A few days ago there was lots of happiness and excitement in the street and you must have wondered what was the source of this excitement.

Well, it was the publication of Peter Ubel‘s new book on behavioral economics — Free Market Madness

To celebrate, here is a web interview with Peter and you are all welcome to join in on the conversation.

Dan: You are a physician writing a book about politics and behavioral economics.  Not to get all Blagojevichy on you, but what the f%^# qualifies you to write about this topic?

Peter: I am a big fan of yours too!

Dan: But seriously.

Peter: I conduct research on the irrational forces that influence people’s medical decisions.  In addition, I take care of patients in clinic every week whose health problems arise, in large part, from their own decisions and behaviors — people with diabetes who cannot lose weight despite their best efforts, smokers who can’t kick the habit despite covering their body with nicotine patches.

Dan: What does that have to do with politics?

Peter: It means that when we leave people to fend for themselves in the free market, we can predict that they will hurt themselves by making bad decisions.  Starting from this perspective I try to expose the unconscious forces that influence our behaviors.  And then I try to show people what that means for the kind of debates we have about whether unfettered free markets deserve some, um, fettering.

Dan: All this looks a bit too general to me.  Can you give me an example of one disease, one mistake that patients make, and one policy recommendation?

Peter:  Diabetes.  We have an epidemic of adult onset diabetes in developed countries now, because people are gaining so much weight.  And the obesity that causes diabetes is a direct result of the market:  capitalism has spurred on innovation in food production, so that people now can eat tasty, calorie dense food without having to spend much time preparing or cleaning up the food (open the bag of chips, insert in mouth, yum . . .).   

What’s the mistake here?  Well, people’s appetites are influenced by unconscious forces. Change the size of my dinner plate and I’ll eat 24% more calories; tell me the food is made of “healthy fat,” and I’ll tell you it doesn’t taste good (even though, as experiments have shown the same cracker will “taste great” if I convince you it is made out of unhealthy fat.)  How much food we eat, then, and how that food tastes is far less rational than most of us believe.

Dan:  So, does this mean that the fault is with capitalism and innovation in food production?  And if this is the case what policies would you try to implement to overcome this problem?

Peter:  We need to experiment on a whole slew of policies to combat obesity: New York is requiring restaurants to post calories on their menus, a good start, but one that is likely susceptible to biases.  For example, if I was trying to sell Big Macs now, I’d add a new line of “Bigger Macs”–add a couple slices of bacon, 3 more kinds of cheese.  I’d proudly label this new burger’s calories: 50% more than the original Big Mac.  And I’d expect two things to happen:  first, some people would be drawn to this meal — risk takers, contrarians, Homer Simpson wannabees and so on; second, most people would not want this new burger, but they’d look at the Big Mac and think, “Wow, that burger is pretty darn healthy!”

I’d like to see someone try to label unhealthy food with emotive pictures, signaling that people should consider trying out another entrée.  Maybe a profile of people in varying stages of obesity?  

Ok, maybe some other symbol.

Dan: Your book is actually not much about medicine and medical related mistakes and it is largely about individuals and markets.  It seems that you believe that markets are efficient in the way that they operate, but that the outcome they arrive at is not optimal.  Can you explain this?

Peter:  Hmm, efficient wouldn’t be on my short list of words to describe markets.  Efficient sounds so uncontroversially good.  

I am a fan of capitalism. Very happy I grew up in the USA rather than the USSR.  But that doesn’t make capitalism, or free markets, perfect.  Look at all the people who bought mortgages they shouldn’t have bought, or SUVs that they mistakenly thought were safer than other cars.  (SUVs are more dangerous than minivans and even sedans, because they have a nasty habit of rolling over–very inconsiderate of them!)

Our brain can tell us that a long commute isn’t a big deal, or an adjustable rate mortgage isn’t a big risk, and the market efficiently provides us with suburban homes and fancy mortgage packages.  That doesn’t mean we picked the right home at the right price.

Confession: I live in the suburbs (barely), drive a sedan (because I don’t feel manly enough for an SUV), based the last decade of my savings and spending behavior on the assumption that my stock holdings (retirement accounts in mutual funds) would grow at 10% a year, and that my house’s value would grow faster than inflation.

At age 46, I have lots of time to rejigger my retirement plans.  But my fingers are crossed that my kids don’t get into college!!

Dan: So now that we know we should not take any advice from you, what are you hoping is the main thing that readers will learn from your book?

Peter:  This may be too personal but if they can go home at Christmas armed with good arguments to take on their insanely libertarian older brother, who really does think the market can solve all the world’s problems (“we need more free market in medicine, schools . . .”), then I will be happy.  

So — here is the summary of 2008 honors for Predictably Irrational

1) “New York Times Best Seller” for Non-fiction

2) Amazon Best Books of 2008, Customers’ Bestsellers: #23

3) Amazon Best Books of 2008, Customers’ Bestsellers in business category: #1

4) Hudson books — #1 book in business category

5) Business Week: The Best Business Books of 2008

6) 100 Notable Books of 2008 (NYT)

7) BNET’s Best Business Books of 2008

8) One of the top 8 Books of 2008 for Church Leaders!

9) Barnes And Noble: Best books of 2008 on Our Modern World

10) Seed Magazine, Book picks for 2008

— not a bad list….

Best

Dan

A new mac vs PC — my personal favorite — it is about planning…

An interesting story out of the BBC: one priest, Father Tim Jones, recently gave an incredibly provocative sermon where he offered controversial advice–to shoplift. His argument is basically that those who are less fortunate may often turn to illegal means: they can rob, they can become prostitutes, etc… Jones is arguing that of these “evils,” shoplifting, especially from large corporations, has the least impact on society, and thus, somehow, is the least immoral. Of course from a psychological standpoint this is our intuition. It is easy to do harm to large corporations because we think that we are spreading our damage out evenly among more individuals, and, moreover, those individuals are faceless people wearing suits. However, giving this more thought, we can also sense that if we were to allow this to happen as a society (or be more forgiving of poor people who steal from big corporations to get by), we could very quickly slip into a system of mutual distrust. Before you know it, we will all be having to have our bags checked at entrances and exits, with costs going up for everyone. On the whole, this might leave fewer people with jobs, and the cycle could continue to spiral out of control. As we know, many of the biggest financial blunders of the recent years had to do with tiny misjudgments that added up to larger and more catastrophic costs, with the resulting mutual distrust freezing credit and badly hurting the economy. One thing we must beware of is the allure of thinking that our tiny, seemingly inconsequential decisions won’t matter much in the long run. As history and research have shown us, it’s the little decisions that we gloss over that end up hurting us most in the end.

In a recent New Yorker article, James Surowiecki proposes that many people want to be forced to pay higher prices for gas.

Surowiecki starts by describing a very important observation made by Thomas Schelling about the N.H.L:

“At the time, players were allowed, but not required, to wear helmets, and most players chose to go helmet-less, despite the risk of severe head trauma. But when they were asked in secret ballots most players also said that the league should require them to wear helmets. The reason for this conflict, Schelling explained, was that not wearing a helmet conferred a slight advantage on the ice; crucially, it gave the player better peripheral vision, and it also made him look fearless. The players wanted to have their heads protected, but as individuals they couldn’t afford to jeopardize their effectiveness on the ice. Making helmets compulsory eliminated the dilemma: the players could protect their heads without suffering a competitive disadvantage. Without the rule, the players’ individually rational decisions added up to a collectively irrational result. With the rule, the outcome was closer to what players really wanted.”

In the rest of the article, Surowiecki tries to make the case that we all feel the same about cars with higher fuel-economy — and that we want to be forced into this situation.

I am not sure I agree.  There are clearly situations where we want to be forced into a better social equilibrium (for example, I want other people to drive safer), but this strikes me more as a situation that we want others to start driving more fuel efficient cars and less about a social coordination.

What do you think?

From taxes to golf — many people cheat just by a little bit ….

This video was produced by spark creative and Diamond consultants — thanks

  We have been a bit slow with the videos, but here is the one for Chapter 7

This week we learned that former Nasdaq chairman Madoff likely swindled investors out of $50 billion – arguably the largest financial fraud ever. And thinking about the gravity of the scam, it occurred to me that Madoff’s scam could be compared in terms of its effects to terrorism. Here’s how:

Consider that there was a time when terrorism wasn’t the big deal that it is now. This was before advances in technology, when terrorists only had recourse to low-level weaponry like stones and knives – which, while harmful on an individual level, are not quite weapons of mass destruction. In time, though, “better” technology came along, leading in turn to “better” terrorist tactics: suicide bombing and the like. Still peanuts, though, compared to what came later: 9/11 planes, bio terror – this is when things really got serious; now even one crazy person can cause a world of damage.

Now, I think Madoff’s case is equivalent in a financial sense. Whereas in the past one person’s monetary misdeeds could affect a handful of people at most, now there’s more at stake: a single person – like Madoff – can cause a whole lot of fiscal damage. And the reason lies in interconnections: when companies began investing with other companies, any fraud can spread and cause damage across many companies.

There’s one other similarity here. What makes terrorism so powerful are its randomness and intentionality: it can strike any time, and you never know when you’ll be a victim and it is done on purpose. Things that we can’t predict, control or at least think we can control make us more afraid. And that’s exactly the case with Madof’s scheme: the investers probably assumed that they were in control and all of a sudeen we all learned that we are much less in control, and that someone can do this to any of us.

If we view the stock market through this terrorism perspective, and we understand that just a few individuals can cause so much damage, it becomes clear that more regulation is needed – we do so much to check people at airports — shouldn’t we use the same level of security for hedge funds?

So many mistakes ….

Recently I had an interesting experience being poor. It didn’t last too long but it was quite distressing and I learned how difficult this is. The story is as follows. I was out of the country for a month and during that time my car insurance expired. When I got back I called my insurance agent and I asked them to renew my policy. “No, no, no, ” they said, “If your insurance has elapsed you can’t do it over the phone and you have to come to our office in person.” Well at that time I was living in Princeton and my insurance agency was 300 miles away in Boston.  So I took the train up, got to the insurance office on time and I was ready to hand them a check and renew my insurance.
Well, here again, I was wrong. It turns out I could not do it by check. The insurance company would not take a check from me because, after all, I have shown I am financially irresponsible. “Will a credit card do?” I said. “Of course not. Only cash.” The limit I can take out with my ATM card is $800 a day and the insurance was almost $3,000 (needless to say they also increased my premium). So I could not solve it this way. “Luckily” the insurance agent had a solution at hand that was designed for this very particular problem.  There is another company they told me that would finance my insurance fee. Interestingly enough, the cost of this financing included 20%  interest rate on the loan itself plus a $100 fee just to enroll in this program.
I had no choice but to take this particular loan. So I paid the $100 fee, I paid the 20% in interest, and I got my insurance. I took the train back to Princeton. A few days later, of course, I canceled this terrible loan and paid it off. But here is what I learned from this distressing lesson, the moment you make one financial mistake the chances that you will be hit with all kinds of fines, all kinds of difficulties, all kinds of financial obstacles, are much, much higher.
If I was on the verge of financial difficulty there is no question that this particular incident would have pushed me over the edge, making my financial life much more difficult and maybe even impossible. I think that this is, in fact, what we do to people with financial constraints all the time. We impose substantial penalties on the people who violate financial responsibilities, not taking into account their viability and therefore make their lives much, much worse.
How can we get over this issue? I think we have to reconsider the punitive systems all the financial institutions use (insurance, banks, credit cards, etc.), and think more carefully about how we want to share responsibility and payment across people.  After all when someone goes bankrupt, they of course suffer, but so does the whole system around them.  From this perspective, it is easy to see how the punitive systems we are using are not only bad for the individuals but they can be very damaging for the whole society.