'People will forgive you for being wrong, but they will never forgive you for being right - especially if events prove you right while proving them wrong.' Thomas Sowell
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Friday, 16 June 2023
Fallacies of Capitalism 7: The Rational Actor Fallacy
How does the "rational economic actor" fallacy overlook the role of cognitive biases, imperfect information, and bounded rationality in decision-making within a capitalist system?
The "rational economic actor" fallacy assumes that individuals in a capitalist system always make decisions in a perfectly rational and self-interested manner. However, this belief overlooks the influence of cognitive biases, imperfect information, and bounded rationality, which can lead to suboptimal decision-making. Let's understand this concept with simple examples:
Cognitive biases: Humans are prone to cognitive biases, which are systematic errors in thinking that affect decision-making. For example, the availability bias occurs when people rely on easily accessible information rather than considering a broader range of data. In a capitalist system, this bias can lead individuals to make decisions based on recent news or vivid examples rather than carefully analyzing all relevant information. This can result in suboptimal choices, such as investing in trendy but risky assets without considering their long-term potential.
Imperfect information: In many economic transactions, individuals do not have access to complete and accurate information. For instance, when buying a used car, the seller may withhold information about the vehicle's hidden problems. This information asymmetry can lead to suboptimal decisions. Buyers, lacking complete knowledge, may overpay for a faulty car. In a capitalist system, imperfect information can distort market outcomes and hinder individuals from making fully rational choices.
Bounded rationality: Bounded rationality recognizes that individuals have limited cognitive abilities to process information and make complex decisions. People often rely on simplifying heuristics and rules of thumb instead of undertaking thorough analysis. For example, when choosing a product, individuals may rely on brand reputation rather than researching all available options. In a capitalist system, bounded rationality can lead individuals to make decisions based on incomplete information or superficial analysis, resulting in suboptimal outcomes.
Emotional influences: Human decision-making is also influenced by emotions, which can deviate from strict rationality. For example, investors may be driven by fear or greed during market fluctuations, leading to irrational investment decisions. In a capitalist system, emotional biases can contribute to market volatility and inefficient allocation of resources.
Social influences: People's decisions are often influenced by social factors, such as peer pressure or social norms, which may override individual rationality. For instance, individuals may conform to popular trends or engage in conspicuous consumption to fit into a particular social group. In a capitalist system, social influences can drive individuals to make choices that prioritize social acceptance over their own best interests.
In summary, the "rational economic actor" fallacy overlooks the role of cognitive biases, imperfect information, bounded rationality, emotional influences, and social factors in decision-making within a capitalist system. Recognizing these limitations is crucial for understanding that individuals do not always act in perfectly rational and self-interested ways. Policymakers and market participants should consider these factors to design regulations, incentives, and interventions that account for the complexity of human decision-making and promote better outcomes in the capitalist system.
Sunday, 10 July 2022
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Sunday, 30 June 2019
The science of influencing people: six ways to win an argument
“I am quite sure now that often, very often, in matters of religion and politics a man’s reasoning powers are not above the monkey’s,” wrote Mark Twain.
Having written a book about our most common reasoning errors, I would argue that Twain was being rather uncharitable – to monkeys. Whether we are discussing Trump, Brexit, or the Tory leadership, we have all come across people who appear to have next to no understanding of world events – but who talk with the utmost confidence and conviction. And the latest psychological research can now help us to understand why.
Consider the “illusion of explanatory depth”. When asked about government policies and their consequences, most people believe that they could explain their workings in great detail. If put to the test, however, their explanations are vague and incoherent. The problem is that we confuse a shallow familiarity with general concepts for real, in-depth knowledge.
Besides being less substantial than we think, our knowledge is also highly selective: we conveniently remember facts that support our beliefs and forget others. When it comes to understanding the EU, for instance, Brexiters will know the overall costs of membership, while remainers will cite its numerous advantages. Although the overall level of knowledge is equal on both sides, there is little overlap in the details.
Simply asking why people support or oppose a policy is pointless. You need to ask how something works to have an effect
Politics can also scramble our critical thinking skills. Psychological studies show that people fail to notice the logical fallacies in an argument if the conclusion supports their viewpoint; if they are shown contrary evidence, however, they will be far more critical of the tiniest hole in the argument. This phenomenon is known as “motivated reasoning”.
A high standard of education doesn’t necessarily protect us from these flaws. Graduates, for instance, often overestimate their understanding of their degree subject: although they remember the general content, they have forgotten the details. “People confuse their current level of understanding with their peak knowledge,” Prof Matthew Fisher of Southern Methodist University in Dallas, Texas, says. That false sense of expertise can, in turn, lead them to feel that they have the licence to be more closed-minded in their political views – an attitude known as “earned dogmatism”.
Little wonder that discussions about politics can leave us feeling that we are banging our heads against a brick wall – even when talking to people we might otherwise respect. Fortunately, recent psychological research also offers evidence-based ways towards achieving more fruitful discussions.
Ask ‘how’ rather than ‘why’
Thanks to the illusion of explanatory depth, many political arguments will be based on false premises, spoken with great confidence but with a minimal understanding of the issues at hand. For this reason, a simple but powerful way of deflating someone’s argument is to ask for more detail. “You need to get the ‘other side’ focusing on how something would play itself out, in a step by step fashion”, says Prof Dan Johnson at Washington and Lee University in Lexington, Virginia. By revealing the shallowness of their existing knowledge, this prompts a more moderate and humble attitude.
FacebookTwitterPinterest Anti-Brexit protester Steve Bray and a pro-Brexit protester face off outside parliament earlier this year. Photograph: Jack Taylor/Getty Images
In 2013, Prof Philip Fernbach at the University of Colorado, Boulder, and colleagues asked participants in cap-and-trade schemes – designed to limit companies’ carbon emissions – to describe in depth how they worked. Subjects initially took strongly polarised views but after the limits of their knowledge were exposed, their attitudes became more moderate and less biased.
It’s important to note that simply asking why people supported or opposed the policy – without requiring them to explain how it works – had no effect, since those reasons could be shallower (“It helps the environment”) with little detail. You need to ask how something works to get the effect.
If you are debating the merits of a no-deal Brexit, you might ask someone to describe exactly how the UK’s international trade would change under WTO terms. If you are challenging a climate emergency denier, you might ask them to describe exactly how their alternative theories can explain the recent rise in temperatures. It’s a strategy that the broadcaster James O’Brien employs on his LBC talk show – to powerful effect.
Fill their knowledge gap with a convincing story
If you are trying to debunk a particular falsehood – like a conspiracy theory or fake news – you should make sure that your explanation offers a convincing, coherent narrative that fills all the gaps left in the other person’s understanding.
Consider the following experiment by Prof Brendan Nyhan of the University of Michigan and Prof Jason Reifler of the University of Exeter. Subjects read stories about a fictional senator allegedly under investigation for bribery who had subsequently resigned from his post. Written evidence – a letter from prosecutors confirming his innocence – did little to change the participants’ suspicions of his guilt. But when offered an alternative explanation for his resignation – to take on another role – participants changed their minds. The same can be seen in murder trials: people are more likely to accept someone’s innocence if another suspect has also been accused, since that fills the biggest gap in the story: whodunnit.
FacebookTwitterPinterest Boris Johnson, Jeremy Hunt, Michael Gove, Sajid Javid and Rory Stewart taking part in a BBC TV debate earlier this month. Photograph: Jeff Overs/BBC/PA
The persuasive power of well-constructed narratives means that it’s often useful to discuss the sources of misinformation, so that the person can understand why they were being misled in the first place. Anti-vaxxers, for instance, may believe a medical conspiracy to cover up the supposed dangers of vaccines. You are more likely to change minds if you replace that narrative with an equally cohesive and convincing story – such as Andrew Wakefield’s scientific fraud, and the fact that he was set to profit from his paper linking autism to MMR vaccines. Just stating the scientific evidence will not be as persuasive.
Reframe the issue
Each of our beliefs is deeply rooted in a much broader and more complex political ideology. Climate crisis denial, for instance, is now inextricably linked to beliefs in free trade, capitalism and the dangers of environmental regulation.
Attacking one issue may therefore threaten to unravel someone’s whole worldview – a feeling that triggers emotionally charged motivated reasoning. It is for this reason that highly educated Republicans in the US deny the overwhelming evidence.
You are not going to alter someone’s whole political ideology in one discussion, so a better strategy is to disentangle the issue at hand from their broader beliefs, or to explain how the facts can still be accommodated into their worldview. A free-market capitalist who denies global warming might be far more receptive to the evidence if you explain that the development of renewable energies could lead to technological breakthroughs and generate economic growth.
Appeal to an alternative identity
If the attempt to reframe the issue fails, you might have more success by appealing to another part of the person’s identity entirely.
Someone’s political affiliation will never completely define them, after all. Besides being a conservative or a socialist, a Brexiter or a remainer, we associate ourselves with other traits and values – things like our profession, or our role as a parent. We might see ourselves as a particularly honest person, or someone who is especially creative. “All people have multiple identities,” says Prof Jay Van Bavel at New York University, who studies the neuroscience of the “partisan brain”. “These identities can become active at any given time, depending on the circumstances.”
You are more likely to achieve your aims by arguing gently and kindly. You will also come across better to onlookers
It’s natural that when talking about politics, the salient identity will be our support for a particular party or movement. But when people are asked to first reflect on their other, nonpolitical values, they tend to become more objective in discussion on highly partisan issues, as they stop viewing facts through their ideological lens.
You could try to use this to your advantage during a heated conversation, with subtle flattery that appeals to another identity and its set of values; if you are talking to a science teacher, you might try to emphasise their capacity to appraise evidence even-handedly. The aim is to help them recognise that they can change their mind on certain issues while staying true to other important elements of their personality.
Persuade them to take an outside perspective
Another simple strategy to encourage a more detached and rational mindset is to ask your conversation partner to imagine the argument from the viewpoint of someone from another country. How, for example, would someone in Australia or Iceland view Boris Johnson as our new prime minister?
Prof Ethan Kross at the University of Michigan, and Prof Igor Grossmann at the University of Waterloo in Ontario, Canada, have shown that this strategy increases “psychological distance” from the issue at hand and cools emotionally charged reasoning so that you can see things more objectively. During the US presidential elections, for instance, their participants were asked to consider how someone in Iceland would view the candidates. They were subsequently more willing to accept the limits of their knowledge and to listen to alternative viewpoints; after the experiment, they were even more likely to join a bipartisan discussion group.
FacebookTwitterPinterest The front pages of two New York newspapers on Friday 2 June 2017, as Donald Trump pledged to withdraw the US from the Paris climate agreement. Photograph: Richard B Levine/Alamy
This is only one way to increase someone’s psychological distance, and there are many others. If you are considering policies with potentially long-term consequences, you could ask them to imagine viewing the situation through the eyes of someone in the future. However you do it, encouraging this shift in perspective should make your friend or relative more receptive to the facts you are presenting, rather than simply reacting with knee-jerk dismissals.
Be kind
Here’s a lesson that certain polemicists in the media might do well to remember – people are generally much more rational in their arguments, and more willing to own up to the limits of their knowledge and understanding, if they are treated with respect and compassion. Aggression, by contrast, leads them to feel that their identity is threatened, which in turn can make them closed-minded.
Assuming that the purpose of your argument is to change minds, rather than to signal your own superiority, you are much more likely to achieve your aims by arguing gently and kindly rather than belligerently, and affirming your respect for the person, even if you are telling them some hard truths. As a bonus, you will also come across better to onlookers. “There’s a lot of work showing that third-party observers always attribute high levels of competence when the person is conducting themselves with more civility,” says Dr Joe Vitriol, a psychologist at Lehigh University in Bethlehem, Pennsylvania. As Lady Mary Wortley Montagu put it in the 18th century: “Civility costs nothing and buys everything.”
Saturday, 5 May 2018
Is Marx still relevant 200 years later?
How should we think about Karl Marx on his 200th birthday? His big influence on the politics of the world is universally acknowledged, though people would differ on how good or bad that influence has been. But going beyond that, there can be little doubt that the intellectual world has been transformed by the reflective departures Marx generated, from class analysis as an essential part of social understanding, to the explication of the profound contrast between needs and hard work as conflicting foundations of people’s moral entitlements. Some of the influences have been so pervasive, with such strong impact on the concepts and connection we look for in our day-to-day analysis, that we may not be fully aware where the influences came from. In reading some classic works of Marx, we are often placed in the uncomfortable position of the theatre-goer who loved Hamlet as a play, but wondered why it was so full of quotations.
Marxian analysis remains important today not just because of Marx’s own original work, but also because of the extraordinary contributions made in that tradition by many leading historians, social scientists and creative artists — from Antonio Gramsci, Rosa Luxemburg, Jean-Paul Sartre and Bertolt Brecht to Piero Sraffa, Maurice Dobb and Eric Hobsbawm (to mention just a few names). We do not have to be a Marxist to make use of the richness of Marx’s insights — just as one does not have to be an Aristotelian to learn from Aristotle.
There are ideas in Marx’s corpus of work that remain under-explored. I would place among the relatively neglected ideas Marx’s highly original concept of “objective illusion,” and related to that, his discussion of “false consciousness”. An objective illusion may arise from what we can see from our particular position — how things look from there (no matter how misleading). Consider the relative sizes of the sun and the moon, and the fact that from the earth they look to be about the same size (Satyajit Ray offered some interesting conversations on this phenomenon in his film, Agantuk). But to conclude from this observation that the sun and the moon are in fact of the same size in terms of mass or volume would be mistaken, and yet to deny that they do look to be about the same size from the earth would be a mistake too. Marx’s investigation of objective illusion — of “the outer form of things” — is a pioneering contribution to understanding the implications of positional dependence of observations.
The phenomenon of objective illusion helps to explain the widespread tendency of workers in an exploitative society to fail to see that there is any exploitation going on — an example that Marx did much to investigate, in the form of “false consciousness”. The idea can have many applications going beyond Marx’s own use of it. Powerful use can be made of the notion of objective illusion to understand, for example, how women, and indeed men, in strongly sexist societies may not see clearly enough — in the absence of informed political agitation — that there are huge elements of gender inequality in what look like family-oriented just societies, as bastions of role-based fairness.
There is, however, a danger in seeing Marx in narrowly formulaic terms — for example, in seeing him as a “materialist” who allegedly understood the world in terms of the importance of material conditions, denying the significance of ideas and beliefs. This is not only a serious misreading of Marx, who emphasised two-way relations between ideas and material conditions, but also a seriously missed opportunity to see the far-reaching role of ideas on which Marx threw such important light.
Let me illustrate the point with a debate on the discipline of historical explanation that was quite widespread in our own time. In one of Eric Hobsbawm’s lesser known essays, called “Where Are British Historians Going?”, published in the Marxist Quarterly in 1955, he discussed how the Marxist pointer to the two-way relationship between ideas and material conditions offers very different lessons in the contemporary world than it had in the intellectual world that Marx himself saw around him, where the prevailing focus — for example by Hegel and Hegelians — was very much on highlighting the influence of ideas on material conditions.
In contrast, the tendency of dominant schools of history in the mid-twentieth century — Hobsbawm cited here the hugely influential historical works of Lewis Bernstein Namier — had come to embrace a type of materialism that saw human action as being almost entirely motivated by a simple kind of material interest, in particular narrowly defined self-interest. Given this completely different kind of bias (very far removed from the idealist traditions of Hegel and other influential thinkers in Marx’s own time), Hobsbawm argued that a balanced two-way view must demand that analysis in Marxian lines today must particularly emphasise the importance of ideas and their influence on material conditions.
For example, it is crucial to recognise that Edmund Burke’s hugely influential criticism of Warren Hastings’s misbehaviour in India — in the famous Impeachment hearings — was directly related to Burke’s strongly held ideas of justice and fairness, whereas the self-interest-obsessed materialist historians, such as Namier, saw no more in Burke’s discontent than the influence of his [Burke’s] profit-seeking concerns which had suffered because of the policies pursued by Hastings. The overreliance on materialism — in fact of a particularly narrow kind — needed serious correction, argued Hobsbawm: “In the pre-Namier days, Marxists regarded it as one of their chief historical duties to draw attention to the material basis of politics. But since bourgeois historians have adopted what is a particular form of vulgar materialism, Marxists had to remind them that history is the struggle of men for ideas, as well as a reflection of their material environment. Mr Trevor-Roper [a famous right-wing historian] is not merely mistaken in believing that the English Revolution was the reflection of the declining fortunes of country gentlemen, but also in his belief that Puritanism was simply a reflection of their impending bankruptcies.”
To Hobsbawm’s critique, it could be added that the so-called “rational choice theory” (so dominant in recent years in large parts of mainstream economics and political analysis) thrives on a single-minded focus on self-interest as the sole human motivation, thereby missing comprehensively the balance that Marx had argued for. A rational choice theorist can, in fact, learn a great deal from reading Marx’s Economic and Philosophic Manuscripts and The German Ideology. While this would be a very different lesson from what Marx wanted Hegelians to consider, a commitment to doing justice to the two-way relations characterises both parts of Marx’s capacious pedagogy. What has to be avoided is the narrowing of Marx’s thoughts through simple formulas respectfully distributed in his name.
In remembering Marx on his 200th birthday, we not only celebrate a great intellectual, but also one whose critical analyses and investigations have many insights to offer to us today. Paying attention to Marx may be more important than paying him respect.
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Slavoj Zizek in The Independent
There is a delicious old Soviet joke about Radio Yerevan: a listener asks: “Is it true that Rabinovitch won a new car in the lottery?”, and the radio presenter answers: “In principle yes, it’s true, only it wasn’t a new car but an old bicycle, and he didn’t win it but it was stolen from him.”
Does exactly the same not hold for Marx’s legacy today? Let’s ask Radio Yerevan: “Is Marx’s theory still relevant today?” We can guess the answer: in principle yes, he describes wonderfully the mad dance of capitalist dynamics which only reached its peak today, more than a century and a half later, but… Gerald A Cohen enumerated the four features of the classic Marxist notion of the working class: (1) it constitutes the majority of society; (2) it produces the wealth of society; (3) it consists of the exploited members of society; and (4) its members are the needy people in society. When these four features are combined, they generate two further features: (5) the working class has nothing to lose from revolution; and (6) it can and will engage in a revolutionary transformation of society.
None of the first four features applies to today’s working class, which is why features (5) and (6) cannot be generated. Even if some of the features continue to apply to parts of today’s society, they are no longer united in a single agent: the needy people in society are no longer the workers, and so on.
But let’s dig into this question of relevance and appropriateness further. Not only is Marx’s critique of political economy and his outline of the capitalist dynamics still fully relevant, but one could even take a step further and claim that it is only today, with global capitalism, that it is fully relevant.
However, at the moment of triumph is one of defeat. After overcoming external obstacles the new threat comes from within. In other words, Marx was not simply wrong, he was often right – but more literally than he himself expected to be.
For example, Marx couldn’t have imagined that the capitalist dynamics of dissolving all particular identities would translate into ethnic identities as well. Today’s celebration of “minorities” and “marginals” is the predominant majority position – alt-rightists who complain about the terror of “political correctness” take advantage of this by presenting themselves as protectors of an endangered minority, attempting to mirror campaigns on the other side.
And then there’s the case of “commodity fetishism”. Recall the classic joke about a man who believes himself to be a grain of seed and is taken to a mental institution where the doctors do their best to finally convince him that he is not a grain but a man. When he is cured (convinced that he is not a grain of seed but a man) and allowed to leave the hospital, he immediately comes back trembling. There is a chicken outside the door and he is afraid that it will eat him.
“Dear fellow,” says his doctor, “you know very well that you are not a grain of seed but a man.”
“Of course I know that,” replies the patient, “but does the chicken know it?”
So how does this apply to the notion of commodity fetishism? Note the very beginning of the subchapter on commodity fetishism in Marx’s Das Kapital: “A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.”
Commodity fetishism (our belief that commodities are magic objects, endowed with an inherent metaphysical power) is not located in our mind, in the way we (mis)perceive reality, but in our social reality itself. We may know the truth, but we act as if we don’t know it – in our real life, we act like the chicken from the joke.
Niels Bohr, who already gave the right answer to Einstein’s “God doesn’t play dice“(“Don’t tell God what to do!”), also provided the perfect example of how a fetishist disavowal of belief works. Seeing a horseshoe on his door, a surprised visitor commented that he didn’t think Bohr believed superstitious ideas about horseshoes bringing good luck to people. Bohr snapped back: “I also do not believe in it; I have it there because I was told that it works whether one believes in it or not!”
This is how ideology works in our cynical era: we don’t have to believe in it. Nobody takes democracy or justice seriously, we are all aware of their corruption, but we practice them – in other words, we display our belief in them – because we assume they work even if we do not believe in them.
With regard to religion, we no longer “really believe”, we just follow (some of the) religious rituals and mores as part of the respect for the “lifestyle” of the community to which we belong (non-believing Jews obeying kosher rules “out of respect for tradition”, for example).
“I do not really believe in it, it is just part of my culture” seems to be the predominant mode of the displaced belief, characteristic of our times. “Culture” is the name for all those things we practice without really believing in them, without taking them quite seriously.
This is why we dismiss fundamentalist believers as “barbarians” or “primitive”, as anti-cultural, as a threat to culture – they dare to take seriously their beliefs. The cynical era in which we live would have no surprises for Marx.
Marx’s theories are thus not simply alive: Marx is a ghost who continues to haunt us – and the only way to keep him alive is to focus on those of his insights which are today more true than in his own time.