Tag Archives: Decision making

Updates from Chicago Booth

Could anything unite the United States?
Cultural and political divisions have persisted for decades. Now there’s a growing gap in how Americans see each other.
By Rose Jacobs – As the Democratic Party battles over whether a moderate or liberal presidential candidate stands the better chance of winning the White House in November 2020, many Americans are asking a similar but broader question: Has the country ever been so divided?

Academics, for their part, are attempting to measure what often feel like widening gaps. In 2017, Stanford’s Matthew Gentzkow looked at a series of Pew Research Center surveys of Americans’ views on policies ranging from government regulation to welfare, immigration, and the environment, and noted that fewer individuals in 2014 than 10 years earlier held positions that put them across the political divide from their own, self-identified political party.

Nor do divides appear confined to politics and policy. Chicago Booth’s Marianne Bertrand and Emir Kamenica examined three national surveys that probe Americans’ consumption habits, leisure time, and social attitudes. They find that different groups of Americans—rich and poor, black and white, men and women, politically liberal and conservative, college educated and not—tend to eat different food, watch different television programs, pursue different hobbies, and adopt different social attitudes. The algorithms the researchers developed for their study were able to predict people’s income bracket with nearly 90 percent accuracy on the basis of the brands of products and services they bought; they could do the same for gender by looking at what TV shows and films people watched and what magazines they read; and they could predict race with 75–85 percent accuracy using self-reported stances on topics such as marriage, law enforcement, and government spending.

Yes, then, the nation appears to be divided.

Bertrand and Kamenica point out that cultural gaps in the categories that they studied, between rich and poor or black and white, for instance, are worrisome in part because they might dampen social and economic mobility. The real-world effects of growing partisanship are less obvious, but research is beginning to probe how a politically divided populace plays out in areas ranging from corporate finance to macroeconomics to medicine and law.

The researchers looked at the months surrounding President Trump’s election in 2016, and find that analysts registered as Democrats were more likely to issue downgrades to the companies they covered after November 8 than were Republican analysts. This effect was greater with analysts who voted more frequently. This result is in line with their wider analysis of political affiliation and presidential elections going back 18 years, which suggests that analysts whose politics do not align with the sitting president’s are more likely to downgrade companies’ debt than analysts who share a political party with the president. more>

Related>

The flaws a Nobel Prize-winning economist wants you to know about yourself

BOOK REVIEW

Nudge: Improving Decisions about Health, Wealth and Happiness, Authors: Richard Thaler and Cass Sunstein.

By Eshe Nelson – Sorry to say it, but you’re not perfect. We like to believe that we are smart, rational creatures, always acting in our best interests. In fact, dominant economic theory these days often makes that assumption.

What was left of this illusion was further dismantled by the The Royal Swedish Academy of Sciences, who awarded the Nobel prize in economics to Richard Thaler, an American economist at the University of Chicago, for his pioneering work in behavioral economics, which examines humanity’s flaws—namely, why we don’t make rational economic decisions.

People can make bad economic choices based on something Thaler dubbed the “endowment effect,” which is the theory that people value things more highly when they own them. In other words, you’d ask for more money for selling something that you own than what you would be willing to pay to buy the same thing.

People experience the negative feeling of loss more strongly than they feel the positive sense of a gain of the same size. This is also impact by anchoring: If you are selling an item, your reference point is most likely to be the price you paid for something. Even if the value of that item is now demonstrably worth less, you are anchored to the purchase price, in part because you want to avoid that sense of loss.

This can lead to pain in financial markets, in particular. more> https://goo.gl/eR1B2B

Apes Make Irrational Economic Decisions – That Includes You

By Christopher Krupenye – These irrational biases are common, they’re really hard to overcome, and they have pervasive impacts on human market behavior.

For example, people are more likely to spend a sum of money when it is framed as a bonus than when it is framed as compensation for a previous loss, like a rebate, which has implications for population trends in spending versus saving.

Framing also influences people’s medical decisions, such as their tendency to undertake preventative measures in personal health care.

And it’s often leveraged by marketing agencies to improve sales.

Decision-making research can help economic institutions – built on the erroneous assumption that people will behave rationally – to account for predictable irrationality.

It can also help us to design choice environments that lead people to make decisions that are better for them. For these reasons, Daniel Kahneman [2, 3, 4] was awarded the Nobel Prize in Economics in 2002, for his contributions (with the late Amos Tversky [2, 3, 4]) to the understanding of irrational decision-making. more> http://goo.gl/q04Rve

Related>

Strategic or random? How the brain chooses

Howard Hughes Medical Institute – The brain excels at integrating information from past experiences to guide decision-making in new situations. But in certain circumstances, random behavior may be preferable. An animal might have the best chance of avoiding a predator if it moves unpredictably, for example.

When faced with a weak competitor, the animals made strategic choices based on the outcomes of previous trials. But when a sophisticated competitor made strong predictions, the rats ignored past experience and made random selections in search of a reward. more> http://tinyurl.com/knpaxcw

Why Hierarchies Must Sign Their Own Death Warrant To Survive

BOOK REVIEW

The Three Ways of Getting Things Done, Author: Gerard Fairtlough.

By Steve Denning – There are only three ways of getting things done effectively as an organization:

The book explains that “hierarchy is not necessary for discipline, for systematic ways of working, for inspiration or for leadership. The alternative to hierarchy is not chaos or anarchy. Only our powerful addiction to hierarchy, given to us by our genes and by our culture, leads us to believe this.” more> http://tinyurl.com/kjtk7ps