This is why culture stays with us . . . or economics of death

Death anxiety is a primary motivational force that drives much of our behavior. It puts our defenses on high alert, and we make strenuous efforts to repress or deny the unwelcome truth of our inevitable end. The way each of us denies death not only affects life in its broadest sense but also influences the way we behave in organizations. Death anxiety underlies much executive behavior and action. However, traditional motivational theories do not acknowledge the influence of death anxiety on our behavior. Although they attempt to help us better understand employee motivation, they are not sufficiently inclusive. This article takes a clinical lens to explore death anxiety as a motivational force, how it affects behavior in organizations, and how we metabolize the feelings death evokes. In addition, I examine the various ways we deal with our knowledge of death. Some of us go into overdrive in trying to suppress it, while others fall into a state of resignation and depression. To deal with the ultimate narcissistic injury that death represents, we resort to a variety of immortality strategies to create permanent or enduring meaning. Furthermore, from an organizational perspective, three maladaptive responses to death anxiety are explored: the manic defense, succession issues, and the edifice complex.

From a paper by Manfred F.R. Kets de Vries. 

Short and Long-Rung Effects of Behavioral Interventions

Interventions to affect repeated behaviors, such as smoking, exercise, or workplace effort, can often have large short-run impacts but uncertain or disappointing long-run effects. We study one part of a large program designed to induce energy conservation, in which home energy reports containing personalized feedback, social comparisons, and energy conservation information are being repeatedly mailed to more than five million households across the United States. We show that treatment group households reduce electricity use within days of receiving each of their initial few reports, but these immediate responses decay rapidly in the months between reports. As more reports are delivered, the average treatment effect grows but the high-frequency pattern of action and backsliding attenuates. When a randomly-selected group of households has reports discontinued after two years, the effects are much more persistent than they had been between the initial reports, implying that households have formed a new "capital stock" of physical capital or consumption habits. We show how assumptions about long-run persistence can be important enough to change program adoption decisions, and we illustrate how program design that accounts for the capital stock formation process can significantly improve cost effectiveness.

From a new paper by Allcott & Rogers (October 2012), which shows that the duration of interventions matters for long-term behavioral changes. It also presents an effective way to induce energy conservation. 

Ambiguity and Economic Behavior

We measure the ambiguity attitudes of a representative sample of U.S. households using a custom-designed module in the American Life Panel, and we test the relation between ambiguity attitudes and economic behavior. Our results show that ambiguity attitudes vary across people: about half are ambiguity averse, around 10% are ambiguity neutral, and close to 40% are ambiguity seeking. Within-subject attitudes are sensitive to the likelihood of ambiguous events, with a tendency to overweight unlikely events and to underweight highly likely events, a pattern termed ‘ambiguity-likelihood insensitivity.’ We test whether individuals’ ambiguity attitudes can explain their decisions regarding equity market participation, asset allocation, retirement planning efforts, and insurance ownership. Results are largely consistent with theoretical predictions: higher ambiguity aversion is associated with less equity market participation, a lower fraction of financial wealth allocated to stocks, and people engage in more retirement planning. High ambiguity-likelihood insensitivity is associated with a higher probability of owning insurance.

Source.  
The authors explain:

Risk refers to stochastic events for which the probabilities of the possible outcomes are known, while ambiguity refers to stochastic events for which the probabilities of the possible outcomes are unknown (p. 1). [Why not uncertainty?].

Behavioral Econ. and "Conventional econ:" Substitutes or Complements

First, . . . behavioural economics is not a new approach to doing economics, but instead is best seen as a way of enriching ‘conventional economics’ (using Gittins’ terminology). Second, that behavioural economics is not a panacea. Not all aspects of economic activity need psychology to be understood and behavioural economics has limitations. Third, that the failings of conventional economics are not as severe as Gittins suggests.

Source: Borland (2012).  

An evolutionary perspective of economics

. . . [H]istorically, economics has not been a discipline aligned in a homogenous way to a single and undifferentiated thought, locked into the idea of perfect rationality, but, on the opposite, is a discipline that has enriched itself and continually is enriching by contributions and significant contaminations with other research fields.

That is from the new paper "Rationality and choices in economics: behavioral and evolutionationary approaches" by Mario Graziano and Daniele Schilirò.

Graph of the day: The increasing influence of "Prospect Theory"

Source. "Prospect Theory" is  . . . 

Regret and behavioral economics?

This is an interesting video by Kathryn Schulz titled "Don't regret regret."

Halloween paper of the day: What costumes tell about children

We examine whether ambiguity aversion correlates with costume choice amongst children at Halloween. We conducted an ambiguity aversion experiment with children on Halloween during trick-or-treating and correlated this with their choice of costumes. We find that children wearing the most commonly chosen costumes are more likely to avoid a gamble with ambiguous odds. This inquiry is in line with a series of recent papers observing whether choices in simple experimental economics games correlate with theoretically similar non-laboratory behavior.

This is from the paper: There’s Something About Ambiguity: Evidence from Halloween 

Kahneman's "Thinking, Fast, and Slow"

Jonah Lehrer reviews the book:

In Mr. Kahneman's important new book, "Thinking, Fast and Slow," his first work for a popular audience, he outlines the implications of this new model of cognition. What are the most important mental errors that we all make? And can they be overcome? 

Consider the overconfidence bias, which drives many of our mistakes in decision-making. The best demonstration of the bias comes from the world of investing. Although many fund managers charge high fees to oversee stock portfolios, they routinely fail a basic test of skill: persistent achievement. As Mr. Kahneman notes, the year-to-year correlation between the performance of the vast majority of funds is barely above zero, which suggests that most successful managers are banking on luck, not talent. 

This shouldn't be too surprising. The stock market is a case study in randomness, a system so complex that it's impossible to predict. Nevertheless, professional investors routinely believe that they can see what others can't. The end result is that they make far too many trades, with costly consequences. 

And it's not just investors who suffer from this mental flaw. The typical entrepreneur believes that he or she has a 60% chance of success, though less than 35% of small businesses survive more than five years. Meanwhile, CEOs who hold more company stock—taken here as a sign of self-confidence—also tend to make more irresponsible decisions, overpaying for acquisitions and engaging in misguided mergers. 

Even consumers are hurt by this bias. A recent survey of American homeowners found that they expected, on average, to spend about $18,500 on remodelling their kitchens. The actual average cost? Nearly $39,000. 

We like to see ourselves as a Promethean species, uniquely endowed with the gift of reason. But Mr. Kahneman's simple experiments reveal a very different mind, stuffed full of habits that, in most situations, lead us astray. Though overconfidence may encourage us to take necessary risks—Mr. Kahneman calls it the "engine of capitalism"—it's generally a dangerous (and expensive) illusion. 

What's even more upsetting is that these habits are virtually impossible to fix. As Mr. Kahneman himself admits, "My intuitive thinking is just as prone to overconfidence, extreme predictions and the planning fallacy as it was before I made a study of these issues."" 

Even when we know why we stumble, we still find a way to fall.

One of the problems in this article [and I should read the book for clarification] is the definition of "rationality" and "irrationality." There are different versions of rationality [and as a corollary, of irrationality as well], from weak to very strong. Strong rationality, in the sense of rational expectations (which comes from John Muth) indicates that people have in their minds the right model of reality - which we know is practically impossible. There are computational limitations in the brain, like Herbert Simon explained. 

If people were more rational, meaning that they don't overestimate the probability of success, then those who start a new business will succeed. However, it might be possible  that the business that succeed in this case are different from the businesses that survive when people overestimate their chances of survival. Did Steve Jobs overestimate his probability of success? May be failure to estimate the right probability is at the core of success in innovation [but again, I am sure Kahneman talks about this in his book]. 

An insurmountable task is the complex calculation of costs and benefits when people overestimate their chances of success.

"Thinking, fast and slow:" Insights from behavioral economist D. Kahneman

"People who have info about an individual case rarely feel the need to know the stats of the class to which the case belongs." D.K. (@ATabarrok).
The planning fallacy:" Most people overrate their own abilities and exaggerate their capacity to shape the future." Source. (@bill_easterly). 
Kahneman's book will be released on October 25.
This is a great Kahaneman's video on experience versus memory.

Why Can’t More Poor People Escape Poverty?

Explanations from psychology, here, source:

Poverty may reduce free will, making it even harder for the poor to escape their circumstances.

But now, we may need to grapple with a new possibility: that poverty doesn’t simply reduce freedom by constraining an individual’s choices, but that it may actually alter the nature of freedom by reducing an individual’s willpower.