A Long Post On A Short Course; Or Economics, Psychology, and Empathy

"MULLAINATHAN: But if you have two dimensions now, you can end with cycling, and cycling has this essential feature that every time someone comes in, it changes the preference ranking, and then the equilibrium is upset, so then some other guy has a different decision to enter, and it turns out one of the things that emerges is that you can get no equilibrium. The features that generate no equilibrium cycling ... which is the notion ... that's what I mean by people want simplicity but can never get it."

"THALER: One footnote on this ... notice if we continue on mortgages as an example, 30 years ago there was essentially one kind of mortgage; 30-year fixed rate. The government passed the Truth in Lending Act that said you have to report interest rates in a uniform way which was APR, and that basically solved all the problems. Choosing the best mortgage, they gave you a sufficient statistic. You look at that number, and you're done. We have zillions of kinds of mortgages. APR is no longer a sufficiency statistic...."

From Edge's "Master Class" Series (A Short Course In Behavioral Economics)

Long story short here; I know that I've abstracted two abstract quotes from this discussion, but they're very important in trying to make sense of the whole market problem, since there seems to be a general trope that two things have happened: Greedy Homebuyers went and bought massively overpriced houses at crazy, unrepayable rates, and Greedy Lenders used fraudulent means to sell people awful, complicated loans. And neither of these answers are accurate - there's no greed there, really. But the fact that we call either side greedy ignores the immediate question of the separation of legitimate self-interest from excessive greed, and the longer term question of what we will ground our empathy (if we find either group empathy-worthy) upon. By which I mean, if empathy is the result of the combination of sympathy and understanding, then how does our understanding of the psychology of economics interact with our general sympathies for those in poverty, and those who aren't necessarily in poverty, but are being forced to give up their expectations and plans for economic reasons.

"MULLAINATHAN: I want to close a loop, which I'm calling "The Irony of Poverty." On the one hand, lack of slack tells us the poor must make higher quality decisions because they don't have slack to help buffer them with things. But even though they have to supply higher quality decisions, they're in a worse position to supply them because they're depleted. That is the ultimate irony of poverty. You're getting cut twice. You are in an environment where the decisions have to be better, but you're in an environment that by the very nature of that makes it harder for you apply better decisions."

To return to those quotes, they're in the context of a discussion about multi-dimensionality in economic problems; in short, how to model the choices of a individual in a system where a given measure changes for an associated variable, instead of remaining constant for all variables. For example, Dr. Mullainathan previous to the quote at hand cites how when you go to Krispy Kreme, you buy four donuts, at which point they offer you an upgrade to a dozen for only 39 cents more. If you model that problem on a demand curve, what happens is that you get the same shape as an old rollercoaster; you get a straight line demand curve (since the price for each donut up 'til four is the same, the per-unit demand is the same) at which point you see a huge drop in demand for donuts purchases between 4 - 11 and a correspondingly massive jump in demand for dozens of donuts. This is not rational. According to classical theory, the consumer goes and buys enough to satisfy rationally determined needs; there should be no actual difference in the per-unit demand curve, since if a person has accepted a per-unit price point for one donut, and they only want four to eleven donuts, it doesn't make sense to purchase more donuts even at a reduced price, because they over-fulfill a given consumer's actual desire. Except that we very well know that when you can maximize your purchase at a greatly increased weight, the opportunity of the value overwhelms the actual utility of the purchase. And so much for classical economics.

This furthermore is the problem behind both the "greedy" homeowners and the "greedy" lenders, since they both faced similar versions of the problem above in pricing their relative purchases. Homeowners simply weren't walking into a lender's office with their minds tuned like Excel spreadsheets; rather, they were being presented with the exact same "Why borrow $200,000 for a house that costs $300,000 at a fixed rate when you can borrow $250,000 at the same initial interest rate, but which switches to a floating Adjustible Rate Mortgage a few years down the line?" that the individual is when they're presented with the "super-sized" K.K. donut dozen. And the economists response is that it's much more intelligent to take the dozen and the larger mortgage, and then save the extra donuts until you want them, and to invest the extra capital in improving the value of the home (re-modeling), buying a pricier home (upgrading), or by using the money for something else of equal or greater personal or professional value (such as vacations, buying stock, paying for school, etc.) If you're not going to do that, says the economist, then the lower mortgage is for you. Which is not something that anyone thinks looking at those numbers.What people think, when they're looking at those numbers, is basically not whether they need the extra money, it turns out, but rather how can they support taking that much more. The reason why I can make that assertion is because of "priming", which is one of the other topics discussed in the Edge series, which basically causes a change in cognition by changing the environment. In this case, the presentation of more options produces a change in valorization; that is, if one only came in and saw two rates, one would choose the lower one - but if one is presented with a higher rate and a lower rate (in an ARM), then one is no longer thinking comparatively but probabilistically, which is a much, much more difficult thing, given over to any number of influences completely unaccountable by current economic measures, in that one, according to the economist, has to take into account is all of the future expectations of earnings, costs, life changes, emergencies, and general feelings about the macroeconomic situation - keep in mind that the valorization of any of these items, as you'll learn if you go through the Edge series, are wildly changed for each and every combination of states that one assumes. Even something like thinking "What if I paint this one room, and get tired of the color in a year?" changes the valorization of the house if you change it to "What if I paint this one room and I get tired of the color in ten months?"

Sound complicated? It very damn well is. Now let's back off, and combine this ugly nest of biting complexity with another observation from psychology - humans are most stressed in situations where they feel they lack control, but are still going to be punished when things go wrong. Overwhelmingly, situations like this lead to all the classical symptoms of anxiety and depression disorders, even in otherwise healthy individuals (in measure of the level of punishment, of course.) Given that one obviously has no control over the world economy, and the housing economy, or even one's job security, individuals are clearly making decisions that are at best only probabilistically rational (something like trying to calculate the odds of risk/return in a casino), rather than the binary "yes/no, good/bad" schema of most individuals when assessing the behavior of strangers.

Hence, empathy. If we're to try and understand what's going on here, it's necessary to take into account that the vast majority of actors here undertook what they did based on acceptably rational reasons that turned out to be wrong because of a peculiar quirk in the human mind which causes value thresholds to be irregular; that is, relative social value. Now, this includes "keeping up with the Joneses", but extends beyond that into understanding how one's given economic position determines access to social goods that aren't included in pure economic exchange. Classic, and most heartbreaking example - good schools. Spots in desireable schools are indirectly related to wealth in that though no one pays individually for public schools, the better ones tend to be middle class-and-up neighborhoods. As such, an individual in buying a house might very well buy a home far beyond their means, that they would lose if/when the rate goes up, on the very reasonable estimation that if they're trying to put a child through a good public high school, and as long as housing values remain at least stable, they can be in-and-out of the house before the rate increase kicks in. The value of the school in driving the individual to accept a ruinous mortgage never shows up in the economists assumptions, nor does it show up in mortgage statistics, which is why it's easy to simply dismiss everyone who took a mortgage as either dumb, greedy, or both, when really every person in this crash could be noble and prudent and it still could have happened.

Empathy then, in this situation, is needed before we apportion blame. It's easy and well-deserved to blame the speculators who packaged these loans; but at each stage, it was a good and prudent thing to do - it made a way for banks to make profit out of sub-prime loans initially, which therefore encouraged them to lend more to lower-income individuals, who therefore were able to achieve "leverage" in an economic sense, which potentially could have served as a means for greater economic security; the economist De Soto's anti-poverty proposal works in a similar manner to this, and he's gotten all sorts of awards for being clever. So calling for the heads of Wall Street traders is pointless; in virtually every case, you'll find that each person was just a normal person doing their normal jobs. What empathy, as an emotion, knows however, is that normalcy is no grounds for not scrutinizing what is going on. Empathy is as much about understanding as it is feeling - which is of course troubling, since individuals who feel that they have no need for others empathy (and there's no one like the successful to feel they need nothing from the unsuccessful) also feels that they do not need the understanding. The quote that most troubles me about this whole affair is the anger A.I.G.'s representatives had towards the S.E.C. and Fed and the rest when they brought to light A.I.G.'s outstanding liabilities; A.I.G. literally believed that just so long as no one knew about the extent of how much was leveraged in the CDOs then there wasn't a problem. It goes to show how the difference between the "magical thinking" that individuals use when estimating value, and the cold hard price-setting, information-providing machine that is the market when described by various Austrians and Friedmanites. As such, as we come to know more, we should always realize that the only ethical course is one in which the vast scope of human motivations is held against the constant realization that all of it must be continually not only scrutinized as much as possible, but always made available for scrutiny to take place in the first place, even if the scrutiny never comes.

They Don't Love You, So Go Blow Up.

When I walked into work today, there was a sign labeled "Renaissance", with an arrow pointed to the right. Have I told you how long I have waited for someone to to FINALLY give me those directions? Figures it would happen when I had to go to work. I'm filing papers, and just down the hall is the Black Prince at Agincourt and Petrarch getting all weird over Laura and Erasmus. Fucking Erasmus. Like the Fresh Prince of Bel-Air whenever he sees a cab with dice in the mirror, I also knew that this sign knew where, but I said nah, back home to Bel-Air. Wait, no, fuck. Back to work.

In other news, this is a sad little study that just came out, via Wired's columnist Bruce Schneier:

"Abrahms has an alternative model to explain all this: People turn to terrorism for social solidarity. He theorizes that people join terrorist organizations worldwide in order to be part of a community, much like the reason inner-city youths join gangs in the United States.

The evidence supports this. Individual terrorists often have no prior involvement with a group's political agenda, and often join multiple terrorist groups with incompatible platforms. Individuals who join terrorist groups are frequently not oppressed in any way, and often can't describe the political goals of their organizations. People who join terrorist groups most often have friends or relatives who are members of the group, and the great majority of terrorist are socially isolated: unmarried young men or widowed women who weren't working prior to joining. These things are true for members of terrorist groups as diverse as the IRA and al-Qaida."

Great. So even terrorists these days are people who just want to fit in and don't pay any attention to the news. I would have like to have thought that radicals were, you know, like radical. Individual and well-informed and only regretfully violent. Apparently not. Apparently terrorists are just like Hannah Montana fans with a lot more semtex, and with equal willingness to kill anything that moves to be the coolest, biggest Miley Cyrus stalker possible. Sigh. When the world has reached a point that indie scenesters are more authentic than al-Qaeda and FARC, you know you're marking off a very strange set of days on the universal calendar. Like the months of Sucktober or Weirdcember or something.

That Is All For Now.

How To Lose A Campaign In 10 Easy Steps

Previously, I had written about the "entitlement" issue in common between Hillary Clinton and John McCain; essentially, they felt, having become the inheritors of their respective party and media institutions, that that alone would be enough to assure them first the nomination, then the election; to reference that a bit better (since I don't think Hillary felt entitled in the Veruca Salt sort of way, though I think John McCain does), I want to post a pair of post-mortems on their respective campaigns, and urge you, dear reader, if you're interested, to ponder the structural similarities between the two.

This first one comes from the New York Times Magazine, and it's about the implosion in the McCain campaign; this second one comes from The Atlantic, about the good Senator's inability to see far enough ahead that she would have to fight the political equivalent of World War One style trench warfare against Obama. Here's also a piece by the same author, written earlier in the campaign; it's not particularly prescient, but it does give one a good sense of what goes on in a campaign, and how a campaign divided cannot stand. My motivation for this is largely because I came across a pair of annoying articles in Dissent, both about how sexism contributed to Hillary's defeat. First one here, second one here. They annoy me because they both refuse to acknowledge that Hillary simply didn't put the time, strategy, and money into planning for a genuine, get-off-your-ass-and-knock-on-doors, fifty-state, full-season campaign (not to mention the genuine and legitimately infuriating way she pushed for the inclusion of Florida's and Michigan's votes after agreeing they wouldn't count.) Remember, Hillary was broke well before the primaries ended, even though she wasn't really all that much behind Obama in fundraising, and had a several year head start, and a rolodex basically of every single rich donor in the U.S. She simply didn't take seriously a serious candidate other than herself, and paid the price. One could even argue that she made a wise decision in trying to load-up the election by winning early and earning momentum - in that case, she paid for her ticket and took her ride. Nothing sexist in that, regardless of the innumerable and unjustifiable things that many said. 

Again - the contrast between these two and Obama could not be clearer; off the top of my head, I can't even name Obama's campaign head, though I can could name several advisors - compare this to the fact that during the primaries, I basically was scouring every couple of days for Solis-Doyle stories (like how she wouldn't work when her soaps were on, and wouldn't call donors back.)  Whether or not one likes Obama, his policies, or his style, he most certainly understands how democracy works. Whether or not this translates into actual leadership remains to be seen, but it seeing it in action gives me a feeling akin only to how I imagine I would feel if I saw the ghost of George Washington getting off a UFO piloted by King Arthur - this isn't supposed to be happening, but it's one of the most awesome things I've ever seen.

The long-term implications of those Dissent pieces - not that they in-and-of-themselves mean this - is that the professional classes in America will continue to deceive themselves that everything is still just a matter of them waiving their hands and making it so; what's really radical about Obama is that he promises that if one takes democracy seriously, and not as a hot new energy drink that all the kids are going to want to buy if you just have Miley Cyrus drink it while half-nude, then Americans will appreciate and respond to that message. Half of everything, so they say, is just showing up. Obama - and his volunteers - showed up every day this election, and I can't think of anything I've seen in politics in my lifetime that was genuinely both so concrete and reassuring. "Blockbuster" campaigns are over; now it's about getting a hundred million people to make and post their own little movies on YouTube. 

That Is All For Now.

Spam Quote Series #2

"Don?t get old with arms folded ? struggle for your life!  Efficiency stays on the first place for antibiotics."

See, I think this is a poem by someone trying to reconcile Dylan Thomas with the modern confrontation of medical treatment and ever-efficient capitalism; the efficiency there is the subject of the sentence - as such, it acts on "the first place for antibiotics", which is clearly infection, but from how it reads now, efficiency usurps priority over treating infection. With that interpretation in mind, of the efficiency of production more important than the disease, the first sentence becomes a call to arms for an otherwise uncertain populace. Clearly, this is brilliant. Or I've a damaged, conspiracy warped mind. Whatev.

That Is All For Now.

McCain Has No Friends Because He Has The Cooties.

I know, enough with the McCain stuff, right? But I had to post this because it is so completely unintentionally funny; from ABC's Politico:

"Another GOP strategist lamented that McCain lacked a core group of rich friends who were willing to part with their money. Harold Simmons, a Dallas billionaire, underwrote the entire cost of the initial Ayers ad for AIP — but his investment wasn’t matched by other wealthy Republicans.

“In 2004, Bush had a cadre of donors who wanted to see him succeed,” said this source, citing “oil guys.”

“But McCain doesn’t have that, and this is where it really hurts.”

I just have this mental image of lil' John McCain, sitting in the back of his bus, waiting for a friend to call, logging into MySpace to see if someone accepted his friend request, then to Facebook to see if anyone poked him back. Sarah Palin's like totally supposed to come over later and work on some homework, but she really doesn't like him and basically just sits there talking on her cell phone to her friends while he does all the work. She's such a slut. Then John's gonna go back to his bedroom and fall asleep watching Wings:MiGs Over Korea while thinking about someday becoming America's First Real Official Gladiator.

That Is All For Now.

Settlements and Statements

From Time:

"When he built his house in the early 1980s, Kennedy says, his water request was denied. He can't even remember the number of times he asked the city's service director for help, only to have nothing happen. Then a house went up next door. A white family moved in, and one day Kennedy saw his new neighbors watering their lawn. "They'd be out there with a hot tub out on the porch," he says, "and I was still going down the road [to the local water treatment plant] with a pickup truck every day."

Basically, for those of you who are TL;DR for the full article, a black community in a white part of the state of Ohio just got awarded 10 million for the fact that, I don't know, they were denied running water for fifty years, despite being only a few hundred feet from a water main servicing white communities. And yes - if you read the article, it's pretty blatant that it solely has to do with the race of the community, and that this is not just tort-mongering.

I'm glad I saw this; I have to work really quite hard to keep myself from falling into that "systemic racism" trap, whereby only a few idiotic white racists exist, and the real problems are all of the "invisible knapsack" variety. Nope. Plenty of good ol' white folks who just don't give a good goddamn about minorities pretty blatantly, if not abusively. And if you're of the Ron Paul mindset - explain to me where we'd be on civil rights if not for the Federal Government? I mean, this is Ohio we're talking about here - one of those places that has a Union memorial practically in every town center.

On a happier note - a list of 50 favorite words, from the Beeb. Personally, I'd like to add a few of mine: 

Ultracrepidarian - someone who talks on subjects of which they have no knowledge;

Lethelogia - to forget a single word; 

Rhinotillexis - to pick one's nose.

That Is All For Now.

Reagans In The Rear-View Mirror May Appear Closer Than They Are.

From The Next Right (http://www.thenextright.com/jon-henke/sarah-palin-and-the-right)

"If Ruffini thinks Palin will be the leader of a grassroots revival, then I think he is probably over-optimistic. As an abstraction, Sarah Palin is a fantastic leader. She's a genuine outsider, she's stood up to her own party, she's pursued and won major reform fights, she's made difficult cuts in spending, and she's generally in line with the Republican grassroots on policy issues. And she's a fresh, interesting face for the Republican Party. (italics mine)

But to be the substantive leader of a political movement, she needs three things:

1. A clear, but sophisticated, political philosophy
2. A serious governing strategy to move the ball forward on her political philosophy
3. A support base, including grassroots and elite infrastructure, that can mobilize to defend her and advance her agenda

I understand why Palin is a compelling idea. I just haven't seen much evidence that she's got the serious substance behind the marketing abstraction. At least, not right now. Remember, Ronald Reagan spent decades writing, speaking and working on difficult political issues, thinking deeply about what he believed and why, before he was taken seriously as a major movement leader. And even then, he stood upon the shoulders of giants. The next leaders of the Right will not be riding an emerging Movement into power; they will be building a Movement anew."

It is always interesting to see movement conservatives claim intellectual heft as part of their party; not to mention the ease with which they Stalinistically erase their history (wasn't "compassionate conservatism" technically the last "clear but sophisticated" conservative intellectual movement? Why hopscotch over to Reaganism? I'd love to see an "intellectual" Republican explain to me why "compassionate conservatism" failed, or how Reaganism as economics is different from general "Washington Consensus" economics.)

But I digress; what has consistently interested me about the Republicans this year is their "team of mavericks" meme - that basically you can have your herd of cats - and eat it too. A party that finds as its highest point of esteem rebellion against the party is a party that will never win anything. Remember how Tom DeLay had a "little black book" that listed every lobbyist who raised money for the GOP, and if you weren't in it, you didn't get access? That's not the way to run a government, but it is the way that you keep power in an government, and if Republicans think they were done a disservice by that blatant "pay your dollar and take your ride" brand of politics, then they just weren't the wealthy Republicans, who made out like - and often were, if you've been paying attention to the contractors in Iraq - bandits.

Now, the rest of those qualifications show a profound ignorance of politics; how again is she a "genuine" outsider? Is anyone not from a political family an outsider now? Because Sarah Palin strikes me as no more an insider or an outsider than Obama - she ascended the greasy pole just like any other citizen not born a scion of a political family (such as your Gores, Bushes, McCains, and Byrds, for example.) Her fiscal record is vastly more populist than either classically conservative, or even neo-Keynesian Republican (think Nixon's "We're all Keynesians now") - after all, she raised taxes to give each citizen of Alaska more money from the Permanent Fund, something straight out of the Huey Long playbook, so that "cut taxes" bit is more of a magic phrase than an accurate assessment. And by generally in line with Republican policy issues, I have no clue what this Henke means; aside from her views on guns and god, there isn't much in her speeches that wouldn't give a Ron Paul supporter the conniptions, which is where the new and final schism in the current GOP is probably going to come from. And in the light of that kind of GOP emphasis on reform - the kind of Paulite reform that destroys the Department of Education, for example, that makes up the real intellectual direction of the party these days - Palin ain't got nothin'.

If honesty is a virtue - and when it comes to self-examination, it generally is - then the GOP is far from virtuous these days. Coming off of Bush, and attempting to understand what happened outside of the freak event of 9-11 that lead to their dominance, the GOP wishes to believe that the "silent majority" still is "Waiting for Righty", which is simply not the case. The bailout put a nail in the common belief that Wall Street ultimately could be trusted to make Americans wealthy through unregulated, off-ledger speculation rather than capital reinvestment in infrastructure and industrial capacity (though lord knows Corporate America wrung every tax break and tariff it could by claiming it was going to just that, just as soon they finish shipping all the lathes and wrenches to the subsidiary in Ciudad Juarez.) The "ownership society" (again, another conservative intellectual concept strangely quiet these days - perhaps because those people who took it seriously now own a share of a society worth 40% less than it was a month ago) is a dead issue; the unions are starting to reverse the last four decades declines in membership, political registration is through the roof, and the domestic issues that Democrats constantly own on are front and center - especially since we've already negotiated a 2011 withdrawal from Iraq (not that anyone's really talking about it.) In short, the GOP is a party falling apart, and the fact that they're even talking Sarah Palin as a serious potential candidate for the resurgence of the party is moonbat babbling at its most enjoyable. Sarah Palin can't create a conservative grassroots movement - she's all that's left of it. And if the Republican thinking class can't see that, then they are in for a rough couple of decades.

That Is All For Now.