Wednesday, April 13, 2016

Lixing Sun — Economics Can Explain the Real World with Two Fixes


Absolute versus relative utility. Why homo sapiens is not homo economicus. Homo economicus, a theoretical construct, is assumed to prefer absolute utility. However, behavioral economicus suggests that homo sapiens actually prefers relative utility. Evolutionary biology explains the reasons.
Apparently, evolution has equipped us with a subconscious long-term perspective that often disagrees with the neoclassical economic assumption that we maximize utility in the here and now.
There is an interesting observation in the post that is also borne out in fact.
The value of reputation can explain such enigmatic human customs as dueling in Europe, “saving face” in East and South Asia, and honor killing in some Muslim communities. For instance, the ancient Chinese practiced filial piety, in which family elders were revered to a degree that they were entitled to the best living conditions—the finest food, the coziest rooms, and the highest social status—even though they were too old to work. The logic: filial piety served as the gold standard for reputation. (How can we trust a person who won’t even treat his parents or grandparents well?) Without knowing the value of reputation, the practice of filial piety makes no economic sense. Clearly, the benefit of reputation warranted the cost of sacrifice.
I was just reading that in China today, filial piety is a factor in one's credit score. Those who don't take care of their parents take a reputational hit.

There is also lifetime payoff versus immediate payoff. Homo economicus assumes immediate payoff, or short term payoff. Homo sapiens recognizes a tradeoff between immediate payoff and lifetime payoff, and has a bias toward lifetime payoff.
Evolution is a blind, amoral process, only caring about organisms that can leave behind the most copies of genes in their lifetimes, regardless of whether they behave selfishly or selflessly in the short term. That is, when the ultimate evolutionary prize is lifetime fitness, being either cooperative or competitive makes no difference, for they are the two sides of the same coin, serving the same end.
Humans have long lifespans and live in stable social groups. These conditions, as biologist Robert Trivers argues, favor cooperation, which often leads to better payoffs than what individuals can accomplish alone in the long run. That’s why prosocial behaviors have thrived in humans. Accordingly, rather than maximizing the utility in every one-shot deal as assumed in rational choice theory, being rational in evolution means behaving in a way that can lead to maximum lifetime payoff.
With the two conceptual modifications—relative and lifetime payoff—in rational choice theory, neoclassical economics can be made compatible with evolution and gain traction in the real world.
Evonomics
Economics Can Explain the Real World with Two Fixes
Lixing Sun | professor of biology at Central Washington University

8 comments:

Matt Franko said...

"Apparently, evolution has equipped us with a subconscious long-term perspective that often disagrees with the neoclassical economic assumption that we maximize utility in the here and now."

This is the cohort Schauble is advocating for.... the savers.... you cant just blow those people off via ZIRP...

Matt Franko said...

The pro-ZIRP people are supporting the max u people... harming the lifetime rewards people....

If you analyze at this in time domain...

Tom Hickey said...

The MMT argument is that interest rates (monetary policy) are not as effective as specifically targeted spending and transfers (fiscal policy). Politically it is also less technocratic and potentially more democratic.

The Mosler proposal also preserves save assets in the form of 90 bills.

In a capitalist economy, investment in capital formation takes precedence over saving, and the financial sector is supposed to serve the productive sector.

A big reason that the US is stuck in "secular stagnation" is that saving (finance) has replaced investment (production) as the driver of the economy. Finance is not itself productive. Finance capitalism is basically rent-seeking and is parasitical.

Tom Hickey said...

BTW, Warren has explained that this is his reasoning behind ZIRP. The chief driver of investment in the US is housing, and keeping interest rates low promotes investment in housing owing to low mortgage rates (long term rates), as well as other investment. Instead of using monetary policy to discipline the credit extension, he recommends regulating the asset side of banks' balance sheet.

Matt Franko said...

"A big reason that the US is stuck in "secular stagnation" is that "

Leading USD flows have been flat-lining for years and the oil rent people have been fucking all the rest of us over during the same time frame....

Auburn Parks said...

matt

how can US government spending flows be the best determinant or predictor of anything when the only time since World War II the nominal government spending has been flat has been since 2010 and yet weve had a dozen recessions?

in other words if nominal spending always goes up and yet we still have recessions and how can we use that is some sort of predictor

nivekvb said...

In the post entrepreneurs built up big companies and savers invested. They worked hard to make the company a success.


Nowadays financiers come along and borrow money from the banks, who invent the money out of thin air, and then they buy a company and asset strip it. They then land the company with the loan they took out, and walk off with $millions. Pensions might have been raided and workers took wage cuts, or even got laid off.

Often these financiers know nothing about the businesses they are buying, so they hire other people to break up and restructure the companies for them.

They are the robber barons.

Matt Franko said...

Auburn if you look at longer term trend of NIA GDP you can see the correlation...

Also, forget about the gold standard era that was a different system operating at that time... we have to look at the post gold standard system which is our present numismatic system...

back in 2000 GDP was about 10T and leading flow was about 2T... by 2008 with the Bush II era fiscal activism, leading flow was up to almost $3.5T and NIA GDP was almost 15T even with the China USD zombies coming in for their ration of USDs in earnest over that time period (golden age of WalMart).... those imports subtract from NIA GDP....

So I guess you could say we had a "recession" in late 2008 when the moron bankers blew up their own industry for a while .... NIAGDP went down by 300B or 400B or so... but with flows solid and then the stimulus in 2009 we recovered within the year and by sometime in 2010 we were back to new highs in NIA GDP... I dont see a 300B pull back in NIA GDP from 14.8T to 14.5T while the bankers blew themselves out of it as the end of the world or something... there was still always plenty of food and beer in the stores... I just dont see a NIA GDP "recession" per se like this as a big deal... I'm just not into all of these things from idiot economists like GDP or wtf... could practically care less... more focused on real outcomes....

So as far as predictions, Mike has made two REALLY substantial equity calls over the last year he made the call in late summer last year on FoxNY at those lows on the "China" thing and then back in January he made that call on the "oil" thing and now we are quickly back to near new highs... I've made some substantial munnie (for me anyway) working the bullish side off of those two calls over this time period...

So I think the way to use this info is to make opportunistic buys when it sells off based on some other false version/ incorrect understanding of how our current system operates... we can rely on a pretty quick recovery from panic sell offs as long as we continue to see the govt sector engaged and maintaining leading flows while we get the sell off... Mike seems lately to be able to gauge the major bottoms pretty well probably from all of his experience with being immersed in just the basic market action all of those years....