Monthly Archives: November 2011

“Thinking, Fast and Slow” is a book by Dr. Daniel Kahneman, a legendary psychology professor at Princeton who has performed pioneering research in the psychology of judgment and decision-making. Avoiding cognitive traps is an important part of increasing your intelligence. This post has some notes from the book.

• People tend to assess the relative importance of issues by the ease with which they are retrieved from memory.

• Because public interest is most easily aroused by dramatic events and by celebrities, media feeding frenzies are common.

• A study found that the pupils dilate when people are engaged in mental effort.

• Switching from one task to another is effortful, especially under time pressure.

• Measures of efficiency in the control of attention predict performance of air traffic controllers and of Air Force pilots beyond the effects of intelligence.

• People who are cognitively busy are more likely to make selfish choices, use sexist language, and make superficial judgments in social situations.

• Forms of voluntary effort (cognitive, emotional, physical) draw on a shared pool of mental energy that can be depleted.

• Self-control relies on sufficient glucose.

• When people believe a conclusion is true, they are also very likely to believe arguments that appear to support it, even when these arguments are unsound.

• A study of children using computer games designed to demand attention and control found that training attention also improved scores on nonverbal tests of intelligence.

• Your actions and emotions can be primed by events of which you are not even aware.

• A study had one group of students unscrambled sentences with words associated with the elderly. The experimental group was found to walk out of the office significantly more slowly than the control group.

• A study had students walk around a room at about one-third of their normal pace. After this experience, the students were much quicker to recognize words related to old age.

• A study found that smiling increases positive experiences while shaping the face into a frown leads to an increased emotional response to upsetting pictures.

• A study found that support for propositions to increase the funding of schools was greater when people were exposed to images of classrooms and school lockers.

• A study found that people primed with images of money persevered longer in solving a difficult problem and were less willing to spend time helping another student.

• Words that you have seen before become easier to see again.

• A reliable way to make people believe in falsehoods is frequent repetition.

• Simpler language is better than complex language for making people think you are credible and intelligent.

• Aphorisms are judged as more insightful when they rhyme.

• People give more credence to a source that is easy to pronounce.

• A study found that investors believe that stocks with fluent names will earn higher returns than stocks with unpronounceable names.

• Studies have found that information or images that have been presented more frequently are rated more favorably.

• An experiment found that putting subjects in a good mood improved performance on an intuitive task.

• Studies of brain responses have shown that violations of normality are detected with astonishing speed and subtlety.

• The tendency to like (or dislike) everything about a person – including things you have not observed – is known as the halo effect.

• To derive the most useful information from multiple sources of evidence, you should always try to make these sources independent of each other.

• The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little.

• Different ways of presenting the same information often evoke different emotions.

• An experiment found that we are endowed with an ability to evaluate, in a single glance at a stranger’s face, two potentially crucial facts about that person: how dominant (and therefore potentially threatening) he is, and how trustworthy he is, whether his intentions are more likely to be friendly or hostile.

• A study found that people judge competence by combining the two facial dimensions of strength and trustworthiness.

• A random event, by definition, does not lend itself to explanation, but collections of random events do behave in a highly regular fashion.

• These two statements mean exactly the same thing: 1. Large samples are more precise than small samples. 2. Small samples yield extreme results more often than large samples do.

• We do not expect to see regularity produced by a random process, and when we detect what appears to be a rule, we quickly reject the idea that the process is truly random.

• If you follow your intuition, you will more often than not err by misclassifying a random event as systematic.

• The anchoring effect occurs when people consider a particular value for an unknown quantity before estimating that quantity. The estimates tend to stay close to the number that people considered.

• People adjust less (stay closer to the anchor) when their mental resources are depleted.

• Powerful anchoring effects are found in decisions that people make about money, such as when they choose how much to contribute to a cause.

• A study of judges who rolled a pair of dice found that those who rolled a 9 were more likely on average to sentence a shoplifter to 8 months in prison, compared to a judgment of 5 months in those judges who had rolled a 3.

• If you think the other side has made an outrageous proposal in a negotiation, you should not come back with an equally outrageous counteroffer, creating a gap that will be difficult to bridge in further negotiations. Instead you should make a scene, storm out or threaten to do so, and make it clear – to yourself as well as to the other side – that you will not continue the negotiation with that number on the table.

• A strategy of deliberately “thinking the opposite” may be a good defense against anchoring effects, because it negates the biased recruitment of thoughts that produce these effects.

• The availability heuristic is the process of judging frequency by the ease at which instances come to mind.

• Maintaining one’s vigilance against biases is a chore – but the chance to avoid a costly mistake is sometimes worth the effort.

•An experiment found that people who were instructed to frown had more difficulty remembering examples of assertive behavior.

• Some conditions in which people “go with the flow” and are affected more strongly by ease of retrieval than by the content they retrieved:

1. when they are engaged in another effortful task at the same time

2. when they are in a good mood because they just thought of a happy episode in their life

3. if they score low on a depression scale

4. if they are knowledgeable novices on the topic of the task, in contrast to true experts

5. when they score high on a scale of faith in intuition

6. if they are (or are made to feel) powerful

• The ease with which ideas of various risks come to mind and the emotional reactions to these links are inextricably linked.

• An availability cascade is a self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action.

• We either ignore small risks altogether or give them far too much weight – nothing in between.

• Rational or not, fear is painful and debilitating, and policy makers must endeavor to protect the public from fear, not only from real dangers.

• Keys to disciplined Bayesian reasoning:

1. Anchor your judgment of the probability of an outcome on a plausible base rate.

2. Question the diagnosticity of your evidence.

• A conjunction fallacy is one which people commit when they judge a conjunction of two events to be more probable than one of the events in a direct comparison.

• Individuals feel relieved of responsibility when they know that others have heard the same request for help.

• Inorder to conclude that a treatment is effective, you must compare a group of patients who receive the treatment to a “control group” that receives no treatment (or, better, receives a placebo). The control group is expected to improve by regression alone, and the aim of the experiment is to determine whether the treated patients improve more than regression can explain.

• Narrative fallacies arise inevitably from our continuous attempt to make sense of the world.

• A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed.

• The worse the consequence, the greater the hindsight bias.

• Stories of business success and failure consistently exaggerate the impact of leadership style and management practices on firm outcomes.

• A study of Fortune’s “Most Admired Companies” found that over a twenty-year period, the firms with the worst ratings went on to earn much higher stock returns than the most admired firms.

• The financial industry appears to be built largely on an illusion of skill.

• Evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. Typically at least two out of three mutual funds underperform the overall market in any given year.

• The year-to-year correlation between the outcomes of mutual funds is very small, barely higher than zero.

• High subjective confidence is not to be trusted as an indicator of accuracy.

• To maximize predictive accuracy, final decisions should be left to formulas.

• Formulas that assign equal weights to all the predictors are often superior, because they are not affected by accidents of sampling.

• Intuition adds value, but only after a disciplined collection of objective information and disciplined scoring of separate traits.

• One experience is often sufficient to establish a long-term aversion and fear.

• Statistical algorithms greatly outdo humans in noisy environments for two reasons: they are more likely than human judges to detect weakly valid cues and much more likely to maintain a modest level of accuracy by using such cues consistently.

• The planning fallacy describes plans and forecasts that are unrealistically close to best-case scenarios and which could be improved by consulting the statistics of similar cases.

• The evidence suggests that an optimistic bias plays a role – sometimes the dominant role – whenever individuals or institutions voluntarily take on significant risks.

• A survey found that 81% of entrepreneurs put their personal odds of success at 7 out of 10 or higher.

• The people who have the greatest influence on the lives of others are likely to be optimistic and overconfident, and to take more risks than they realize.

• Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck. We are therefore prone to an illusion of control.

• A study that asked chief financial officers of large corporations to estimate the returns of the S&P index over the following year found that the financial officers had no clue about the short-term future of the stock market. The correlation between their estimates and the true value was slightly less than zero!

• A study of patients who died in the ICU found that autopsy results showed that clinicians who were “completely certain” of the diagnosis before death were wrong 40% of the time.

• Once you have accepted a theory and used it as a tool in your thinking, it is extraordinary difficult to notice its flaws.

• Selling goods that one would normally use activates regions of the brain that are associated with disgust and pain. Buying also activates these areas, but only when prices are perceived as too high.

• The brains of humans and other animals contain a mechanism that is designed to give priority to bad news.

• We are driven more strongly to avoid losses than to achieve gains.

• Brain imaging has found that the brains of people who are engaged in punishing one stranger for behaving unfairly to another stranger have increased activity in the “pleasure centers” of the brain.

• We tend to overweight small risks and are willing to pay far more than expected value to eliminate them altogether.

• Loss aversion  can be reduced if people “think like a trader” (you win some, you lose some).

• An organization that can eliminate both excessive optimism and excessive loss aversion should do so. The combination of the outside view with a risk policy should be the goal.

• The disposition effect describes the preference for selling winners rather than losers in finance.

• The sunk-cost fallacy involves the escalation of commitment to failing endeavors.

• The fear of regret is a factor in many of the decisions that people make.

• People expect to have stronger emotional reactions (including regret) to an outcome that is produced by action than to the same outcome when it is produced by inaction.

• It is the departure from the default that produces regret.

• If you can remember when things go badly that you considered the possibility of regret carefully before deciding, you are likely to experience less of it.

• People who are the least susceptible to framing effects show enhanced activity in a frontal area of the brain that is implicated in combining emotion and reasoning to guide decisions.

• Unless there is an obvious reason to do otherwise, most of us passively accept decision problems as they are framed and therefore rarely have an opportunity to discover the extent to which our preferences are frame-bound rather than reality-bound.

• A study found that about half of participants reported going through an entire day without experiencing an unpleasant episode, while a significant minority of the population experienced considerable emotional distress for much of the day.

• The Gallup World Poll has found that the second-best predictor of the feelings of a day is whether a person did or did not have contacts with friends or relatives.

• Reports of stress and anger are common among parents, but the adverse effects on life evaluation are smaller.

• An analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index found that a headache increases the proportion reporting sadness and worry from 19% to 38% for individuals in the top two-thirds of the income distribution. A headache increases the proportion of respondents reporting sadness and worry from 38% to 70% in the poorest tenth of people.

• Studies have found no overall difference in experienced well-being between women who lived with a mate and women who did not.

• A disposition for well-being is as heritable as height or intelligence, as demonstrated by studies of twins separated at birth.

• One recipe for a dissatisfied adulthood is setting goals that are especially difficult to attain.

• A study found that students in California enjoyed their climate and students in the Midwest despised theirs, but climate was not an important determinant of well-being.

It’s important to pay attention to what high IQ people like physicists and mathematicians think. IQ is highly heritable and polygenic, in the words of this study. The book Spent by Dr. Geoffrey Miller describes the neurological bases of intelligence. General intelligence correlates positively with:

1. overall brain size

2. sizes of specific cortical areas

3. concentrations in the brain of particular neurochemicals

4. age at which the cortex is thickest in childhood

5. speed of performing basic sensory-motor tasks

Before getting into the details of the misapplication of my IQ, it’s important to note that I don’t blame myself or anyone else for any problems I’ve encountered in education or in life. This post is an effort to view myself dispassionately and describe how others can overcome obstacles to maximizing their genetic potential. Scientists have convinced me that free will doesn’t exist, so blaming myself or others is totally counterproductive. I certainly don’t blame my parents for anything, since they invested a lot of effort in creating an enriched environment for me through reading and discussions and play – all of which are associated with enhanced cognitive development. Instead of searching for people to blame, I’ve learned that it’s more important to make decisions in accordance with the scientific method.

I was recently discussing the heritability with someone in my family. I described the research indicating that intelligence has a largely genetic component and is stable throughout a person’s life. She told me about how I had taken the Wechsler Intelligence Scale for Children test in second grade. My scores indicated superior intelligence. My scores on the Iowa Tests of Basic Skills also put me in the 99th percentile of intelligence. My score on the ACT test later put me in the 97th percentile of graduating seniors nationwide. Here are some of the results from my early IQ tests and standardized tests (click to enlarge):

Despite having a high IQ according to standardized tests, I ended up graduating college with a degree in English. This isn’t necessarily terrible, since data shows that people who major in the humanities, and especially English literature, can have average or even high scores on verbal and analytic writing tests and sufficiently high intelligence:

1. IQ Estimates By Intended College Major

2. GRE Scores by Intended Major

3. MCAT Scores by Undergraduate Major

All the talk about valuable vs. worthless degrees in the blogosphere has still gotten to me. Engineering majors are on average better than me in nearly every way – which has been proven both in my research and in my personal experience. I have experience working in engineering environments where I’m basically a second-class citizen, even though the people have still been very nice to me. If you are an engineering student or graduate and feeling down about anything in your life, this may lift your spirits. Keep in mind that this could also be due to my multi-decade experience with depression and anxiety, so your mileage may vary if you graduated with a humanities degree.

To be fair, all of my scores on standardized tests have indicated higher scores on verbal sections than quantitative sections. Mathematics ability has major genetic and neurological components, as described in the post The Neuroscience and Neuropsychology of Mathematics Ability and Math Anxiety. It can also go the other way. I remember talking with a CEO who had graduated from MIT and Harvard Business School. He said his daughter was taking SAT practice tests and had great mathematics scores but was struggling on the reading and writing sections.

Personality is also important for succeeding in engineering. I wish I could have been an engineer, but personality is difficult to permanently change without medications, and the right medications may not have even been created yet. Engineering students tend to be tough-minded, emotionally stable, and even extroverted and confident. This is the opposite of me. The following papers describe the role of personality in engineering:

1. A comparison of computing and non-computing students’ personalities based on the five-factor model. (Link)

2. Family and psychosocial variables in the choice of university studies. (Link)

3. Investigation of broad and narrow personality traits in relation to major satisfaction for students in engineering, education and psychology majors. (Link)

4. Key factors that influence engineering students’ academic success: A longitudinal study. (PDF)

5. Personality Characteristics of Commerce and Engineering Graduates – A Comparative Study. (PDF)

6. Personality characteristics of engineers. (Link)

7. Personality differences between writers and mathematicians on the EPQ. (Link)

I also want to specifically highlight a very informative dissertation by Dr. Yonca Toker titled “Non-ability correlates of the science-math trait complex: searching for personality characteristics and revisiting vocational interests” (PDF). This paper goes into great detail about the role of personality in how well a student succeeds in studying engineering in college.

So where did it all fall apart? The following factors probably contributed to my downfall, and I am in the process of reversing them.

Nutrition:

As I child, adolescent, and young adult, I had a suboptimal diet. I ate plenty of wheat, sugar, fructose, soy, and trans fats. You can see from my extensive health posts in the archives or by reading blogs like Evolutionary Psychiatry that those foods are associated with poor mental performance. My family didn’t eat beef, which has the cholesterol and saturated fat that are very important to cognitive health. Fish oil is also incredibly important to cognitive development, and the supplement wasn’t as popular back then as it is now. I also made the mistake of trying a vegetarian diet for about a year in college, which accelerated my decline into depression and despair since it didn’t have the animal protein and saturated fat needed for proper brain function.

Social and emotional problems:

I most likely have a hereditary predisposition towards anxiety. Research by Harvard Professor Jerome Kagan shows that temperament is heritable and persists throughout the lifespan. The New York Times article Understanding the Anxious Mind provides a useful popular overview of his research. His book The Long Shadow of Temperament goes into greater detail. It’s difficult for a student to do well in college if they worry about death every time they leave their home. A person doesn’t have a sufficient future orientation if they frequently worry about the end of the world, as I did, due to religious obsessions. My high level of anxiety qualified me for an MRI study (High Resolution MRI Images of My Brain). There are probably SNP variants associated with panic in my genome (New 23andMe Data).

Existential problems:

For a few years, I tried to live according to the Bible as closely and literally as possible. I would say that it was impossible and a form of obsessive-compulsive disorder. People aren’t meant to live according to arbitrary rules. In reality, humans are primates with very little free will. See books like Spent or The Consuming Instinct or Sex at Dawn or Essential Evolutionary Psychology or Looks or The Evolutionary Bases of Consumption or The Mating Mind or Living with Our Genes or Principles of Behavioral Genetics or Brandwashed or Evolutionary Psychology in the Business Sciences or A Mind of Her Own or Evolution and Genetics for Psychology or Biological Influences on Criminal Behavior for what really drives human behavior.

I later enjoyed The Year of Living Biblically by A.J. Jacobs, who had more fun than I did with a literalist interpretation of the Bible. As I will discuss in a moment, religiosity has genetic influences. I have grandparents and relatives who are very religiously observant. After taking SSRI’s, I now fortunately have fewer literalist religious beliefs. That indicates, at least in some people, that religiosity is a result of problems in the brain’s serotonin system. The study of scrupulosity shows that religious obsessions are related to obsessive-compulsive disorder.

Treatments for OCD, such as medications like selective serotonin reuptake inhibitors and supplements like 5-HTP and inositol, may reduce religiously-motivated obsessions. Hopefully as the use of antidepressants increases, global religiosity and fundamentalism will continue to decline. Interestingly, whether a person is religious or not isn’t really their fault. Heritability of religiousness actually increases from adolescence to adulthood. The Biology of Religion blog explores the biological influences that lead to religiosity. The book The Neuroscience of Religious Experience describes some interesting research on neurology and religion.

It was therefore fitting that my research journey began when I fainted at church. Fortunately, now I know more than ever before about medical research and the brain and can help others maximize their potential.

Here’s how to get started:

1. Learn about the right foods to eat. Dr. Emily Deans’ Evolutionary Psychiatry blog that I linked to earlier is one of the best resources for learning how nutrition affects the brain.

2. Get medications and nootropic supplements to correct any weaknesses in your brain. The books by Dr. Stephen Stahl are an excellent illustrated introduction to psychiatric medication. Studies indexed under the nootropics subject heading in PubMed are also very useful.

3. Embrace the practice of living scientifically. As far as I know, scientific causality determines everything that happens in the world.

4. Boost IQ with techniques such as dual N-back training and strategies for improving fluid intelligence.

I’m excited to help people become more intelligent and improve the world through science.

Updated 11/29/2012

In my post The Science of Traders, I linked to some research that discussed the role of hormones in trading. In my post Markets are Driven by Primates and Robots, I discussed the rise of trading algorithms and quantitative finance. In a post of notes from the book Snakes in Suits, I discussed some research on psychopaths and speculated on their role in the ongoing economic crash. The global economy may have been damaged by the actions of sociopaths obsessed with power, who used obfuscation and rogue trading to pursue personal gain at all costs. In a world where people are losing their homes and even dying from economic inequality, cutesy freakonomic ideas will no longer suffice. It’s time to replace economics with something better.

Economics lacks effective predictive power when it comes to describing human behavior and global events. Books such as 23 Things They Don’t Tell You About Capitalism and Economyths and Debunking Economics provide useful critiques of economics. Physics and biology have greater potential to explain the world as compared to economics. Physics can accurately describe details of energy usage and the raw materials used in technological development. Biology can also explain microeconomic behavior better than economics. Investment funds should place a greater emphasis on research from evolutionary biology and neuroscience. Personality and intelligence are heritable and affect career and shopping decisions. The following books describe how humans are primates (probably without free will) who are driven by genes and environment:

• A Mind of Her Own

• Born Entrepreneurs, Born Leaders

• Essential Evolutionary Psychology

• Evolution and Genetics for Psychology

• Evolutionary Psychology in the Business Sciences

• Living With Our Genes

• Looks

• Principles of Behavioral Genetics

• Spent

• The Consuming Instinct

• The Evolutionary Bases of Consumption

• The Mating Mind

If my premise is true, investors who draw on research from physics and biology will have a better chance of earning high returns than investors who only rely on economic research. The rise of behavioral finance is influencing investment decisions. Barry Ritholtz is an example of an investor with physics training who also recognizes that humans are primates with cognitive biases. He’s become the most popular financial blogger in the world and keeps raising money and earning returns for clients. James Montier is a behavioral finance expert who joined the asset allocation team at GMO, one of the largest funds in the world.

It’s understandable that people are angry at a system that ruined the economy. Some individuals who run large financial businesses may be psychopathic primates (see The Science of Traders and Snakes in Suits). Financial executives bought off politicians and were able to secure bailouts for their banks and hedge funds. No one went to jail for financial malfeasance except for a few forgettable rogue traders. The anger is further justifiable since orthodox economics has been based on hopes and dreams rather than scientifically plausible research.

There’s also frustration over inequality. While inequality is expected in a world where IQ is largely heritable and people don’t choose their genes or environment, that doesn’t excuse it. There are plenty of negative outcomes associated with socioeconomic inequality. Here’s a search that finds medical studies about inequality. In abstract terms, it doesn’t matter that some people are richer than others. It does start to matter when people suffer ill health and die due to inequality.

The anger over inequality can be harnessed for productive purposes. A way of going about this is to examine high income professionals and figure out how to undermine them with superior innovation and automation. This will have the benefit of breaking open clubby social networks and elevating yourself to the level of the rich while simultaneously putting them in their place by reducing their wealth. This frustration can be channeled into entrepreneurship. The cost of technology and scientific equipment continues to increase in effectiveness while dropping in price. While rich people have access to investment resources and the best employees, they may become complacent as social and economic dominance lulls them into a false sense of security.

Envy and resentment can be harnessed in a way that makes the world a better place by making even more products and services cheaper or even free. When you think of a rich person who has everything, you can think about giving their customers better service at a cheaper price – or even for free, in the case of social entrepreneurship. Poor people are going to get replaced by robots and automation anyway, so they might as well bring rich people down to their level. Formerly rich people would then have incentives to care about inequality once they’re getting replaced by robots and nearly free goods, like everyone else:

• Will Robots Take Our Jobs?

Formerly wealthy people would then have real incentives to fix the country and not settle for the status quo.

It’s time for the real scientists to take over the investment world.

Debunking Economics is a book by Dr. Steve Keen, a professor of economics who was one of the few economists to accurately predict the Great Recession. The first edition of the book was published in 2002. The notes in this post come from the revised and expanded edition, which was published last month. The book describes the failings of neoclassical economics and mainstream economic research. The book itself is much more detailed than the notes in this post, and there are even more facts and figures at the book’s website: http://debunkingeconomics.com/

Here are some notes from the book:

• Conventionally trained economists ignore the role of credit and private debt in the economy.

• Dirk Bezemer conducted research to find people who had warned of the 2007 economic crisis before it happened and who met the following criteria:

1. provided some account of how they arrived at their conclusions

2. went beyond predicting a real estate crisis, also making the link to real-sector recessionary implications, including an analytical account of those links

3. the actual prediction must have been made by the analyst and available in the public domain, rather than being asserted by others

4. the prediction had to have some timing attached to it

Twelve people successfully predicted the economic crisis: Steve Keen, Dean Baker, Wynne Godley, Fred Harrison, Michael Hudson, Eric Janszen, Jakob Brochner Madsen, Jens Kjaer Sorensen, Kurt Richebacher, Nouriel Roubini, Peter Schiff, and Robert Shiller

• Bezemer’s research identified four common aspects of the work of financial researchers who predicted the economic crisis:

1. a concern with financial assets as distinct from real-sector assets,

2. with the credit flows that finance both forms of wealth,

3. with the debt growth accompanying growth in financial wealth, and

4. with the accounting relation between the financial and real economy

• Neoclassical economists assume that the real economy is a miracle engine that always returns to a state of steady growth and never generates any undesirable side effects.

• If economic textbooks actually gave an accurate rendition of the economy, they would describe an economy that generates cycles, is in disequilibrium all the time, and is prone to breakdown.

• If the Fed hadn’t intervened in 1987, the process of escalating debt would probably have ended there, and America would have begun the painful but necessary process of deleveraging from a debt-to-GDP level of 160 percent – about 10 percent below the 175 percent level that precipitated the Great Depression – and in a milieu of moderate inflation.

• Before the Subprime Bubble popped, the debt ratio had risen to almost 300 percent of GDP – 1.7 times the 1930s level, and even 1.25 times the peak level of 235 percent of GDP achieved in 1932, when rampant deflation and plunging output drove the debt ratio higher even as Americans drastically reduced the nominal level of debt.

• In a society consisting of many different individuals with many different commodities, the ‘market demand curve’ can have any shape at all – so that sometimes demand will rise as a commodity’s price rises, contradicting the ‘Law of Demand.’

• According to neoclassical economic theory, the Law of Demand will apply if, and only if, there is only one commodity and only one consumer. But in such a situation, the very idea of a ‘Law of Demand’ makes no sense. The whole purpose of the Law of Demand is to explain how relative prices are set, but if there is just one commodity and one consumer, then there can be no relative prices.

• The widely-used Mas-Collel Microeconomic Theory textbook assumes that free market capitalism will maximize social welfare if, and only if, there is a benevolent dictator who redistributes wealth prior to trade.

• The leading undergraduate economics textbook by Gregory Mankiw implies that all that is needed to derive a market demand curve is to horizontally sum individual demand curves.

• The textbook by economist Paul Samuelson assumes that in a capitalist society, incomes are continuously adjusted so that an ethical distribution of income is achieved.

• Since economics is non-empirical, there is no disconnect between theory and reality that might warn economists that something is wrong with the theory.

• It is ironic that the ancient defense of inequality ultimately backfires on economics, by making it impossible to construct a market demand curve which is independent of the distribution of income. If the market demand curve depends upon the distribution of income, if a change in prices will alter the distribution of income, and if this does not result in a single equilibrium between marginal revenue and marginal cost, then economics cannot defend any one distribution of income over any other. A redistribution of income that favors the poor over the rich cannot be formally opposed by economic theory – in fact, economic theory requires such a distribution before it can even derive a market demand curve!

• The entire neoclassical theory of consumer behavior has been derived in ‘armchair philosopher’ mode, with an economist constructing a model of a hypothetical rational consumer in his head, and then deriving rules about how that hypothetical consumer must behave.

• “We conclude that the evidence for the utility maximization hypothesis is at best mixed. While there are subjects who appear to be optimizing, the majority of them do not.” – Reinhard Sippel, describing the results of an experiment that tested revealed preference

• It is simply impossible to hold in your head a complete set of preferences for the bewildering array of combinations one can form from the myriad range of commodities that confront the average Western shopper.

• A competitive market will set price above marginal cost, and therefore a supply curve that is independent of the demand curve can’t be drawn.

• The revenue and costs of real firms are nothing like those assumed by neoclassical economists.

• In contrast with economic theory, it’s fairly obvious that industries have a clear tendency to end up being dominated by a few large firms.

• If you add up a huge number of flat lines, you will get one very long flat line. If you break one downward-sloping line into many small lines, you will have many downward-sloping lines. The economic concept of perfect competition is based on a mathematical error of confusing a very small quantity with zero.

• Losses at the market level must mean losses at the individual firm level – yet these are presumed to be zero by economic analysis, because it erroneously assumes that the perfectly competitive firm faces a horizontal demand curve.

• If large firms have cost advantages over small ones, then given open competition, the large firms will drive the small ones out of business. Hence increasing returns to scale mean that the perfectly competitive market is unstable: it will, in time, break down to a situation of either oligopoly or monopoly.

• In terms of the model of perfect competition, there would be no limit to the amount a competitive firm would wish to produce, so that neoclassical theory could not explain how firms (in a competitive industry) decided how much to produce. In fact, according to the conventional model, each firm would want to produce an infinite amount.

• Economics assumes that products are homogenous, consumers are indifferent between the outputs of different firms and decide their purchases solely on the basis of price, that there are no transportation costs, etc. In such a world, no one needs marketing, because consumers already know everything, and only price (which consumers already know) distinguishes one firm’s output from another.

• Ironically, economic theory makes economists essentially ‘anti-capitalist,’ in that they deride real businesses for pricing by a markup on cost, when theory tells them that prices should be set at the much lower level of marginal cost.

• Over 150 empirical studies have been conducted into what the costs of actual firms really are, and with rare unanimity, every last one of them has found that the vast majority of firms report that they have very large fixed costs, and either constant or falling marginal costs, so that average costs of production fall as output rises.

• A study showed factory managers eight drawings of the shape of cost curves. When asked to choose which drawings most closely resembled the relationship between cost and output levels in their factories, only one of the 334 companies chose the curve that looks most like the curve drawn in virtually every neoclassical microeconomics textbook.

• Six serious problems with a meritocratic view of income distribution and employment determination:

1. The supply curve for labor can ‘slope backwards’ – so that a fall in wages can cause an increase in the supply of labor.

2. When workers face organized or very powerful employers, neoclassical theory shows that workers won’t get fair wages unless they also organize.

3. Sraffa’s observations about aggregation indicate that it is inappropriate to apply standard supply and demand analysis to the labor market.

4. The basic vision of workers freely choosing between work and leisure is flawed.

5. Economic analysis excludes one important class from consideration – bankers – and unnecessarily shows the income distribution game between workers and capitalists as a zero-sum game.

6. To maintain the pretense that market demand curves obey the Law of Demand, neoclassical theory had to assume that income was redistributed by ‘a benevolent central authority’ prior to exchange taking place.

• For the majority of workers, work is not an option but – in the absence of a very generous social security system – a necessity. Rather than smoothly choosing between work and leisure, in a completely free market system they face the choice of either working or starving.

• Policies based on lowering wages actually make a debt deflation worse, because they drive down the general price level and actually increase the debt burden on society. What is really needed is not lower wages, but lower debt levels – and paradoxically that can be achieved by increasing wages. A boost to money wages during a depression can cause inflation far more effectively than ‘printing money,’ and this inflation can reduce the real debt burden.

• Economists are forever opposing ‘market interventions’ which might raise the wages of the poor, while defending astronomical salary levels for top executives on the basis that if the market is willing to pay them that much, they must be worth it. In fact, the inequality which is so much a characteristic of modern society reflects power rather than justice.

• Rather than prices determining the distribution of income as economists allege, the distribution of income determines prices. Within limits, the distribution of income is something which is determined, not by market mechanisms, but by relative political power.

• Milton Friedman argued that unrealistic assumptions were the hallmark of good theory and said the following: “Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate representations of reality, and, in general, the more significant the theory, the more unrealistic the assumptions (in this sense).”

• Theories can be evaluated by their assumptions to some extent, if one has an intelligent taxonomy of assumptions. A theory may well draw power from ‘unrealistic’ assumptions if those assumptions assert, rightly, that some factors are unimportant in determining the phenomena under investigation. But it will be hobbled if those assumptions specify the domain of the theory, and the real-world phenomena are outside that domain.

• Psychology, with the help of experiments, was able to undergo a revolution from one dominant school to another – while economics continues to be dominated by the same school.

• There is little doubt that an effective academic union could increase the wages paid to academic economists. If economists were truly self-motivated – if they behaved like the entirely self-interested rational economic man of their models – they would do well to support academic unions, since the negative impacts they predict unions to have would fall on other individuals (fee-paying students and unemployed academics). But instead, one often finds that economists are the least unionized of academics, and they frequently argue against actions that, according to their theories, could conceivably benefit the minority of academics at the expense of the greater community. However ideological economists may appear to their critics, in their hearts they are sincerely non-partisan – and, ironically, altruistic.

• Neoclassical economic models in general ignore processes which take time to occur, and instead assume that everything occurs in equilibrium. For this to be allowable, the equilibrium of the dynamic processes of a market economy must be stable, yet it has been known for over forty years now that those processes are unstable: that a small divergence from equilibrium will not set up forces which return the system to equilibrium.

• The emphasis on modeling everything as an equilibrium phenomenon has isolated economics from most if not all other sciences, where dynamic analysis – and in particular evolutionary analysis – is now dominant.

• Complex systems have what are known as ‘emergent behaviors’ which mean that they cannot be understood by studying their constituent parts alone. This reality invalidates a key aspect of modern neoclassical macroeconomics: the attempt to derive models of the macroeconomy from microeconomic models of the behavior of individuals.

• Neoclassical economics is driven by a teleological desire to prove that capitalism is fundamentally stable, rather than by a desire to understand the empirical record of the actual economy.

• The neoclassical growth model resulted in a model of the macroeconomy as consisting of a single consumer, who lives forever, consuming the output of the economy, which is a single good produced by a single firm, which he owns and in which he is the only employee, which pays him both profits equivalent to the marginal product of capital and a wage equivalent to the marginal product of labor, to which he decides how much labor to supply by solving a utility function that maximizes his utility over an infinite time horizon, which he rationally expects and therefore correctly predicts. The economy would always be in equilibrium except for the impact of unexpected ‘technology shocks’ that change the firm’s productive capabilities (or his consumption preferences) and thus temporarily cause the single capitalist/worker/consumer to alter his working hours. Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed, he’s just taking more leisure. And there are no banks, no debt, and indeed no money in this model

• Many of the leading lights of US academic economics have lived in the revolving door between academia, government and big business, and in particular big finance. The fact that their theories, while effectively orthogonal to the real world, nonetheless provided a smokescreen behind which an unprecedented concentration of wealth and economic power took place, make these theories useful to wealthy financiers, even though they are useless – and in fact outright harmful – to capitalism itself.

• Overconfidence is an inevitability in the real world because all real-world variables are bound to be either above or below their ideal equilibrium values. A chain reaction then ensues that can tip the economy into depression. It begins with distress selling, at severely reduced prices, driven by the need to cover debt repayments. Falling prices means that the real burden of debt actually rises, even as nominal debt is reduced, and the repayment of debts reduces the money supply. These effects cause further bankruptcies, reducing profits, investment, output and employment. Pessimism rises, causing those with money to hoard it, which further reduces business activity. The falling price level also has the perverse effect that the real rate of interest rises even though nominal rates have fallen, and this drastically reduces investment.

• The efficient market hypothesis makes no distinction between investors’ expectations of the future and the future which actually occurs. In essence, the EMH presumes that investors’ expectations will be fulfilled: that returns will actually turn out to be what investors expected them to be. In effect, every stock market investor is assumed to be Nostradamus. What economists describe as ‘efficient’ actually requires that investors be prophetic.

• If investors influence each other’s expectations, this is likely to lead to periods when the market is dominated by pessimistic and optimistic sentiment, and there will be cycles in the market as it shifts from one dominant sentiment to the other.

• The boards that employ professional stock managers discipline their behavior to make them conform to the norm. Any manager who is truly trying to anticipate future economic trends is bound to make recommendations that are wildly at variance with what is popular in the market, and this behavior will appear eccentric and ill informed in comparison to the current market favorites.

• Empirical research shows that the actual behavior of the market strongly contradicts the predictions of the efficient market hypothesis. Specifically:

1. Share market returns are not at all related to the so-called ‘betas.’

2. Much higher returns and lower volatility can be gained by selecting undervalued stocks (ones whose share market value is substantially below their book value).

3. Far from there being a trade-off between risk and return, it is possible to select a portfolio that has both high return and low volatility, by avoiding the so-called ‘growth stocks’ that are popular with market participants.

• The key to preventing depressions is to prevent an explosion in the ratio of private debt to GDP, so that debt-financed demand cannot reach a level from which its collapse will trigger a depression.

• Aggregate demand in a credit-driven economy is equal to income (GDP) plus the change in debt. This makes aggregate demand far more volatile than it would be if income alone was its source, because while GDP (and the level of accumulated debt) changes relatively slowly, the change in debt can be sudden and extreme. In addition, if debt levels are already high relative to GDP, then the change in the level of debt can have a substantial impact on demand.

• Just a slowdown in the rate of growth of debt can be enough to trigger a recession. An absolute fall in debt isn’t needed to cause problems, though it certainly will make things worse still.

• The late 1960s marked the point at which the accumulated debt of the private sector exceeded 100 percent of GDP. From that point on, the dynamics of debt began to dominate macroeconomic performance in the USA – first generating a false prosperity, and then a calamitous collapse when the great debt bubble finally burst.

• For the first time since the Great Depression, the aggregate level of private debt began to fall in January 2009. But the economic downturn began well before, when the rate of growth of debt slowed from its peak level.

• The year 2008 brought to a close a period of literally half a century in which private debt had always been growing, and thus adding to aggregate demand. This of course was not inherently a problem: as both Schumpeter and Minsky argued, rising debt is necessary to finance entrepreneurial activity and to enable the economy to grow. The problem for America, and most of the OECD, was that this increase in debt was rising relative to GDP – indicating that what was being funded was not good, Schumpeterian innovation, but bad Ponzi-finance speculation.

• Since the change in debt is a major component of aggregate demand, and aggregate demand determines unemployment, unemployment rises if the rate of change of debt falls.

• This current recession has been so extreme compared to its post-World War II predecessors because all three debt indicators (debt-to-GDP ratio, debt-financed proportion of aggregate demand, and Credit Impulse) reached levels that are unprecedented in the post-WWII period.

• The financial sector carried the highest level of debt leading into the Great Recession – virtually 125 percent of GDP, five times the level of debt it had in 1930. Households come second now, with a debt level of almost 100 percent of GDP, two and a half times the level they had in 1930.

• Since the household sector in particular is debt-saturated, credit growth will hit a debt ceiling and give way to deleveraging again. The US economy in particular is likely to be trapped in a never-ending sequence of ‘double dips,’ just as Japan has been for the last two decades. There is a simple, but confrontational, way to stop this process: a unilateral write-off of debt.

• When lending is undertaken for investment or consumption, debt tends not to get out of hand. But when borrowing is undertaken to speculate on asset prices, debt tends to grow more rapidly than income. This growth causes a false boom while it is happening, but results in a collapse once debt growth terminates – as it has done now.

• Though borrowers can be blamed for having euphoric expectations of unsustainable capital gains, in reality the real blame for Ponzi schemes lies with their financiers – the banks and the finance sector in general – rather than the borrowers. Many firms willfully wrote loans when they knew – or should have known – that borrowers could not repay them.

• The consequences of our current behavior are twofold. First, the economy will be encumbered by a debt burden that should never have been generated, and will limp along for a decade or more, as has Japan. Secondly, the financial sector will continue to believe that ‘the Greenspan Put’ will absolve them from the consequences of irresponsible lending. A debt jubilee would address both these consequences. First, debt repayments that are hobbling consumer spending and industrial investment would be abolished; secondly, this would impose the pain of bankruptcy and capital loss on the financial sector – a pain it has avoided in general thus far through all the rescues since Greenspan’s first back in 1987.

• The practice of banks providing working capital and investment funds for industrial capitalism should be the primary role of banking, but it virtually died out as the financial sector became more and more an engine for speculation, so that most companies today raise their funds on the commercial paper market. A debt jubilee would bankrupt many banks, and put them into receivership; though it would be painful, the receivers could also be required to re-establish this key but neglected banking practice. It would also be necessary to compensate to some extent those not in debt as well – though they would also benefit from the sudden increase in spending power that such a policy would cause.

• Most economists who are trying to build models that transcend the neoclassical dead end are attempting to build computer-based multi-agent models in which those macroeconomic phenomena arise as emergent properties of the models.

• Banks are so willing to create debt and discourage its repayment because the source of bank profits is interest on outstanding debts, and the more debt that is out there, the more they make. The amount of outstanding debt will rise if existing money is turned over more rapidly, if new money is created more rapidly, and if debts are repaid more slowly. Banks therefore have an innate desire to create as much debt as possible – which is why it is unwise to leave the level of debt creation up to the financial sector.

• Few if any stock market speculators trade on the basis of new information. Instead, they trade on the basis of how they think other market participants will, on average, expect the market to react to the news. Unlike the efficient market hypothesis, this ‘news’ can include the most recent movements of stock prices themselves.

• Research by Robert Haugen shows that price-driven volatility accounts for almost 95 percent of all volatility. Knowledge of this fact could reduce the risk premium to as low as 0.4 percent (compared to a historical 6 percent). This could lead to a higher rate of investment and economic growth.

• Research by Didier Sornette shows that the behavior of stock markets follows the ‘log-periodic’ pattern of earthquakes. This can be used to make predictions about future stock market crashes that can be verified after the predicted crashes have occurred.

• Not only are regulators slower to move than the organizations they are intended to control, they often become advocates rather than monitors of those organizations.

• The appropriate starting point for mathematical models of the economy is dynamic equations, in which the relationships between variables cannot be reduced to straight lines. These are known in mathematics as nonlinear differential equations.

• Here are five alternatives to neoclassical economoics (Keen himself is supportive of Post-Keynesian economics, but recognizes that the best aspects of all five approaches can be integrated to form the economics of the future):

1. Austrian economics, which shares many of the features of neoclassical economics, save a slavish devotion to the concept of equilibrium

2. Post-Keynesian economics, which is highly critical of neoclassical economics, emphasizes the fundamental importance of uncertainty, and bases itself upon the theories of Keynes and Kalecki

3. Sraffian economics, based on Sraffa’s concept of the production of commodities by means of commodities

4. Complexity theory and Econophysics, which apply concepts from nonlinear dynamics, chaos theory, and physics to economic issues

5. Evolutionary economics, which treats the economy as an evolving system along the lines of Darwin’s theory of evolution

 

Economyths is a book by Dr. David Orrell, an applied mathematician who studies complex systems. The book describes the flawed thinking of economists and the flaws in economics itself. This post has some notes from the book.

Introduction:

• According to forecasters polled by Bloomberg.com at the start of 2008, none foresaw a loss and the average prediction was for a gain of 11 percent. By year-end, the S&P 500 index was actually down 38 percent and $29 trillion had been lost from global markets.

• “We were seeing things that were 25-standard deviation moves, several days in a row.” – CFO of Goldman Sachs (a 25-standard deviation event is something that is not expected to happen even once in the duration of the universe – let alone each day of a week).

• The economy is unfair. In 2009 one hedge fund manager earned over $2 billion, while over a billion people earned less than $1 a day.

• The economy is unstable. In late 2007 the price of oil surged to over $140 a barrel, then plunged to under $40, all in the space of a few months.

• Ideas in economics superficially have the look and feel of real science, but they are not actually scientific.

The Anarchic Economy:

• According to econophysicist Joe McCauley, there is no empirical evidence for the existence of supply and demand curves.

• According to the EIA, world oil supply actually rose and demand dropped in the six-month period preceding the 2008 oil price spike. The spike in oil was a classic speculative bubble.

• Agent-based models have been used to reproduce the boom/bust behavior of markets.

• The exact behavior of a system depends on all the exact details, and the only way to predict a system would be to reproduce it on the computer. That’s the point of emergent properties: they can’t be predicted by a simple equation. Instead, complexity scientists search for pockets of predictability – aspects of the system that are amenable to prediction.

The Connected Economy:

• Whether the economy is surging or depressed, the GDP model from the US Energy Information Administration always points to a growth of around 3 percent. The track record of models at other institutions like the OECD or IMF is no better.

• When one bank or financial institution fails, it puts other nodes in the network under increased stress. Not only must they make up the financial slack, but they also come under increased scrutiny themselves.

• Some design principles shared by robust networks – but not currently by our financial system – include modularity, redundancy, diversity, and a process for controlled shut-down.

• Much of the appeal of the complex financial products developed in the last decade is that they enabled financial institutions to get around reserve requirements. Investment banks such as Lehman Brothers were leveraged at extremely high ratios (over 30 to 1), so they were essentially gambling with other people’s money.

• Canadian banks survived the credit crunch relatively unscathed, in large part because they have tougher lending requirements than their American counterparts.

• Intense competition between financial institutions such as hedge funds meant they were afraid of under-performing their peers, so were actually more likely to adopt the same techniques. The trend was exacerbated by the fact that funds often use quantitative rule-based strategies, which are inherently easy to copy. Banks also adopted near-identical risk models, even though they were known to be flawed, exactly because they were widely accepted by the industry.

• Banks often structure themselves in a deliberately labyrinthine manner in order to avoid taxes, which makes them hard to wind up.

• Companies, including banks, spend a lot of time worrying about their own short-term risk, but much less on systemic risk.

The Unstable Economy:

• When prices of an asset like housing or a particular stock are going up, they attract a class of investors known as momentum buyers, who see people making money and decide to jump on the bandwagon. That acts as positive feedback by bidding prices up even further.

• Because banks all use the same Value at Risk formula, with only minor adjustments, a consequence is that when volatility increases they are all required to sell assets at the same time. This creates further volatility, which again increases VaR, which means that more assets need to be sold to meet the regulatory requirement, and so on.

• One lesson from the recent crisis is that central banks need to pay as much attention to the destabilizing effects of excess credit and asset price growth as they do to things like inflation. Use of the controls should be flexible, instead of rule-based, to avoid being gamed for commercial advantage.

• When trust is high, firms take on more leverage, and investors get drawn into the market. The economy appears strong, but risk is growing. After a disaster, trust evaporates, but risk may actually be at its lowest. It’s impossible to time the markets, but one can avoid over-leveraging during the good times, or becoming overly cautious during the bad times.

The Extreme Economy:

• Sharpe’s Capital Asset Pricing Model, Markowitz’s Modern Portfolio Theory, and Black and Scholes options formula all assumed the key economic myths: that investors are rational and independent, that markets are free and fair, that markets are stable and correctly reflect value and risk, and that as a result of this price changes are random and follow a normal distribution.

• Orthodox risk-assessment techniques have failed to realistically assess the risk of every financial crisis of the past few decades, including the 1997 Asian crisis, the 2000 dot-com crisis, and the 2007-08 credit crunch.

• The frequency of both financial crashes and earthquakes are described by the same power law. Numerous studies have demonstrated that the distribution of price changes for major international indices follow a power-law distribution with a power of approximately 3.

• A model that was valid in the 1960s or 1980s won’t be valid in the 2010s, because the entire economy will be different – the mix of companies, investors, regulators, and so on will have changed.

• Despite the popularity of Value at Risk, the model fails on a regular basis. On February 29, 2008, Bear Stearns reported a VaR of $62 million at 95 percent confidence. By mid-March, its share price had dropped from $70 to $2, representing a loss of $8 billion.

• By downplaying the possibility of extreme events, quantitative risk management increases risky behavior, thus making disaster more likely.

• The next way to improve economics is to use the findings of complexity and fractal statistics, not to predict the timing or magnitude of the next crash, but to model the financial system and find ways to reduce the likelihood and impact of extreme events.

• Four steps for creating a financial system that is less prone to harmful collapses: 1. better regulate the introduction of new financial products (including not allowing new financial products unless they can be shown to provide a measurable improvement over other alternatives with no dangerous side-effects), 2. reduce the incentives for bankers to make bets that have a high probability of paying off in the short term but are guaranteed to eventually blow up, 3. controlling credit creation and leverage, 4. modernizing risk models used by banks and financial institutions to reflect the fractal nature of the markets and the possibility of extreme events

The Emotional Economy:

• A neurological study at University College London showed that the physical response of our brain when we experience financial loos is the same as that caused by fear or pain.

• Making a list of every future contingency is impossible, the same way that making a list of irrational numbers is impossible.

• The purpose of Computable General Equilibrium Models is to predict how the economy’s equilibrium will react to changes in government policy, commodity prices, and so on. These models not only fail to predict, but they give a false illusion of control.

• “Almost no one contests the poor predictive performance of economic theory. The justifications are many, but the conclusion is not even the subject of debate.” – economist Alan Kirman

• “[Much of the past three decades of macroeconomics was] spectacularly useless at best, and positively harmful at worst.” – economist Paul Krugman

• “[Macroeconomics has been] notable for paying very little rigorous attention to data… there is nothing in the empirical performance of these models that could come close to overcoming a modest scepticism. And more certainly, there is nothing to justify reliance on them for serious policy analysis.” – economist Robert Solow

• Government models do not properly account for the role of the financial sector. For example, The Bank of England’s general equilibrium model omits banks.

• There’s nothing like rising prices and a risk of losing your job to upset the electorate – which is why politicians keep a close eye on the misery index.

• The Law of Small Numbers presents empirical results showing that experimental subjects could not make accurate estimates of probability when thinking in an intuitive manner.

• Brain scans have shown that the offer of a reward affects different parts of the brain depending on whether the reward is immediate or delayed.

• Our asymmetric attitude towards loss means that our decrease in purchasing power outweighs any wage gains.

• “As any non-orthodox economist knows, it is almost impossible to have an article accepted into one of the mainstream academic journals unless it has the full panoply of economic assumptions: rational behaviour (according to the economic definition of rational!), markets that are always in equilibrium… and so on.” – economist Steve Keen

• “Conventional economics assumes that people are highly rational – super-rational – and unemotional. They can calculate like a computer, and they have no self-control problems. They never overeat, they never over-drink, they save for retirement, just the right amount – first by calculating how much they need to save, and then religiously putting the money aside. Real people are not like that.” – economist Richard Thaler

• As neuropsychologist David Lewis noted, purchase decisions are “more emotional than logical and generated in the oldest part of the brain,” though we may rationalize them after the fact. Retailers and advertising companies are well ahead of economists at understanding this, because they have been nudging us into buying things since shopping was invented.

• Economic agents should make decisions based on the information available to them, instead of a global bird’s-eye view. They should employ simple rules of thumb more than abstract reasoning. They should be rational at times, but not always. They should be influenced by the context and by other agents.

• There is plenty of empirical evidence to show that simple models make better predictions than complicated models.

• Many of the features of the economy, such as stock market crashes, are inherently unpredictable. The aim of models should be not to predict the unpredictable, but to help design the financial system so that it is more robust.

• “Existing economics is a theoretical system which floats in the air and which bears little relation to what actually happens in the real world.” – economist Ronald Coase

• “A theory is accepted not because it is confirmed by conventional empirical tests but because researchers persuade one another that the theory is correct and relevant.” – economist Fischer Black

The Gendered Economy:

• Iceland’s Financial Supervisory Authority had allowed the newly privatized banks to lend out too much money – about ten times the country’s GDP. Only ten days after the start of the Icelandic financial crisis, the three main Icelandic banks had failed.

• “The crisis is man-made. It’s always the same guys. Ninety-nine percent went to the same school, they drive the same cars, they wear the same suits and they have the same attitudes.” – Halla Tomasdottir of Audur Capital

• “[Sveriges Riksbank had] infringed on the trademarked name of Nobel. Two thirds of the Bank’s prizes in economics have gone to US economists of the Chicago School who create mathematical models to speculate in stock markets and options – the very opposite of the purposes of Alfred Nobel to improve the human condition.” – Peter Nobel

• The Commodity Futures Modernization Act exempted futures and derivatives from any kind of regulation. A clause on energy futures had helpfully been drafted by lawyers from the energy company Enron.

• Because home loans were divided into tranches, it was possible to achieve a kind of financial alchemy and turn even the most subprime mortgages into a high-quality security.

• The Gaussian copula technique assumed that market prices correctly reflect correlations. It also assumed that markets are stable, so that correlations do not change with time, and that the past is a good guide to the future. In particular, the model was calibrated on US housing data for a period that had never seen a nationwide housing decline.

• Credit default swaps evolved from a form of insurance into a tool for hedge funds to make sophisticated bets on just about anything. The net effect of all this insurance activity was to move risk off the banks’ balance sheets, thus allowing them to lend even more money. This meant that credit became cheap, further fueling the housing boom.

• Because risk computations were based on historical data, the longer house prices kept rising in tandem, the lower seemed the risk. A positive feedback loop was therefore set up, in which rising prices lowered the calculated risk, which increased the supply of credit which made loans more affordable, which drove further price increases. In reality, of course, the risk was climbing all the time, but the model couldn’t see that because it didn’t include the concept of a price bubble. The situation was supported by interest rates that had been set low after 9/11 and remained there, in part because China was lending money cheaply to the US government.

• “The most dangerous part is when people believe everything coming out of [the model]” – mathematician David X. Li

• Part of the appeal of methods like VaR or the Gaussian copula is that they ignore extreme events and consistently underestimate risk, thus enabling traders to justify highly aggressive and speculative bets.

• “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.” – Alan Greenspan

• An economist or quantitative analyst could calculate the theoretical risk of a CDO prospectus using a single formula, but to truly understand the underlying securities they would have had to read, according to one estimate, over a billion pages of documentation.

• If there is one aspect of the crisis that everyone can agree with, it is that just about everybody involved at a senior level was a male.

• Goldman Sachs made money in three ways during the crisis: by packaging up subprime mortgages as CDOs, by insuring them (or betting they would blow up) with credit default swaps, and then by absorbing $13 billion of federal fund when the insurer AIG collapsed.

• Goldman Sachs alumni include Henry Paulson (treasury secretary), William Dudley (New York Federal Reserve president), Robert Hormats (economic advisor to the secretary of state), Mark Patterson (chief of staff to the treasury secretary), and Gary Gensler (chairman of the Commodity Futures Trading Commission).

• The December 2008 issue of Bloomberg Markets magazine featured a fold-out page of 42 influential ex-partners, and eight honorable mentions. Out of all 50, only one of the ex-partners was female.

• “Might this be one of many factors contributing to what is wrong with Wall Street leadership today? Arguably at this moment of financial and economic crisis, after approximately $10 trillion of global wealth has vanished, women remain virtually absent at the decision-making tables that count… In my 20 years of professional life I have seen very little to no progress for women in the financial services industry or in corporate America as a whole.” – former Goldman Sachs partner Jacki Zehner

• A paper entitled “Testosterone and financial risk preferences” showed that testosterone levels are a predictor for risk-taking.

• A study by Hedge Fund Research found that while women manage only about 3 percent of total funds, these fell half as much during the crisis as those managed by men, and also outperformed them over the past decade.

• According to an international survey of 12,000 women performed by the Boston Consulting Group, the financial sector is ranked worst at connecting with women customers.

• Just as faulty risk models make the economy more risky, so a worldview that sees and treats the economy as inherently stable and self-regulating will (via loosening regulations) eventually turn it into the opposite.

• Mathematical models are useful tools for simulating and understanding the economy, but they will never be able to accurately predict its course or fully capture risk.

• According to Statistics Canada, activities (such as cooking, cleaning, and caring) that are dominated by women contribute around $11 trillion to global GDP, yet it doesn’t even register as part of the economy.

The Unfair Economy:

• A United Nations report in 2000 found that the top one percent of the population controlled 40 percent of the world’s financial assets. The top 20 percent of the population owned 93.9 percent of the wealth.

• By 2007, the ratio of CEO compensation to the average worker’s pay had grown to 500:1

• Men in their thirties earn 12 percent less, in inflation-adjusted terms, than their fathers did at the same age.

• Positive feedback network effects mean that the more network connections CEOs make with other business leaders, the more powerful they become, thus improving their position in the network, and so on.

• For a typical business, payroll makes up about 70 percent of their costs. There is therefore tremendous pressure, both from customers and from shareholders, to reduce employee pay. Even if executives are vastly overpriced, their compensation is still a relatively small proportion of the total wage bill, and of course they are the ones deciding how pay should be divided.

• Large companies fuel inequality in the larger economy by increasing the downward pressure on wages for ordinary workers, at the same times as executive compensation balloons. They influence consumers through enormous advertising campaigns. Companies such as banks that become too big to fail can take enormous risks under the implicit guarantee that the government will bail them out if they get into trouble. The companies can also employ armies of lobbyists to exert pressure on government bodies, for example to relax environmental or labor regulations.

• Part of the enduring appeal of orthodox economic theory to our corporate leaders is that it provides a convenient intellectual argument for the program of deregulation, privatization of government assets, and social cutbacks that has been in place in many countries for the past few decades, and that has benefited large corporations at the expense of average workers. These changes have been justified by the myth that the economic system is inherently fair, so people are paid what they are worth. But just as assuming that the market is stable actually makes it more risky, so the assumption of fairness ends up making the economy less fair.

• According to social epidemiologists Richard Wilkinson and Kate Pickett, inequality is correlated with community breakdown, mental and physical health problems, drug addiction, imprisonment rates, educational underperformance, and teenage births.

• “Without ever having heard calls for equality, [human hunter-gatherer] cultures are nevertheless keenly aware of the risk that inequity poses to the social fabric.” – primatologist Frans de Waal

• In 1980, the percentage of a son’s income explained by his father’s income was about 10 percent. In 2000, that had increased to 33 percent.

• A 2009 report from the Organization for Economic Cooperation and Development found that intergenerational inequality is higher in the US than in other OECD countries.

• Although there is no single formula to create an equal society, some of the tools available are progressive taxation, wage controls, alternative company structures, and social policy.

• According to political economist Gal Alperovitz, non-profit electricity companies are on average 11 percent cheaper than profit-making companies, and are more likely to adopt sustainable technology.

• In unequal countries such as the UK or US, there is a huge difference in quality between the best and the worst schools. Rich families can buy their children a good education, either by sending them to a private school or moving to the catchment area of one of the better state-funded schools.

• A UK study headed by Alan Milburn showed that parents send their children to good schools not just for academic reasons, but also so they can learn soft skills such as social confidence.

• In 2007, 47 percent of Harvard graduates went into finance or consulting.

• The same deregulatory ideology that allowed this instability to develop in the stock markets may also be pushing society towards an unstable tipping point. Markets crash, but societies can too. To delay the day of reckoning, governments in the US and elsewhere don’t actually need to reduce inequality – they only need to perpetuate the illusion that (a) everyone’s situation is improving, and (b) everyone has a shot at the prize. Above all, they need to keep the economy growing.

• “Growth is a substitute for equality of income. So long as there is growth there is hope, and that makes large income differentials tolerable.” – former Federal Reserve governor Henry Wallich

The Over-Sized Economy:

• “The most important assumptions of a model are not in the equations, but what’s not in them; not in the documentation, but unstated; not in the variables on the computer screen, but in the blank spaces around them.” – systems scientist John D. Sterman

• Neoclassical economics completely neglects the fact that the human economy is embedded in the biosphere, which consists of living things, the products of living things, and necessary resources for living things.

• In the 1990s, a subsidiary of Goldman Sachs asked for an exemption from the Commodity Futures Trading Commission so that it could hedge the risk of oil price fluctuations. Goldman Sachs and other banks persuaded large institutional investors like pension funds and sovereign wealth funds to invest in commodity futures. Between 2003 and 2008, the value of speculative oil future contracts grew by a factor of more than 20.

• Because neoclassical economics assumes that the economy is at or near equilibrium, it ignores the effects of time and concentrates on maximizing utility in the short term. When future events are incorporated they are assigned a discount rate, so they become less important the further away they are, and dwindle to insignificance after a few decades.

The Unhappy Economy:

• The main determinants of long-term wealth include country of birth, education, ability, who your parents are, ambition, work, health, social networks, luck, opportunity, and whether or not you have access to a trust fund.

• A problem with social inequality is that we tend to compare ourselves with those who have more than us rather than less.

• A study of 4,700 American people who were followed from 1983 to 2003 found that happiness spreads between individuals like an infectious disease (but a nice one). Having a happy friend or neighbor boosts your own feelings of happiness by an estimated 9 percent.

• “People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities.” – psychologist Daniel Kahneman

• While poor countries do report lower happiness than rich countries, the correlation is small for countries with average incomes above $15,000 and disappears completely at $25,000.

• A study found that when subjects were primed to think about money, they became less likely to ask for assistance, to make offers of help, or collaborate with others. They even preferred to sit further away from other people.

• In a 2007 survey by the American Psychological Association, 73 percent of the respondents cited money as a significant source of stress.

• A study by a group of epidemiologists from Yale found that involuntary job loss more than doubled the risk of heart attack and stroke among older workers.

The Good Economy:

• “I fear that there will not be much change in basic paradigms. The rational expectations models will be tweaked to account for the current crisis. The basic curriculum will not change.” – economist Robert Shiller

• What we can do instead is build an alternative, based on 21st-century knowledge and technology. These new theories will draw their inspiration from new areas of applied mathematics, such as network theory, complexity, and nonlinear dynamics.

• You can take the orthodox route – and risk ending up with a qualification as impressive as a degree in Marxist ideology right after the fall of the Berlin Wall. Or you can take a chance on regime shift, by speaking up, questioning your teachers, being open to disruptive ideas, and generally acting as an agent of change. You can insist that the economy is a complex, dynamic, networked system – and demand the tools to understand it. You can point out that the economy is unfair, unstable, and unsustainable – and demand the skills to heal it. You can tell the oracles that they have failed. You can go in and break the machine. And then you can do something new.

23 Things They Don’t Tell You About Capitalism is a book by Dr. Ha-Joon Chang, a professor at the University of Cambridge. The book shows that economics is much more nuanced than free market enthusiasts would like you to believe. The book supports each of the 23 arguments with evidence from current and historical economic events.

1. There is no such thing as a free market

• Regulations on car and factory emissions were originally opposed as infringements on freedom.

• There is a huge range of restrictions on what can be traded such as drugs, human organs, electoral votes, government jobs, legal decisions, etc.

• Many countries ban trading in firearms or alcohol.

• Usually medicines have to be explicitly licensed by the government, upon the proof of their safety, before they can be marketed.

• Child labor regulation bans the entry of children into the labor market.

• Licenses are required for professions that have impacts on human life, such as medical doctors or lawyers (which may sometimes be issued by professional associations rather than by the government).

• Many countries allow only companies with more than a certain amount of capital to set up banks.

• Companies must fulfill listing requirements, meeting stringent auditing standards over a certain number of years, before they can offer their share for trading.

• Trading of shares is only conducted by licensed brokers and traders.

• There are many rules regulating various aspects of the exchange process: product liability, failure in delivery, loan default, etc.

• There are permissions on the location of sales outlets – such as restrictions on street vending or zoning laws that ban commercial activities in residential areas.

• Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation.

• Following the 2008 financial crisis, the prices of loans have become a lot lower in many countries thanks to the slashing of interest rates as a result of political decisions to boost demand.

• What is a starvation wage in the US is a handsome wage in China (the average being 10 percent that of the US) and a fortune in India (the average being 2 percent that of the US).

• In 2008, the U.S. government established the TARP program, which was to use at least $700 billion of taxpayers’ money to buy assets that were negatively impacting the financial system.

• Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise.

• Opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed.

• Saying that an existing regulation should be abolished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on a one-dollar-one-vote principle.

2. Companies should not be run in the interest of their owners

• The unholy alliance between the professional managers and the shareholders was financed by squeezing the other stakeholders in the company. Jobs were ruthlessly cut, many workers were fired and rehired as non-unionized labor with lower wages and fewer benefits, and wage increases were suppressed (often by relocating to or outsourcing from low-wage countries). Suppliers and their workers were also squeezed by continued cuts in procurement prices, while the government was pressured into lowering corporate tax rates and/or providing more subsidies.

• As a result of pursuing the interests of shareholders, income inequality soared and the vast majority of the American and British populations could share in the apparent prosperity only through borrowing at unprecedented rates.

• Investment as a share of US national output has actually fallen from 20.5 percent in the 1980s to 18.7 percent since then. The growth rate of per capita income in the US fell from around 2.6 percent per year in the 1960s and 1970s to 1.6 percent during 1990-2009, the heyday of shareholder capitalism.

• Share buybacks used to be less than 5 percent of US corporate profits until the 1980s but have kept rising since then and reached 280 percent in 2008.

• Had GM not spent the $20.4 billion that it did in share buybacks between 1986 and 2002 and put it in the bank (with a 2.5 percent after-tax annual return), it would have had  no problem finding the $35 billion that it needed to stave off bankruptcy in 2009.

• The constant threat of job cuts discourages workers from investing in acquiring company-specific skills, eroding the company’s productive potential.

• Higher dividends and greater own-share buybacks reduce retained profits, which are the main sources of corporate investment in the US and other rich capitalist countries, and thus reduce investment.

• Shareholders are the ones who are least committed among the various stakeholders to the long-term viability of the company because they can exit the company easily by selling their shares.

3. Most people in rich countries are paid more than they should be

• A bus driver in New Delhi gets paid around 18 rupees an hour. A bus driver in Stockholm gets paid the equivalent of 870 rupees per hour.

• Workers in countries like Sweden are protected from competition from the workers of poor countries through immigration control.

• Even in sectors where rich country individuals are genuinely more productive than their counterparts in poor countries, their productivity is in great part due to the system, rather than the individuals themselves. They live in economies that have better technologies, better organized firms, better institutions and better physical infrastructure – all things that are in large part products of collective actions taken over generations.

4. The washing machine has changed the world more than the internet has

• In England, 10 to 14 percent of the workforce was employed as domestic servants between 1850 and 1920.

• The electric washing machine reduced the time required for washing a 38 lb load of laundry by a factor of nearly 6.

• Up to two hours per day are spent fetching water in some developing countries.

5. Assume the worst about people and you get the worst

• Self-interest is one of the most important human motives, but we have many other motives – honesty, self-respect, altruism, love, sympathy, faith, sense of duty, solidarity, loyalty, public-spiritedness, patriotism, etc.

• Production processes rely heavily on workers’ goodwill to do extra things that are not required by their contracts or exercise initiatives and take shortcuts in order to expedite things when the rules are too cumbersome. The motivations behind such non-selfish behaviors by workers are varied – fondness of their jobs, pride in their workmanship, self-respect, solidarity with their colleagues, trust in their top managers, or loyalty to the company.

• If everyone was only out to advance his or her own interest, there would be so much cheating in trading and slacking in production. People would also feel that they were not trusted as moral agents and refuse to act in moral ways, making it necessary to spend a huge amount of resources monitoring, judging, and punishing people.

6. Greater macroeconomic stability has not made the world economy more stable

• There is no evidence that, at low levels, inflation is bad for the economy. Even studies done by free-market economists associated with institutions such as the University of Chicago or IMF suggest that, below 8-10 percent, inflation has no relationship with a country’s economic growth rate. Some other studies would even put the threshold higher – 20 percent or even 40 percent.

• During the 1960s and 1970s, Brazil had an average inflation rate of 42 percent but was one of the fastest-growing economies in the world, with its per capita income growing at 4.5 percent a year.

• During the 1960s and 1970s, per capita income in South Korea was growing at 7 percent per year, despite having an annual average rate of inflation of nearly 20 percent.

• Per capita income growth fell in Brazil and South Africa when these countries started to control inflation by raising real interest rates.

• A study by professors Kenneth Rogoff and Carmen Reinhart found that virtually no country was in banking crisis between the end of the Second World War and the mid 1970s, when the world was much more unstable than today, when measured by inflation. The proportion of countries with banking crises shot up to around 20 percent in the mid 1990s, when inflation was thought to have been tamed.

• In the rich countries since the 1990s, where inflation has been completely tamed, per capita income growth fell from 3.2 percent in the 1960s and 1970s to 1.4 percent during 1990-2009.

7. Free-market policies rarely make poor countries rich

• The economic superstars of the late nineteenth century (USA) and of today (China) have both followed protectionist policy recipes that go almost totally against today’s neo-liberal free-market orthodoxy.

• Britain adopted free trade only in the 1860s, when its industrial dominance was absolute.

• Virtually all of today’s rich countries used protectionism and subsidies to promote their infant industries. Many of them (especially Japan, Finland, and South Korea) also severely restricted foreign investment.

• Singapore, which is famous for its free-trade policies and welcoming attitudes towards foreign investors, produces over 20 percent of its output through state-owned enterprises, when the international average is around 10 percent.

• In many of today’s rich countries, it was legal to patent someone else’s invention as long as that someone else was a foreigner.

• Despite their own history, the rich countries make developing countries open their borders and expose their economies to the full forces of global competition, using the conditions attached to their bilateral foreign aid and to the loans from international financial institutions that they control (such as the IMF and the World Bank).

• Per capita income growth in the developing world fell from 3 percent per year in the 1960s and 1970s to 1.7 percent during the 1980-2000 period, when there was the greatest number of free-market reforms.

• During the 2000s, there was a pick-up in the growth rate of the developing world, bringing the growth rate up to 2.6 percent for the 1980-2009 period, but this was largely due to the rapid growth of China and India – two countries that did not embrace neoliberal policies.

8. Capital has a nationality

• In most companies, however transnational their operations may seem, the top decision-makers still remain the citizens of the home country.

• Most of a corporation’s R&D activities stay at home.

• Among US-based transnational companies, less than one-third of the output of manufacturing firms is produced overseas. In the case of Japanese companies, the ratio is well below 10 percent.

• Companies, especially in the early stages of their development, are often supported with public money. They may receive direct subsidies for particular types of activities, bailouts using public money, or indirect subsidies in the form of tariff protection or statutory monopoly rights.

• The majority of foreign direct investment involves taking control of existing firms, rather than the creation of new output and jobs.

9. We do not live in a post- industrial age

• As of 2007, the Chinese share in world exports is only around 17 percent.

• If you adjust for the changes in relative prices, the decline of manufacturing in rich countries has been far less steep than it appears to be.

• As revealed by the 2008 financial crisis, much of the productivity growth in those activities was due not to a real rise in their productivity butto financial innovations that obscured the riskiness of financial assets.

• As the economy becomes dominated by the service sector, where productivity growth is slower, productivity growth for the whole economy will slow down.

• De-industrialization has a negative effect on a country’s balance of payments because services are inherently more difficult to export than manufactured goods.

• In order to develop, a developing country has to import superior technologies from abroad. Therefore, when it has a balance of payments problem, its ability to upgrade and thus develop its economy by deploying superior technologies is hampered.

• In per capita terms, Switzerland has the highest industrial output in the world. Japan, Singapore, Finland, and Sweden make up the rest of the top five industrialized economies.

• Except for a few small places such as the Seychelles that rely on tourism, no country has so far achieved even a decent (not to speak of high) living standard by relying on services.

10. The US does not have the highest living standard in the world

• Despite having the highest average PPP income, the US ranks only about thirtieth in the world in health statistics such as life expectancy and infant mortality.

• In per capita terms, the US has eight times more people in prison than Europe and twelve times more than Japan, indicating that there is a far bigger underclass in the US.

• Because they have much less job security and weaker welfare supports, US workers work for lower wages and under inferior conditions than do their European counterparts.

• Per hour worked, US income is lower than that of several European countries, even in purchasing power terms.

11. Africa is not destined for underdevelopment

• During the 1960s and 1970s, per capita income in Sub-Saharan Africa grew at around 1.6 percent, which compares favorably with the rates of 1-1.5 percent achieved by today’s rich countries during their Industrial Revolution.

• Since the late 1970s, Sub-Saharan African countries were forced to adopt free-market and free-trade policies through the conditions imposed by the Structural Adjustment Programs of the World Bank and the IMF. By suddenly exposing immature producers to international competition, these policies led to the collapse of what little industrial sectors these countries had managed to build up.

• Many countries that are now rich have overcome tropical diseases, harsh climates, landlocked status, ethnic divides, bad institutions, and lazy cultures.

12. Governments can pick winners

• Countries in the East Asian miracle economies (South Korea, Japan, Taiwan, Singapore) and Europe (France, Finland, Norway, Austria) shaped and directed industrial development with great success through protection, subsidies, and investments by state-owned enterprises.

• The computer, semiconductor, aircraft, internet, and biotechnology industries have all been developed thanks to subsidized R&D from the US government.

• In exactly the same way that even those governments that have the best track records at picking winners do not pick winners all the time, even the most successful firms do not make the right decisions all the time.

13. Making rich people richer doesn’t make the rest of us richer

• Since the 1980s, many rich capitalist economies have had governments that espouse upward income redistribution through policies such as welfare reform, reductions in top income tax rates, financial deregulation, and deregulation in other industries.

• Despite rising inequality since the 1980s, investment as a ratio of national output has fallen in all G7 economies and in most developing countries.

• An analysis by the Economic Policy Institute found that the top 10 percent of the US population appropriated 91 percent of income growth between 1989 and 2006, while the top 1 percent took 59 percent.

14. US managers are over-priced

• The average CEO compensation in the USA is 300 to 400 times the average worker compensation.

• The ratio of CEO compensation to average worker compensation in the US used to be in the region of 30 or 40 to 1 in the 1960s and 1970s.

• Median worker compensation rose at the rate of 0.1 percent per year between 1992 and 2000 and did not grow at all during 2002 to 2007.

• CEOs in Japan and Europe running similarly large companies are paid only 25% to 64% of what American CEOs are paid.

• Including stock options in the analysis of CEO compensation means that Japanese CEO compensation may be as low as 5 percent that of US CEO compensation.

• When the American and the British governments injected astronomical sums of taxpayers’ money into troubled financial institutions in the autumn of 2008, few of the managers who were responsible for their institution’s failure were punished.

15. People in poor countries are more entrepreneurial than people in rich countries

• According to an OECD study, in most developing countries 30 to 50 percent of the non-agricultural workforce is self-employed, with the ratio even higher in agriculture.

• 66.9% of people in Ghana, 75.4% of people in Bangladesh, and 88.7% of people in Benin are entrepreneurs – compared to only 7.5% in the USA.

• Without subsidies from governments or international donors, microfinance institutions have to charge near-usurious rates.

• As much as 90% of microfinance loans have been used for the purpose of consumption rather than investment in entrepreneurship.

• Even exceptional entrepreneurs like Thomas Edison and Bill Gates have become what they have only because they were supported by a whole host of collective institutions: the whole scientific infrastructure that enabled them to acquire their knowledge and also experiment with it; the company law and other commercial laws that made it possible for them subsequently to build companies with large and complex organizations; the educational system that supplied highly trained scientists, engineers, managers, and workers that manned those companies; the financial system that enabled them to raise a huge amount of capital when they wanted to expand; the patent and copyright laws that protected their inventions; the easily accessible market for their products

16. We are not smart enough to leave things to the market

• When Nobel Prize winners in economics, especially those who got the prize for their work on asset pricing (like Merton and Scholes, who were involved in funds that had major failures) cannot read the market, how can we run the world according to an economic principle that assumes people always know what they are doing and therefore should be left alone?

• “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of the [credit default swap] transactions.” – AIG CFO Joe Cassano, six months before the collapse of the company

• Many regulations work not because the government necessarily knows better than the regulated but because they limit the complexity of the activities, which enables the regulated to make better decisions.

17. More education in itself is not going to make a country richer

• In 1960, Taiwan had a literacy rate of only 54 percent but has since had one of the best economic growth performances in history.

• In 1960, Korea had a 71 percent literacy rate while Argentina had a 91 percent literacy rate. Despite the significantly lower literacy rate, Korea has since grown much faster than Argentina.

• Between 1980 and 2004, literacy rates in Sub-Saharan African countries rose from 40 percent to 61 percent, yet per capita income in the region actually fell by 0.3 percent per year during this period.

• A study by Lant Pritchett analyzed data from dozens of rich and developing countries during the 1960-1987 period and concluded that there is very little evidence to support the view that increased education leads to higher economic growth.

• Cross-country statistical analyses have failed to find any relationship between a country’s math scores and its economic performance.

• In the mathematical part of the 2007 TIMSS, US fourth-graders scored behind East Asian countries, Kazakhstan, Latvia, Russia, and Lithuania. Children in all other rich European economies included in the test (except England and the Netherlands) scored even lower than the US children.

• Switzerland is one of the richest and most industrialized countries in the world, yet it has the lowest university enrollment rate in the rich world. Switzerland was able to maintain one of the highest national productivities in the world with a university enrollment of only 10 to 15 percent up to the mid-1990s. The Swiss university enrollment rate was only 47 percent in 2007, which is lower than rich countries like Finland (94 percent) and the USA (82 percent) as well as poorer economies such as Greece (91 percent) and Lithuania (76 percent).

18. What is good for General Motors is not necessarily good for the United States

• Economies such as South Korea, Japan, Taiwan, and China have been highly regulated during their periods of rapid growth. In contrast, over the last three decades many developing countries in Latin America and Sub-Saharan Africa have deregulated their economies in the hope that it would stimulate business activities and accelerate their growth. However, they have grown far more slowly since the 1980s as they did during the 1960s and 1970s.

• Many regulations help preserve the common-pool resources that all firms share, while others help business by making firms do things that raise their collective productivity in the long run.

19. Despite the fall of communism, we are still living in planned economies

• Governments in capitalist countries set broad targets concerning key economic variables (such as investments in strategic industries, infrastructure development, exports) and working with the private sector to achieve them. These targets are not legally binding, but the government will mobilize various incentives (subsidies, granting of monopoly rights) and punishments (regulations, influence through state-owned banks) at its disposal.

• Countries such as France, Finland, Norway, Austria, Japan, Korea, and Taiwan used forms of government indicative planning to upgrade their economies.

• In all capitalist economies, the government plans the national technological future by funding a very high proportion (20 to 50 percent) of research and development.

• Between the 1950s and the 1980s, the share of government funding in total R&D accounted for between 47% and 65%, depending on the year.

20. Equality of opportunity may not be fair

• Individuals are not born into a vacuum. The socioeconomic environment they operate in puts serious restrictions on what they can do. Or even on what they want to do.

• A study found that the Scandinavian countries have higher social mobility than the UK, which in turn has higher mobility than the US.

21. Big government makes people more open to change

• The relative incomes of medical doctors in South Korea have been falling, yet even the least competitive of the country’s twenty-seven undergraduate medical departments has become more difficult to enter than the best engineering departments in the country.

• Market liberalization has pushed the percentage of workers without a permanent contract up to 60 percent. Those with permanent contracts also experience heightened job insecurity.

• Since the welfare state in South Korea is the smallest among the rich countries, people play it safe to an excessive degree in their careers.

• Worker resistance to any industrial restructuring that involves job cuts is much greater in the USA than in Europe. If a person in Europe loses their job due to the decline of an industry, they can keep their health insurance and housing subsidies while receiving unemployment benefits and government-subsidized retraining. After a job loss in the USA, workers are confronted with patchy unemployment insurance, little help with job training, loss of health insurance, and a higher probability of losing their home.

• Greater insecurity may make people work harder, but it makes them work harder in the wrong jobs in declining industries.

• Two of the fastest-growing economies in the core OECD group during the post-1990 period were Finland and Norway, both with a large welfare state. Per capita income in the USA grew at 1.8 percent between 1990 and 2008, while Finland’s growth was 2.6 percent and Norway’s growth was 2.5 percent during this period.

22. Financial markets need to become less, not more, efficient

• Expansion of the financial system turned Iceland into the fifth richest country in the world by 2007. After the global financial crisis, the IMF estimated that the economy shrank at the rate of 8.5 percent in 2009, the fastest rate of contraction among the rich countries.

• Ireland had financial assets reach the equivalent of 900% of GDP and its economy contracted by 7.5 percent in 2009.

• Finance capital seeks short-term gains and creates economic instability in the short run. In the long run, it leads to weak productivity growth, because long-term investments are cut down to satisfy impatient capital.

• Ways to reduce the speed gap between finance and the real economy include a transaction tax, making hostile takeovers difficult, banning short-selling, increasing margin requirements, or putting restrictions on cross-border capital movements.

23. Good economic policy does not require good economists

• Historic economic booms have been led by lawyers (in Japan), engineers (in Taiwan), and both lawyers and engineers (in South Korea).

• A potential way for the government to acquire able economic policy-makers would be to recruit students who have high general intelligence.

• Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (as well as dozens of smaller financial crises that came before it) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. They advanced theories that justified the policies that have led to slower growth, higher inequality, and heightened job insecurity.

• The commonality of the style of economics followed by high-growth Asian countries was the recognition that capitalism develops through long-term investments and technological innovations that transform the productive structure.

Evolution and Genetics for Psychology is a book by Dr. Daniel Nettle, a professor at Newcastle University. This post has some notes from the book.

• Several evolutionary researchers have proposed that morning sickness during pregnancy evolved to protect the mother and embryo from dangerous substances contained in foodstuffs.

• Studies of thousands of pregnant women indicate that they have the greatest aversion to meat and the greatest craving for fruit.

• Humans have a large number of pseudogenes where monkeys have functioning genes coding for smell receptors.

• Around 12% of the human genome consists of sequences of which individuals have varying numbers of copies due to recent segmental duplications.

• In a base-by-base comparison of the two copies of the genome within a single human, at least 0.5% of the genome was different between the two copies. Forty-four percent of coding genes showed some difference between the maternal and paternal copies.

• Estimates of the extent of deleterious mutation have been produced for humans, with one estimate being that each of us has 1.6-3 new deleterious mutations.

• An allelic variation of the MAOA gene may be associated with attention-deficit hyperactivity disorder and with antisocial behavior of various kinds.

• A MRI study of 139 pairs of twins found that the total volume of the cerebral hemispheres was correlated within MZ twins at 0.87 and within DZ twins at 0.56. This gives a Falconer heritability of 0.62.

• Several twin studies yield a heritability estimate of 0.42 for reading ability.

• A study of British women found that the highest likelihood of having children was found amongst women who were neither extremely tall nor extremely short.

• A study found that taller-than-average men had more marital or cohabiting relationships than men of average height.

• A study found that in every one of 86 human populations, women had paler skins than men.

• Studies in the southern USA and South Africa have found that neural tube defects are more common in the white population than in people of African descent.

• African-American women have dramatically higher levels of vitamin D insufficiency than white Americans.

• A study found that people prefer the scent of T-shirts hat have been worn by people whose major histocompatibility complex alleles are unlike their own.

• Data from 52 countries indicates that men express a desire for a greater number of sexual partners in the future than women, while women report requiring a longer period of acquaintance with a man before consenting to sex than men do for sex with a woman.

• Surveys show that a sizeable fraction of women at least sometimes have sex outside of their established relationship.

• Highly symmetrical men report having more often been a partner in an extra-pair mating.

• At the point of their menstrual cycle where women are most fertile, they show more interest in and fantasize more about men other than their current partner, as well as being more likely to actually commit an extra-pair mating.

• Data from several different human pygmy populations reavealed much harsher mortality rates than non-pygmy populations. The pygmy populations stopped growing sooner and reproduced earlier in life.

• A study of Chicago neighborhoods found that when life expectancy is low, women have more babies overall and in particular carry out much more reproduction early in life (before the age of 25 years).

• A study of Finnish people born during the Second World War found that women who were sent away to Sweden and Denmark had earlier onset of menstruation and more children overall than those who had stayed at home. Amongst the men, the former evacuees had an earlier age at first parenthood and a shorter interval between successive children.

• A study in Finland found that having had twins reduces the length of a woman’s lifespan even if she survives the immediate reproductive period.

• A study in Britain found that each additional sibling reduced the amount of parental care an individual received, and in the long term this means that children from large families have lower IQ scores and are less upwardly socially mobile than children with one sibling.

• A study of British women found that mothers of sons ate more around the time of conception than mothers of daughters.

• A study found that feeling uncertain of being a child’s biological father increased the probability of the father divorcing the mother and decreased his involvement in the child’s development.

• A study of British adults whose fathers played a significant role in their upbringing have higher IQs and more upward social mobility than those lacking parental input.

• Grandmother presence has been shown to improve child survival in more populations than father presence.

• Studies have found that the maternal grandmother is more likely to provide care than the paternal grandmother.

• A series of studies of the British civil service showed large differences in self-perceived well-being according to the occupational grade reached.

• An experiment found that anonymous participants who were more generous in bestowing money also received more money.

• A laboratory task found that people contributed more money to a charitable fund when other group members would see their decision than when their decision was private.

• A study of Hungarian women found that observers are more likely to correctly match a photograph of a woman’s husband to one of her adoptive father than they are to match a photograph of the woman herself to her husband, or a photograph of the woman’s adoptive mother to one of her husband. This suggests that women may be imprinting on their fathers and using this as a template for mate choice.

• A study found that the social practice of adopting a female child to grow up alongside a son and become his wife when they mature doesn’t work and the resulting marriages are generally unsuccessful, despite the wishes and desires of the families.

• Humans are closely related to chimpanzees, with up to 99% resemblance in aligned DNA sequences. This is a similarity as high as often found in animals from the same genus.

• Researchers have found the hallmarks of current positive selection for around 7% of human genes.

• Genes involved in immunity are particularly likely to show evidence of current selection.

• A study found that when viewing complex scenes, young Americans spontaneously allocate more attention to animals than to other types of object.

• A study found that British men prefer female bodies with a BMI of under 20 and find much larger bodies unattractive, whereas South African Zulus find BMIs of up to 40 attractive.

• A study found that hungry Americans express a preference for a larger body size in a mate than satiated Americans.

Principles of Behavioral Genetics is a book written by two professors at North Carolina State University, Dr. Robert Anholt and Dr. Trudy Mackay. The book primarily focuses on genetic studies in flies and mice (not that there’s anything wrong with that) but it also discusses heritability and genetic mutations in humans. This post has some notes from the book.

• Monozygotic twins are genetically identical, while dizygotic twins have the same genetic covariance as full siblings.

The genetic covariance of IQ in humans for various relationships:

MZ twins raised together: 0.85

MZ twins raised apart: 0.74

DZ twins raised together: 0.59

Siblings raised together: 0.46

Siblings raised apart: 0.24

Heritability estimates of behavioral traits in humans:

Schizophrenia: 0.70-0.85

Alcohol dependence: 0.50-0.60

Criminal conviction: 0.58

Reading disorder: 0.60

Bipolar disorder: 0.60-0.85

Major depressive disorder: 0.40

Autism/Autism spectrum disorders: 0.90

Anorexia nervosa: 0.55

Bulimia nervosa: 0.60

Panic disorder: 0.40-0.50

Obsessive-compulsive disorder: 0.60-0.70

Attention-deficit hyperactivity disorder: 0.60-0.90

• Examples of mutations that result in congenital advanced sleep phase syndrome have been identified in the phosphorylation domain of the human PER gene and in the casein kinase 1 gene, which phosphorylates this site.

• Members of a family who had a language disorder were found to have a single G to A nucleotide mutation in exon 14 of the FOXP2 gene that changed an arginine to a histidine.

• A study of boys who were maltreated during childhood found that a polymorphism in the gene encoding monoamine oxidase A, which metabolizes bioamines, was associated with the development of antisocial behavior in these children. This polymorphism consists of a variable number tandem repeat at the promoter of the monoamine oxidase A gene, and is associated with violent behavior only in individuals who were abused as children. Maltreated children with high levels of this enzyme were less likely to develop antisocial problems than maltreated children with low levels of monoamine oxidase A expression.

• The heritability of dyslexia has been estimated at about 40% to 70%.

• Fragile X syndrome results from an expansion of a trinucleotide repeat at the FMR1 gene on the long arm of the X-chromosome.

• Family studies have shown that the heritability of performance on standardized intelligence tests can be as high as 0.86.

• Candidate genes that contribute to susceptibility for dyslexia include DYX1C1, KIAA00319, DCDC2, and ROBO1.

• Familial early-onset Alzheimer’s disease is rare, and is often caused by dominant genes that run in families. Nearly 200 different mutations in the presenilin-1 or presenilin-2 genes (on chromosomes 14 and 1, respectively) have been documented, in over 500 families. In addition, more than 20 different mutations in the APP gene on chromosome 21 have been implicated in early-onset Alzheimer’s disease. It is of interest that the brains of people with Down syndrome, which results from trisomy of chromosome 21, also contain neuritic plaques similar to those found in Alzheimer’s disease.

• An allele of the gene that encodes Apolipoprotein E on chromosome 19 is a major susceptibility factor for late-onset Alzheimer’s disease.

• In addition to single nucleotide polymorphisms, variation in the number of copies of certain genes has also been suggested as a factor that may predispose to autism. Interestingly, copy number variants throughout the genome have also been implicated in schizophrenia. Autism is not localized to any specific brain area, but affects widespread regions of the brain. These observations suggest that the genetic risk for developing autism is expressed during early development of the central nervous system.

• Several studies have pointed at dopamine receptor gene alleles (DRD1, DRD2, and DRD4) as genetic risk factors for pathological gambling.

• Linkage studies on twins and nuclear families have mostly led to the identification of large chromosomal regions that may harbor risk alleles for alcoholism, including the region on chromosome 4 that contains a tandem array of seven alcohol dehydrogenase genes.

The Long Shadow of Temperament is a book by Dr. Jerome Kagan (a psychology professor at Harvard) and Dr. Nancy Snidman (Director of the Child Development Unit at Children’s Hospital Boston). The book describes the results of a longitudinal study that indicates infant temperament is heritable and stable throughout childhood and into adulthood.

This post has some notes from the book.

• A study of middle-class men in California found that those who were shy as children established their careers, chose wives, and became fathers later in life than their more sociable peers.

• Eighteen-year-olds in New Zealand who had been categorized by observers as shy when they were 3 years old described themselves as cautious when facing new challenges or dangerous situations.

• A study of children over nearly 30 years found that a small group of children who usually avoided unfamiliar people, objects, and events during the first 3 years preserved some derivatives of that bias as young adults. They were introverted, cautious, and dependent for emotional support on family, friends, or spouses. By contrast, the bolder, sociable children were extroverts who chose competitive, entrepreneurial vocations. The adults who had been the timid children had high, minimally variable heart rates, suggesting higher sympathetic tone in the cardiovascular system.

• A study of children who were assessed at ages 4, 5, 7, and 13 found that children classified originally as inhibited retained an inhibited behavioral style, while children who had been classified as uninhibited preserved a bold, sociable profile. The children were evaluated again when they were between 12 and 14 years old. Those who had been inhibited were more likely to show signs of social anxiety.

• A study of children who were 4.5 years old found that twice as many low-reactive as high-reactive children were extremely sociable and talkative during a play session with unfamiliar children. By contrast, 46 percent of those who had been high-reactive infants were shy, quiet, and timid, compared with only 10 percent of those who had been low-reactive infants.

• 7-year-olds who had been high-reactive infants were most likely to have anxious symptoms. 45 percent of high-reactives but only 15 percent of low-reactives received this classification.

• The high-reactives displayed fewer spontaneous comments and smiles while interacting with the examiner.

• The low-reactives were more likely than high-reactives to report they were “happy most of the time.”

• The biological measures regarded as indirect signs of amygdalar excitability were more frequent among the 11-year-olds who had been high-reactive infants than among those who had been low-reactive.

• A slightly shorter stature, lighter weight, and blue eyes were more common among the high-reactives, while more low-reactives were taller, heavier, and more often brown-eyed.

• When teachers in 133 different classrooms nominated the Caucasian child in thier class who was most shy and the Caucasian child who was least shy, 60 percent of the most shy children were blue-eyed and 58 percent of the least shy children were brown-eyed.

• A study found that 10 girls born to a parent with panic disorder were extremely shy with the examiner and had a very high heart rate – and all 10 girls had very light blue eyes.

• The fact that more than twice as many high-reactives as low-reactives had values on some of the physiological variables that imply an excitable amygdala, whether these adolescents were shy or bold, implies preservation of a biological property over the course of childhood.

• Very few high-reactives became exuberant, sociable, minimally aroused preadolescents, and very few low-reactives became fearful, quiet introverts with high levels of biological arousal. Less than 5 percent of the children from each of these temperamental groups developed the behavioral and biological features characteristic of the other type.

• When teachers in kindergarten and, later, in sixth grade rated over 1,800 Canadian children for fearfulness, most of the sixth-graders received a rating that resembled the one they had received in kindergarten.

• A study found that shy and over-controlled Icelandic children were more likely than their classmates to remain shy at adolescence.

• A study found that two-year-old children who were described by their adoptive Dutch mothers as shy and dysphoric possessed similar traits when they were 7 years old. Neither the family’s social class nor the mother’s sensitivity with her infant predicted these psychological properties at 7 years.

• A group of fourth-grade and fifth-grade children living in south Florida had been assessed for the presence of anxiety 15 months before Hurricane Andrew struck the area. The 11 percent of the children who remained distressed 7 months after the fierce storm had been categorized as anxious prior to the hurricane.

• A study found that only 10 percent of a sample of 2-year-olds were consistently inhibited across varied unfamiliar events, and only the consistently inhibited children had low vagal tone.

• The degree of amygdalar activation is correlated primarily with the magnitude of discrepancy or degree of unexpectedness of an event, rather than with its degree of danger or level of aversiveness.

• Estimates of the heirtability of panic disorder range between 0.5 and 0.6

• The heritability of smiling and laughter in a large sample of monozygotic and dizygotic twin pairs approached 0.6, which is higher than the heritability of behavioral inhibition.

• Adult extroverts have more power in the alpha frequency band in frontal areas in EEG studies than introverts, and this frequency band increases in power from 6 to 11 years of age.

• Individuals with greater activation in the left frontal area of the brain more often report sanguine moods, are biased to detect pleasant features in pairs of words, and show less anxiety than the smaller portion who show greater activation on the right side.

• Social phobics showed increased activity in the right dorsolateral prefrontal cortex when they thought they had to give a short speech while strangers watched.

• Four-year-olds who were shy with 3 other unfamiliar children in a laboratory playroom showed right frontal activation, while those who were sociable showed left frontal activation. A similar result was found in 9-year-olds.

• Adults who reported being shy and minimally sociable showed right frontal activation, while extroverts, with the opposite persona, showed left frontal activation.

• Perhaps the most intriguing relation between the child’s self-reports and asymmetry involved the item “I feel really bad if one of my parents said I did something wrong.” Every high-reactive boy who was right-active at frontal and parietal sites ranked this item as more descriptive than the total sample, compared with only one-third of the high-reactive boys who were left active at both sites.

• Only 23 percent of right-active, high-reactive boys endorsed the item “I enjoy going on roller coasters in amusement parks,” compared with 67 percent of left-active, high-reactive boys.

• 47 percent of low-reactives, but only 15 percent of high-reactives, combined a preference for novelty with low biological arousal.

• When low-reactive children reported a preference for novelty, the probability was 0.8 that they would show low biological arousal. When high-reactive children disliked novelty, the probability was 0.8 that they would show high biological arousal.

• A longitudinal study of British children reported that the children who preserved their inhibited behavioral style from 4.5 to 7.5 years of age had higher heart rates than others.

• Asian and Caucasian populations differ in a DNA segment that defines the promoter region monitoring the production of the serotonin transporter molecule and in alleles that affect the receptors for gastrin-releasing peptide. This peptide mutes activity in the basolateral nucleus of the amygdala by enhancing GABA activity.

• Clinicians have learned that Asian-American psychiatric patients require a lower dose of psychotropic drugs than Caucasian-American patients with the same symptoms living in the same region, implying that Asians are at a lower level of limbic arousal.

Willpower is a book by psychology professor Roy Baumeister written with New York Times reporter John Tierney. The book describes research the science of self-control. What I found most interesting about the book is that while Dr. Baumeister is a defender of free will, the book actually reinforced my skepticism regarding free will. Comments in the book about how Chinese people are less genetically susceptible to ADHD, how judges make dramatically different decisions depending on how much glucose is in their system, hypoglycemia among criminals, failures of self-control during the luteal phase of the menstrual cycle, how men take greater risks after seeing photos of attractive women, how mirrors make people more responsible, and the finding having a father in the home was the best predictor of self-control indicate that genetic and environmental factors dramatically influence a person’s life. Plus, it takes a certain IQ and level of conscientiousness to read a book about willpower in the first place.

The book is still excellent and has many useful tips. This post has some notes on the research studies discussed in the book.

• A study found that people spend about a quarter of their waking hours resisting desires.

• People who had shown the most willpower at age four went on to get better grades and test scores in college. Children who had managed to delay gratification for fifteen minutes scored 210 points higher on the SAT than the ones who had given in after the first half minute.

• When researchers compared students’ grades with nearly three dozen personality traits, self-control turned out to be the only trait that predicted a college student’s grade-point average better than chance.

• In workplaces, managers scoring high in self-control were rated more favorably by their subordinates as well as by their peers.

• People with poor self-control are likelier to hit their partners and to commit a variety of other crimes.

• A study of prisoners who were tracked for years after their release found that the ones with low self-control were most likely to commit more crimes and return to prison.

• A long-term study that tracked children in New Zealand from birth until age thirty-two found that the children with high self-control grew up into adults who had better physical health, including lower rates of obesity and fewer sexually transmitted diseases. Among those with the lowest levels of self-control, more than 40 percent had a criminal conviction by the age of thirty-two, compared with just 12 percent of the people who had been toward the high end of the self-control distribution in their youth.

• A study found that people who had depleted their willpower by watching a movie of animals suffering took longer to respond during a task and made more mistakes. An EEG showed that ego depletion causes a slowdown in the anterior cingulate cortex, the brain area that’s crucial to self-control.

• A study found that while ego depleted persons didn’t show any single telltale emotion, they did react more strongly to events.

• A study that used beepers to query people about their desires throughout the day found that the more willpower people expended, the more likely they became to yield to the next temptation that came along.

• When people in laboratory experiments exercise mental self-control, their pulse becomes more erratic. People whose normal pulse is relatively variable do better on laboratory tests of perseverance than do people with steadier heartbeats.

• Experiments have shown that chronic physical pain leaves people with a perpetual shortage of willpower because their minds are so depleted by the struggle to ignore the pain.

• Research has found that people with hypoglycemia are more likely to have trouble concentrating and controlling their negative emotions when provoked.

• A study found below-average glucose levels in 90 percent of the juvenile delinquents recently taken into custody.

• Studies have found that people with hypoglycemia were more likely to be convicted of a wide variety of offenses: traffic violations, public profanity, shoplifting, destruction of property, exhibitionism, embezzlement, arson, spouse abuse, and child abuse.

• A study in Finland found that the response to a glucose test predicted with greater than 80 percent accuracy whih convicts would go on to commit violent crimes.

• A study of dieters found that ego depletion caused an increase in activity in the nucleus accumbens and a corresponding decrease in the amygdala.

• In the lab, students who have just performed a self-control task eat more sweet snacks but not more salty snacks.

• During the luteal phase of the menstrual cycle, the average woman eats about 810 calories at lunch (about 170 calories more than what she eats at lunch during the rest of the month).

• During the luteal phase, women spend more money and make more impulsive purchases than at other times. They smoke more cigarettes and drink more alcohol.

• Inside women’s prisons, disciplinary problems based on breaking prison rules are highest among women who are at the luteal phase of their cycle.

• When researchers have given sugar tables to smokers trying to quit, sometimes the extra glucose has led to higher rates of success, particularly when the sugar tablets were combined with other therapies, like the nicotine patch.

• Experiments involving thousands of teenagers in correctional institutions found that replacing sugary foods and refined carbohydrates with fruits and vegetables led to a sharp decline in escape attempts, violence, and other problems.

• A study found that workers who were not getting enough sleep were more prone than others to engage in unethical conduct on the job.

• In a laboratory experiment offering test takers the chance to win cash, students who had not slept enough were more likely than others to take advantage of an opportunity to cheat.

• A series of studies found that having conflicting goals leads to negative rumination, less accomplishment, fewer positive emotions, more negative emotions, and greater levels of illness.

• A study of heroin addicts found that the typical addict contemplated the future only for the next nine days, whereas the typical person in the control group thought about their plans for the next four and a half years.

• Studies of heavy users of tobacco, alcohol, and other drugs (but not marijuana) found that they prefer risky strategies with quick big payoffs/

• A study found that people with high incomes tend to look further into the future than people with low incomes.

• A study in the Netherlands found that high school boys who cared more about long-term objectives tended to do better in school. Those who were relatively indifferent to such distal goals tended to be worse students.

• A study of students found that monthly planning led to greater improvements in study habits and attitudes than daily planning.

A study found that shoppers who had made the most decisions during their shopping trip gave up the quickest on a math test.

• A study of a parole board found that the prisoners who appeared early in the morning received parole about 65 percent of the time. Those who appeared late in the day won parole less than 10 percent of the time. Prisoners who appeared right before the judges had a mid-morning food break had only about a 15 percent chance of getting parole, whereas the ones who came right after the food break had about a 65 percent chance.

• Studies of people making decisions have found that being confronted with tough decisions leads to greater fatigue and a less enjoyable shopping experience.

• A study found that men who looked at photos of attractivewomen shifted toward getting an immediate reward instead of waiting for a larger payoff in the future.

• Modern DNA research has revealed that most men in the past did not leave a line of descendants – their odds of reproducing were only half as high as the typical woman’s. Men today are therefore descended from the minority of men who managed to reproduce, and their brains seem primed for a quick response to any opportunity to improve their reproductive odds.

• When people are placed in front of a mirror or told their actions are being filmed, they work harder at laboratory tasks and give more valid answers to questionnaires.

• Research showed that people can make themselves feel good by comparing themselves to the “average person” – who we all like to think is inferior to ourselves.

• A study of college students who were instructed to correct their posture whenever they thought about it during the day found that this simple action led to significantly higher improvements in self-control.

• A study found that exercising self-control in one area seemed to improve self-control in all areas of life.

• An experiment found that people who answered questions in a clean room did better on measures of self-control than people in a messy room.

• A study found that people were more likely to give to charity via a clean and well-designed web site than on a messy web site.

• A study of men who were ordered to attend therapy for alcohol abuse found that the ones who were better at getting support from other people ended up abstaining more frequently and doing les overall drinking.

• An analysis of more than three dozen studies found that religiously active people were 25 percent more likely than nonreligious people to remain alive.

• An analysis of hundreds of studies of religion and self-control found that religion promotes family values and social harmony, reduces people’s inner conflicts among different goals and values, and builds willpower.

• An analysis of several hundred studies found that grades in tenth grade predicted self-esteem in twelfth grade, but self-esteem in tenth grade failed to predict grades in twelfth grade.

• A study found that students who were randomly assigned to receive messages that increased their self-esteem ended up doing worse on the final exam in a class.

• A study of narcissists found that they seemed to be everyone’s favorite person at first, but after a few months they dipped to the bottom of the rankings.

• There’s evidence that the genetic factors associated with ADHD are much rarer in Chinese children than in American children.

• A study of children in Trinidad found that children who had a father in the home were far more willing to delay gratification. Half of the children living with fathers in African homes chose the delayed reward, but none of the children in fatherless homes were willing to wait. Similarly, none of the Indian children living without a father were willing to wait.

• Studies of children who were raised by single parents because the father was absent for reasons other than having abandoned the family (such as being stationed overseas for a long time, or dying at a young age) found that they showed some deficits in self-control, but their problems were not as large as those of the children whose fathers had voluntarily left the home. This suggests that, as usual, children are shaped by a mixture of genetics and the environment.

• Independent research has shown that children who participated in the Tools of the Mind program ended up with significantly better self-control when compared with children who attended more conventional sorts of preschools.

• A study of middle school children found that most children aren’t hurt by playing video games, and that they can derive some of the same benefits from the games as from practicing other activities.

• An analysis of dozens of studies of people with high self-control found that these self-disciplined people did slightly better than average at controlling their weight, but the difference wasn’t as marked as in other areas of their lives.

• A study found that dieters who had suppressed emotions during a sad movie had a much harder time suppressing their appetite.

• A study found that dieters who had sat within arm’s reach of candy gave up sooner on puzzles, demonstrating that their willpower had been depleted by the effort of resisting temptation.

• In lab studies, college students who performed self-control tasks that had nothing to do with food or dieting found themselves having higher desires for sweet foods.

• A study found that people who weighed themselves every day were much mroe successful at keeping their weight from creeping back up.

• A study found that those who kept a food diary lost twice as much weight as those who used other techniques.

• Researchers have shown that eating in front of the television increases snacking and that viewers will eat more when their attention is engaged.

• A study found that people who were told to postpone eating candy ended up eating less than people who were told to assume they had decided to eat or who were told to deny themselves the pleasure.

• People who postponed gratification in an experiment reported less desire to eat the candy than either the people who had refused the pleasure outright or those who had eaten their fill.

• A study found that people with good self-control mainly use it not for rescue in emergencies but rather to develop effective habits and routines in school and in work.

• A set of studies found that people with high self-control consistently report less stress in their lives. They use their self-control not to get through crises but to avoid them.

• Studies show that procrastinators are more impulsive than other people. When they are feeling anxious about a difficult job or bored by a mundane chore, they give in to the urge to improve their mood by doing something else.

• Experiments have found that people with stronger willpower are more altruistic. They’re more likely to donate to charity, to do volunteer work, and to offer their own homes as shelter to someone with no place to go.