is murky. The Longterm is scary. Pray for Hari Seldon :mrgreen:

gotta go now to kill some gophers, pick some rocks, and plant some seed.
YMMV :sharebeer
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sun Oct 15, 2017 11:56 am

cinghiale wrote:
Fri Oct 13, 2017 7:11 am
2015 wrote,
3 books I'll be picking up tomorrow are:
The shallows : what the Internet is doing to our brains
This is off-topic, but Carr’s book The Shallows is the enlargement of an excellent essay he published in The Atlantic in 2008 titled “Is Google Making Us Stupid?” With all respect to the author, the book doesn’t add that much to the essay. Since it was mentioned that one’s time is one’s money is one’s life, this may save you a few hours of reading that you can devote to the other books on your list.

See: https://www.theatlantic.com/magazine/ar ... id/306868/
This an excellent article, cinghiale,

Thank you for linking it. This statement was particularly powerful to me:
Nicholas Carr, in The Atlantic wrote:When we read online, she says, we tend to become “mere decoders of information.” Our ability to interpret text, to make the rich mental connections that form when we read deeply and without distraction, remains largely disengaged.

Reading, explains Wolf, is not an instinctive skill for human beings. It’s not etched into our genes the way speech is. We have to teach our minds how to translate the symbolic characters we see into the language we understand.
A more recent article on a related topic is "How Technology is Hijacking Your Mind — from a Magician and Google Design Ethicist" by Tristan Harris, https://journal.thriveglobal.com/how-te ... d62ef5edf3 . The Internet-induced psychological adaptations have evolved from side-effects (Carr) to intentional manipulation (Harris).
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.
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2015 wrote:
Sat Oct 14, 2017 10:05 pm
I would read the book, as it delves deeper into how changes in communication throughout history changed humankind. It weaves nicely with Yuval Noah Harari's Sapiens. IMO, one's time is best spent creating larger picture views of concepts that can be applied to everyday life. Nothing has changed humanity to the extent the internet has since the invention of the Gutenberg press, due to the liberation of knowledge. The implications are profound and reading the book might have some people questioning time spent in social media use.
After attempting to interpret Taleb and Thaler, I will do the same to cinghiale. I think cinghiale suggested an article as an alternative to the book in response to your comment that you prefer helicopters to the weeds. Carr's article will provide the key substance in less time. Of course, cinghiale has a huge advantage over Taleb and Thaler in that he can controvert my hypothesis in this very thread.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by cinghiale » Mon Oct 16, 2017 9:50 am

I quite happy with Victoria’s thesis. A short expanding on it.

It appears that 2015, like so many of us, is grappling with the following hard realities:

1). So many books, so little time! Or if you wish a bit more precision, so much knowledge and wisdom, and so little time and energy to discover the best sources, and do the requisite thinking, interrogation, comparison, and application to truly internalize them.

2). It’s not what you read; it’s what you retain.

There´s often a cost-benefit calculation to be made in in seeking to be educated, enlightened, autonomous, wise... (fill in your own goals here). I’ve read Carr’s article at least five times, as I have assigned it to students in a graduate seminar. Repetition helps. The five readings took a fraction of the time it would have taken to read the book. Almost ten years on, I have retained much of the article. A single reading of the book? I’m not sure how much of it would have stuck.

Thus the recommendation to go with the essay in The Atlantic.

An odd aside concerning Mr.Taleb. I’ve been intrigued by some of his book reviews on Amazon, wondering, “What interests Taleb enough to critique it?” Looking over all his reviews, I’ve discovered some great, thought-provoking reads. It’s a bit of cue-taking, and it saves gobs of time and effort that would have otherwise been used in seeking out such works. Again, so little time...
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Mon Oct 16, 2017 4:15 pm

cinghiale wrote:
Mon Oct 16, 2017 9:50 am
An odd aside concerning Mr.Taleb. I’ve been intrigued by some of his book reviews on Amazon, wondering, “What interests Taleb enough to critique it?” Looking over all his reviews, I’ve discovered some great, thought-provoking reads. It’s a bit of cue-taking, and it saves gobs of time and effort that would have otherwise been used in seeking out such works. Again, so little time...
I do the same! When I remember to do it, I check what books Taleb recommends.

Earlier, we discussed that sometimes it's easier to get Taleb by listening to his books in the audio format. I am finding that Russ Roberts' discussions with Taleb on EconTalk are equally illuminating. Roberts is quite good in asking Taleb to explain various concepts that are not immediately apparent and providing his interpretations that help the discussion.

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Sun Oct 22, 2017 5:47 am

Two interesting articles on Richard Thaler receiving the Nobel Prize in Economics. The first is from fellow laureate Robert Shiller.
I find it wonderful that the Nobel Foundation chose Thaler. The economics Nobel has already been awarded to a number of people who can be classified as behavioral economists, including George Akerlof, Robert Fogel, Daniel Kahneman, Elinor Ostrom, and me. With the addition of Thaler, we now account for approximately 6% of all Nobel economics prizes ever awarded.

But many in economics and finance still believe that the best way to describe human behavior is to eschew psychology and instead model human behavior as mathematical optimization by separate and relentlessly selfish individuals, subject to budget constraints. Of course, not all economists, or even a majority, are wedded to this view, as evidenced by the fact that both Thaler and I have been elected president, in successive years, of the American Economic Association, the main professional body for economists in the United States.
Link to article - https://www.project-syndicate.org/comme ... er-2017-10

The second article is from economic journalist David Warsh writing in his weekly column, Economic Principals.
Richard Thaler is a rock star among economists. Don’t take my word for it. See his cameo appearance in the film The Big Short (2015), sitting next to singer Selena Gomez in a casino, explaining the logic of synthetic collateralized debt obligations.

Or read his 2015 autobiography, Misbehaving: The Making of Behavioral Economics, “laced with antic stories of spirited battles with the bastions of traditional economic thinking,” as the book jacket says. All Thaler’s gifts are on display in Misbehaving: he’s affable, witty, incisive, and more than a little bit pompous. Last week Thaler was recognized with the 2017 Nobel economics prize “for integrating economics with psychology.” ...

If the prize is controversial, as Robert Shiller expects, it is not so much because some economists remain unconvinced that psychology has a place in economics, as Shiller wrote last week, as because so many have been convinced by persons other than Thaler. Both Misbehaving and the Nobel committee’s paper on the scientific background of the award are characterized by a certain lack of generosity towards others who contributed to the acceptance of the new view, including, say, Ariel Rubinstein, Colin Camerer, David Laibson, Matthew Rabin, George Lowenstein, Sendil Mullainathan, Andrei Shleifer, and Ernst Fehr.

A case in point: the single most newsworthy piece of evidence in my memory was contributed by Brigitte Madrian and Dennis F. Shea, in 2001, in the Quarterly Journal of Economics. “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior” quickly won the TIAA Paul A. Samuelson Award for outstanding scholarly writing on lifelong financial security.
The paper by Madrian and Shea looked at the advantages of automatic enrollment for employees of a company offering defined-contribution retirement savings plans.

Link to article - http://www.economicprincipals.com/issue ... ncipals%29

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sun Oct 22, 2017 3:01 pm

Dandy wrote:
Sun Oct 15, 2017 7:57 am
What amazes me is that an educated body of economic thinkers had a hard time accepting that people don't always make rational economic decisions :oops:
I frequently get this question, and I used to provide a standard response that economic models are built with a trade-off between simplicity and accuracy. For a long time, a rational-actor assumption was a reasonable trade-off. It prevailed until Kahneman and Tversky have demonstrated systematic biases in people's decision-making, and consequently, in the standard-economics models.

But recently I have thought of another example. Pythagoras, Plato, Archimedes, and other ancient greats have been using plane geometry as a model for distances and areas. People knew that seas, rivers, mountains, and forests are not bounded by straight lines. But the approximations were good enough for thousands of years. And then came Benoit Mandelbrot who showed that the length of a coastline changes dramatically depending on the scale of the measuring instrument. It took a long time for Mandelbrot's fractal geometry to move into the mainstream, even though mathematics are, generally, less controversial than psychology and economics.

In comparison to fractal geometry, Behavioral Economics received acceptance relatively quickly.

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by TravelGeek » Sun Oct 22, 2017 3:28 pm

cinghiale wrote:
Mon Oct 09, 2017 12:56 pm
If there are any newcomers reading this and saying, “huh?,”
Huh? ;)
...allow me to direct you to a truly splendid primer on Thaler’s wheelhouse: behavioral economics. Secure a copy of Nudge coauthored by Thaler and law professor Cass Sunstein. (Unfortunately, the Nobel just goosed the prices of used copies on Amazon, but you can get a used paperback copy for $10.00 or a hardcover for $14.00, including S & H.).
Thanks. I secured a “hold” on Nudge at my local library. There is quite a waiting list (surprise!), but that’s okay; I have plenty of other books to work through. And Bogleheads threads such as this one to catch up with :)

Appreciate your post and reading suggestion.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Sun Oct 22, 2017 4:12 pm

There were economists working in behavioral economics at roughly the same time as Kahneman and Tversky. That includes one of the founders of behavioral economics, George Lowenstein. In his book Misbehaving, Thaler dedicates the book to several others, including Lowenstein, whose work he credits with later inspiring his own work in behavioral economics. Here is Lowenstein, writing in the NYTimes about the limitations of behavioral economics.
It seems that every week a new book or major newspaper article appears showing that irrational decision-making helped cause the housing bubble or the rise in health care costs.

Such insights draw on behavioral economics, an increasingly popular field that incorporates elements from psychology to explain why people make seemingly irrational decisions, at least according to traditional economic theory and its emphasis on rational choice. Behavioral economics helps to explain why, for example, people under-save for retirement, why they eat too much and exercise too little and why they buy energy-inefficient light bulbs and appliances. And, by understanding the causes of these problems, behavioral economics has spawned a number of creative interventions to deal with them.

But the field has its limits. As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. ...

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.
Link -http://www.nytimes.com/2010/07/15/opini ... ef=opinion

Here is Lowenstein discussing behavioral economics and health policy.
https://videocast.nih.gov/summary.asp?Live=10625&bhcp=1

A link to George Lowenstein's website - https://www.cmu.edu/dietrich/sds/people ... tein.html


And here is a partial list of prominent economists other than Thaler who have produced lots of good work in behavioral economics: George Akerloff, Robert Shiller, Robert Frank, Ariel Rubinstein, Colin Camerer, David Laibson, Matthew Rabin, George Lowenstein, Sendil Mullainathan, Andrei Shleifer, Ernst Fehr, and Brigitte Madrian.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by itstoomuch » Sun Oct 22, 2017 6:41 pm

^ where my older bro works, he often cites that it's not the hard numbers that affects the Bank but the behavior problems of the Executives. Bonus incentives are part of the problem and personality (strivers, better than the next person, competition) are another another part.
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Sun Oct 22, 2017 7:52 pm

One of the earliest papers in behavioral economics was the 1961 paper, Risk, Ambiguity and the Savage Axioms by Daniel Ellsberg. Yes, that Daniel Ellsberg - the one made famous by the Pentagon Papers release. In the paper he discussed what has become known as the “Ellsberg Paradox”.
Link to paper - http://www.ellsberg.net/documents/Risk_Ambiguity.pdf

For the definitive introduction to behavioral economics aimed at advanced undergraduate and above students interested in behavioral economics, the go-to book is, The Foundations of Behavioral Economic Analysis by Sanjit Dhami.

Here is what Cass Sunstein, coauthor of Nudge and Founder and Director of the Program on Behavioral Economics and Public Policy, Harvard Law School has to say about the book.
"This is a unique and truly remarkable achievement. It is a magnificent overview of behavioral economics, by far the best there is, and it should define the field for at least a generation. But it is much more than that. It is also a brilliant set of original discussions, with pathbreaking thinking on every important topic. An invaluable resource for policymakers, students, and professors -- and if they want to try something really special, for everyone else."
And here is what Richard Thaler has to say about the book.
"The publication of this book is a landmark occasion for the field of behavioral economics.

Link to The Foundations of Behavioral Economic Analysis - https://www.amazon.com/Foundations-Beha ... 7JF4WJJ579

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Tue Oct 24, 2017 3:01 pm

bobcat2 wrote:
Sun Oct 22, 2017 7:52 pm
One of the earliest papers in behavioral economics was the 1961 paper, Risk, Ambiguity and the Savage Axioms by Daniel Ellsberg. Yes, that Daniel Ellsberg - the one made famous by the Pentagon Papers release. In the paper he discussed what has become known as the “Ellsberg Paradox”.
Link to paper - http://www.ellsberg.net/documents/Risk_Ambiguity.pdf

For the definitive introduction to behavioral economics aimed at advanced undergraduate and above students interested in behavioral economics, the go-to book is, The Foundations of Behavioral Economic Analysis by Sanjit Dhami.

Here is what Cass Sunstein, coauthor of Nudge and Founder and Director of the Program on Behavioral Economics and Public Policy, Harvard Law School has to say about the book.
"This is a unique and truly remarkable achievement. It is a magnificent overview of behavioral economics, by far the best there is, and it should define the field for at least a generation. But it is much more than that. It is also a brilliant set of original discussions, with pathbreaking thinking on every important topic. An invaluable resource for policymakers, students, and professors -- and if they want to try something really special, for everyone else."
And here is what Richard Thaler has to say about the book.
"The publication of this book is a landmark occasion for the field of behavioral economics.

Link to The Foundations of Behavioral Economic Analysis - https://www.amazon.com/Foundations-Beha ... 7JF4WJJ579

BobK
Hi Bob,

After reading your message and Amazon reviews I have ordered Sanjit Dhami's book. The price does not bother me, but it will be a challenge to identify books it will displace on my BE bookshelf.

Thanks!
Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Lynette » Tue Oct 24, 2017 3:22 pm

Is there a tablet with a Kindle App or a Kindle device in your future? :D I've got too many devices, laptops and desktops but I use my $200 Chromebook most of the time - like now. I also read the Kindle books I ordered from Amazon on it. I go to Amazon and bring up the book I ordered from the Digital tab. It states that I have already ordered this so I start start reading on my Chromebook. I did download the Kindle App but don't think this is necessary. I'm about to do some work on an Excel spreadsheet that is on a Windows 10 laptop. I use my Chromebook to look up information I need by logging onto websites such as Vanguard so I'm using two devices at once. Of course I could order another monitor!

I've ordered some books as I'm learning Spanish and I write in them. However, when I need to look up a word in a dictionary, I often use google on my Chromebook or Google Translate. Despite what my Spanish prof says artificial intelligence is becoming very good with language translations.

I greatly admire your knowledge and dedication to reading all of those books. Keep on with your pursuits and best wishes.

Lynette

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Tue Oct 24, 2017 3:33 pm

Lynette wrote:
Tue Oct 24, 2017 3:22 pm
Is there a tablet with a Kindle App or a Kindle device in your future? :D
Thank you, Lynette,

And great thanks for the recommendations you gave me at BH-2017!

I might get a Kindle or another portable reader in the future. But that would be for reading fiction. With non-fiction, and particularly with the difficult books that I read for my research, it must be paper. I read these books slowly and annotate them extensively. I have developed my own system of underlining, using symbols in the right and left margins, making comments in the top and bottom margins, and summarizing my own ideas invoked by the book in the empty spaces on the front and back pages. Sometimes, I draw tables, decision trees, and diagrams. I use extra-fine (0.5 mm) ball point pens made in Japan that enable me to write in smaller letters. Most of my writing is with black pen, but I use a red pen for labeling blocks of text and extra emphasis.

Even if all my required functions could be replicated in Kindle, it would be an effort for me to develop new working habits.

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by bobcat2 » Tue Oct 24, 2017 3:47 pm

Hi Victoria,

I just ran across this list of essential papers in behavioral finance by Noah Smith.
Here's a link to the list. - https://noahpinionblog.blogspot.com/201 ... ioral.html

I'd stay away from the Weitzman paper. :wink:

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Wed Oct 25, 2017 11:07 am

bobcat2 wrote:
Tue Oct 24, 2017 3:47 pm
Hi Victoria,

I just ran across this list of essential papers in behavioral finance by Noah Smith.
Here's a link to the list. - https://noahpinionblog.blogspot.com/201 ... ioral.html

I'd stay away from the Weitzman paper. :wink:

BobK
Thank you, Bob,

While my main interest is in the Behavioral Economics, Behavioral Finance is an important BE application. It helps that some Noah Smith's references are to full PDFs of papers (unfortunately, some papers are no longer available).

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sat Nov 04, 2017 3:47 pm

VictoriaF wrote:
Tue Oct 24, 2017 3:01 pm
bobcat2 wrote:
Sun Oct 22, 2017 7:52 pm
One of the earliest papers in behavioral economics was the 1961 paper, Risk, Ambiguity and the Savage Axioms by Daniel Ellsberg. Yes, that Daniel Ellsberg - the one made famous by the Pentagon Papers release. In the paper he discussed what has become known as the “Ellsberg Paradox”.
Link to paper - http://www.ellsberg.net/documents/Risk_Ambiguity.pdf

For the definitive introduction to behavioral economics aimed at advanced undergraduate and above students interested in behavioral economics, the go-to book is, The Foundations of Behavioral Economic Analysis by Sanjit Dhami.

Here is what Cass Sunstein, coauthor of Nudge and Founder and Director of the Program on Behavioral Economics and Public Policy, Harvard Law School has to say about the book.
"This is a unique and truly remarkable achievement. It is a magnificent overview of behavioral economics, by far the best there is, and it should define the field for at least a generation. But it is much more than that. It is also a brilliant set of original discussions, with pathbreaking thinking on every important topic. An invaluable resource for policymakers, students, and professors -- and if they want to try something really special, for everyone else."
And here is what Richard Thaler has to say about the book.
"The publication of this book is a landmark occasion for the field of behavioral economics.

Link to The Foundations of Behavioral Economic Analysis - https://www.amazon.com/Foundations-Beha ... 7JF4WJJ579

BobK
Hi Bob,

After reading your message and Amazon reviews I have ordered Sanjit Dhami's book. The price does not bother me, but it will be a challenge to identify books it will displace on my BE bookshelf.

Thanks!
Victoria
Sanjit Dhami's book has arrived, and it's humongous at 1,800 pages and 6.5 pounds. In the introduction, Dhami notes that he wrote it for over 10 years. He was a "normal" economist, when a colleague has introduced him to behavioral economics and convincingly demonstrated that BE was a legitimate approach to economics. The parts I've read so far are excellent.

Bob, thank you again for the recommendation,

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by Jeff Albertson » Sat Nov 04, 2017 6:31 pm

Thaler has two articles in the current NY Times:
If you get health insurance from your employer, you have to make decision every year about which coverage to choose.
...
But the mistake I am referring to is different. Because of human quirks, lack of understanding and overly complicated plans, many people are paying more without getting anything extra in return.

Economists have a term for a situation like this, where one option is better than another under any circumstances, dominance. And that is what we see in many workplaces: The cheaper health care plan, at every level of medical spending, often has a higher deductible — a higher spending hurdle that must be reached before reimbursements begin.
Why So Many People Choose the Wrong Health Plans
https://www.nytimes.com/2017/11/04/busi ... 2Fbusiness

Which Health Plan Is Cheaper?
https://www.nytimes.com/2017/11/04/busi ... 2Fbusiness

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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by VictoriaF » Sat Nov 04, 2017 7:16 pm

Jeff Albertson wrote:
Sat Nov 04, 2017 6:31 pm
Thaler has two articles in the current NY Times:
If you get health insurance from your employer, you have to make decision every year about which coverage to choose.
...
But the mistake I am referring to is different. Because of human quirks, lack of understanding and overly complicated plans, many people are paying more without getting anything extra in return.

Economists have a term for a situation like this, where one option is better than another under any circumstances, dominance. And that is what we see in many workplaces: The cheaper health care plan, at every level of medical spending, often has a higher deductible — a higher spending hurdle that must be reached before reimbursements begin.
Why So Many People Choose the Wrong Health Plans
https://www.nytimes.com/2017/11/04/busi ... 2Fbusiness

Which Health Plan Is Cheaper?
https://www.nytimes.com/2017/11/04/busi ... 2Fbusiness
Thaler makes great points in these articles. But here is an example of why people may not do it.

I have been using a High-Deductible Health Plan (HDHP) with HSA for several years now for all the reasons listed by Thaler. But I started considering HDPD only after Grabiner told me about its benefits. Before that, I knew that my employer was offering HDHP, and I was reviewing health plans every year during the enrollment period. The reasons preventing me from signing for HDHP were:

1. I thought that with a HDHP plan, I would have to pay my high deductible directly to a healthcare provider. I knew that prices negotiated by insurance companies are much lower than list prices, and I was wrongly assuming that I would end up always paying the high deductible.

2. I assumed that all plans are similarly priced, just as Social Security payouts are actuarially fair, and that there were no dominated strategies.

After Grabiner has corrected both of my assumptions I have gladly switched to HDHP. But if I could be mistaken, there are probably many others with similar assumptions. And the thing is that once you make an assumption similar to my (1) or (2), you don't bother investigating it any further. Until someone points it out, someone like Grabiner or Thaler.

Victoria
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by itstoomuch » Sat Nov 04, 2017 7:32 pm

Every year, my goal for health insurance and costs is to exceed the 7% itemized threshold :P . Every year it gets easier because of increasing LTCi premiums, dental, and "other" maladies. Next year, we will probably be moving to a HCOL city. Thayler is assuming people are healthy. :oops:
Ymmv :annoyed
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by grabiner » Sat Nov 04, 2017 11:14 pm

VictoriaF wrote:
Sat Nov 04, 2017 7:16 pm
The reasons preventing me from signing for HDHP were:

1. I thought that with a HDHP plan, I would have to pay my high deductible directly to a healthcare provider. I knew that prices negotiated by insurance companies are much lower than list prices, and I was wrongly assuming that I would end up always paying the high deductible.

2. I assumed that all plans are similarly priced, just as Social Security payouts are actuarially fair, and that there were no dominated strategies.
The plans may be actuarially fair from the insurance company's point of view; the insurer charges less for the HDHP (unless it uses some of the payment to fund your HSA), because it expects to pay less.

What causes the HDHP to be a dominant strategy is payments made from other sources. With an HDHP, you can contribute $3450 (individual) or $6900 (family) to an HSA, for a tax reduction. And the employer subsidies may be unequal. For example, the US government subsidizes 75% of the cost of its employees' insurance, up to a limit; if the HDHP contributes $1500 to your HSA, the 75% subsidy means that you only pay $375 of the extra premium.

The combination of those two means that US Government employees are likely to find that the HDHP dominates the low-deductible plan from the same provider. I worked out this example for the DC Diehards in 2014, using 2015 rates. For a VA resident in the 25% bracket with family coverage, one HDHP cost $2925 less if you had no medical expenses, and had a $3000 deductible.
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Re: And the Nobel Memorial Prize in Economic Sciences goes to [Richard Thaler]

Post by willthrill81 » Sat Nov 04, 2017 11:36 pm

Valuethinker wrote:
Sun Oct 15, 2017 8:54 am
Dandy wrote:
Sun Oct 15, 2017 7:57 am
What amazes me is that an educated body of economic thinkers had a hard time accepting that people don't always make rational economic decisions :oops:

People go for a free dinner and end up buying a timeshare they don't need and can't afford, people who are thrifty their whole life and then send all their money to someone who calls them and convinces them that gold is the only answer. Interest rates are at historic lows and people give their life savings to someone who guarantees them a 15% return. People invest in active funds with poor track records that have outrageous fees. The beat goes on. Oh and I have made some irrational decisions so I know from personal experience. While people can make irrational decisions all on their own, we often get a lot of help with sales pressure that is geared to play on our ego, dreams, or fears.
[EDIT: my original response was too harsh and didn't directly address your point -- my sincere apologies if you caught it before I edited it for an intemperate post.

I happen to agree with you that people do behave irrationally, and that is why we have advertising etc.

I wanted to consider though the assumption that economists assume that is not the case. Actually most economists do believe as individuals that we are flawed decision makers-- however they assume that in aggregate that that does not matter. I would suggest that it depends very much which markets we are considering-- financial markets for example are pretty efficient]

The famous quote is from (George Stigler? It might be Milton Friedman) "to drive your car home you solve a complex system of dynamic differential equations, but that's not how we experience driving".

So economics has assumed that, on average, we are rational. Even though we all have biases, and make mistakes, on average the market behaves rationally. If it does not, then there would be systematic biases which could be exploited-- in other words, arbitraged away. Hence the famous (apocryphal?) line between Stigler and Friedman "there's no point picking up that $20 bill, it will be arbitraged away by the time you get to it".

This Forum is in fact dedicated to that proposition. Because we believe in efficient financial markets-- there are no $20 bills just lying around. You don't get higher returns without higher risk. And, most importantly, if you beat the markets you were just lucky, and you are just as likely to underperform for the next arbitrary sub period. Therefore the rational investor uses low cost mutual funds which minimize costs (which you can control) and taxable distributions (another cost that can be reduced).

Besides Vanguard, ishares (Blackrock) and to some extent DFA have built whole businesses on that assumption (Donald Mackenzie has some academic studies of how DFA manages dealing, for example, to reduce liquidity costs).

If irrationality was so pervasive that it prevented arbitrage, we'd see it in financial markets- -there would be people out there making billions at everyone else's expense. The best evidence (short of a few hedge funds like Renaissance, and it is estimated that if they lose a tax case, all of those billions of outperformance are lost) is that no one is doing that-- asset prices really do follow a random walk.

It's a decent bet, though, that not all markets are so rational. Hence events like the US housing bubble. There are quite significant limits to arbitrage. And product and labour markets are much more complex, and characterized by limited information/ informational asymmetry, and that has a huge impact on whether the markets are efficient (and for which George Stiglitz and George Akerlof got their Nobel Prizes). Note though that informational asymmetry does not mean irrationality-- it can be quite rational to behave in an "incorrect" way if there is significant uncertainty.

https://krugman.blogs.nytimes.com/2017/ ... egion=Body

Paul Krugman's blog introduces the concepts quite well.

Where you are coming in is Modern Macroeconomics, where the "rigorous microfoundations" approach (aka "the Freshwater School" after U of Chicago, Carnegie Mellon, Rochester, Minnesota where it is most prominent) that dominates the academic journals (and determines any chance of getting tenure) has taken root. There, the assumption of ultrarationality and the generalization from individual microeconomic agents (firms and individuals) has led to a series of depictions of the real world that seem stretched, and have not really stood up.

As international economists have long known, and most economists should know post the 2008 Crash, the assumption that the causes of recessions are "sunspots" i.e. exogenous fluctuations in things like technology or preference for leisure time, has not held water.

Do we really believe that the recession of 2008 and after, the worst of the postwar years, and the weakest recovery, was really caused by American workers seeking more leisure time? Or by some technology change?


That tradition inherited from Milton Friedman (Permanent Income Hypothesis, Adaptive Expectations -- and hence the U of Chicago roots) but took it much further than Friedman was ever willing to go. It emerged in response to "stagflation" and the crisis of Keynesian economics in the 1970s-- it's seminal contribution to economics has been the role of expectations in forming behaviour (Robert Lucas, Thomas Sargent, Robert Barro - another Nobel Prize).

So in summary and conclusion:

- economists assume on average individuals are unbiased estimators - i.e. that they, on average, lead markets to behave as rational (otherwise arbitrage opportunities would emerge)

- in financial markets the lack of investing strategies and individuals who sustainably outperform and whose past performance is a guide to future performance (consider Bill Miller at Legg Mason) suggests that that's not a bad assumption

- other markets, which are more informationally inefficient (labour & product markets) this is less clear and in fact in some areas (such as exchange rates) it's absolutely clear that the markets don't behave "rationally"

- we don't have a good explanation of financial bubbles and crashes, and the best ones (Hyman Minsky) are Keynesian ones

- we need structuralist interpretations (that look at how financial markets are constructed) to explain the link between financial bubbles and crashes and subsequent recessions and depressions-- again the best evidence for that is various Emerging Market crises, and Japan

- the best applications of Behavioural Economics, for Bogleheads who are devoted to market efficiency as a key concept, is in terms of understanding our own biases (towards undersaving, overtrading etc.) and in particular the use of precommitment devices to control our behaviour and overcome our irrationality (Kahneman's 2nd "Slow system" beating our 1st "Fast system").
Overall, I agree with your comments, though I, along with many experts far more knowledgeable than me, strongly disagree with the 'random walk' notion of stocks; this notion effectively says that momentum does not truly exist at all. I believe that few academics in the field of finance would support that view any more.

While I've not read his book yet, Andrew Lo's 'adaptive market hypothesis' sounds more appealing to me than the EMH, which he argues is nested inside the AMH in much the same way that Newtonian physics is a subset of quantum mechanics. He argues that under conditions of relative stability, the EMH basically holds true, but that the EMH progressively breaks down under conditions of relative uncertainty due to the many known behavioral issues exhibited by investors.

I'm very happy for Thaler. His work has been instrumental for many and has, along with that of others, IMHO, refuted the notion of homo economicus. The idea that biases in the market simply 'cancel each other out' in a large group makes an assumption that these researchers have shown is false, the assumption being that the mean value of all investors' collective biases is zero. That assumption is demonstrably false. Most human beings share many, if not most, of the same biases, which can easily result in the entire market behaving in a very irrational manner, particularly in the short-term and under conditions of significant uncertainty and doubt.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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