Heuristics, Networks and Trust - Moving Away from Standard Economics

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Presentation to post AS-level students on developments in economics that lie beyond the standard content of first year courses

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  • Many bridges still have height max signs at the front ……. Hindsight bias …. Not a very good idea
  • Copying behaviour by agents is intuitive and widespread – it is often rational to copy the behaviour of others
  • I have responded a lot to this reminder …. But the last time I made a purchase ….
  • Trust
  • On average apartments on Airbnb are 21 per cent cheaper than hotels in most major US cities, according to a Priceonomics study
  • On average apartments on Airbnb are 21 per cent cheaper than hotels in most major US cities, according to a Priceonomics study
  • In this short presentation we will look at a small number of behavioural ideas that try to capture the reality and complexity of modern markets and economies.
    These are:
    Heuristics
    Network effects
    Herd behaviour
  • Some suggestions for enrichment reading in the summer of 2014
  • Heuristics, Networks and Trust - Moving Away from Standard Economics

    1. 1. Geoff Riley FRSA, Eton College and Tutor2u Fly Beyond the AS Economics Syllabus
    2. 2. It is not only Economists who can be bad for you!
    3. 3. “EVERYTHING THAT CAN BE INVENTED HAS BEEN INVENTED” Spokesman for the US Patent office, 1899
    4. 4. “I THINK THERE IS A WORLD MARKET FOR MAYBE FIVE COMPUTERS” Thomas Watson, IBM Chairman 1943
    5. 5. “THEY COULDN’T HIT AN ELEPHANT AT THIS DIST.......” Last words of General Sedgwick, Battle of Spotsylvania 1864
    6. 6. “The master-economist must possess a rare combination of gifts ... He must be a mathematician, historian, statesman, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. No part of man’s nature of his institutions must lie entirely outside his regard. “ Keynes on the qualities of a master-economist
    7. 7. Challenges to Economic Orthodoxy At a November 2008 visit to the LSE the Queen asked Luis Garicano, an LSE expert on economics and management: “Why did no one see it [the crisis] coming?”
    8. 8. • Dogmatic belief in the efficiency of markets • Perpetuating the myth of the rational maximizing agent with perfect information “Living in a neo-liberal world?” (Madonna)
    9. 9. “In the economist's mind, people are calculating rationalists, merely seeking to maximize their own utility in a world of perfect information, and devoid of such concepts as uncertainty, mistrust, fear and regret.” Rory Sutherland
    10. 10. The human is far less a rational calculating machine than a kind of anxious, moralizing, herd- like, reciprocating, image-conscious, story-telling game theorist. The best quote on economics that I have ever read
    11. 11. • Humans are very different from Econs! • Social • Emotional • Habitual • Satisficers • Lack self-control • Many cognitive biases in behaviour
    12. 12. At least nine major schools of economics 1. Classical 2. Neoclassical 3. Marxist 4. Keynesian 5. Schumpeterian 6. Austrian 7. Institutionalist 8. Behaviouralist 9. Developmentalist There are alternatives to what you have been taught
    13. 13. Relying on neo- classical economics is the equivalent of using a very large hammer! Economic and Social Problems are Complex
    14. 14. Economic and Social Problems are Complex Relying on neo- classical economics is the equivalent of using a very large hammer! This is more likely to do the job!
    15. 15. Heuristics Network Behaviour Signalling and Trust in Markets
    16. 16. Heuristics
    17. 17. Heuristics Rules of thumb designed to get us through life …………...
    18. 18. Heuristics Rules of thumb designed to get us through life …………... We often rely on our gut instinct rather than precise measurement of cost and benefit
    19. 19. Heuristics are used when catching a ball
    20. 20. 1/ Fix eye on ball 2/ Start running 3/ Adjust your running until the angle of gaze remains constant……………………… The Gaze Heuristic
    21. 21. Andy Haldane Heuristics and financial markets “The Dog and the Frisbee” (Bank of England)
    22. 22. Which has more? – 1) Words that begin with the letter “K"
    23. 23. Which has more? – 1) Words that begin with the letter “K" – 2) Words that have the letter “K“ in the 3rd position
    24. 24. Which has more? – 1) Words that begin with the letter “K" Kinesthetic
    25. 25. Which has more? – 1) Words that begin with the letter “K" – 2) Words that have the letter “K“ in the 3rd position Kinesthetic Ark
    26. 26. • Which has more? – 1) Words that begin with the letter “R" – 2) Words that have the letter “R“ in the 3rd position
    27. 27. • Which has more? – 1) Words that begin with the letter “R" Radio
    28. 28. • Which has more? – 1) Words that begin with the letter “R" – 2) Words that have the letter “R“ in the 3rd position Radio Aerial
    29. 29. • Answer – Words with the letter "R" or "K" in the third position are more common.
    30. 30. • Answer – Words with the letter "R" or "K" in the third position are more common. –There are three times as many words that have the letter “R" in the third position
    31. 31. • Answer – Words with the letter "R" or "K" in the third position are more common. –There are three times as many words that have the letter “R" in the third position Aerial Bark Carpet Dermatologist Earmarked Farmer
    32. 32. Which of these towns has the bigger population? Slough Plymouth
    33. 33. Which of these towns has the bigger population? Slough Plymouth 250,000
    34. 34. Which of these towns has the bigger population? Slough Plymouth 250,000 140,000
    35. 35. How to spot the terrorist at an airport
    36. 36. No heuristic pretends to apply to everything, but some heuristics work well some of the time
    37. 37. I normally find what I need without scrolling down…
    38. 38. “If nothing bad happened last time, do what I did last time.”
    39. 39. I don’t want the best burger in the world; I want a burger like the one I had last time ……………………………….
    40. 40. Nearly all people and businesses SATISFICE!
    41. 41. In a World of Uncertainty and Complexity, Instinct Can Beat Analytical Thinking
    42. 42. Expert bias doesn’t always pay dividends! Using heuristics often leads to better decisions than the models of “rational” decision- making developed by mathematicians and statisticians. Gerd Gigerenzer
    43. 43. Heuristics for uncertain financial markets asset allocation heuristic = 1/n i.e. allocate money equally to each of n fundsGerd Gigerenzer
    44. 44. Heuristics for uncertain financial markets Do not be impulsive in data-rich situations where you should be thoughtful; do not be thoughtful in data-poor situations where you should be intuitive Gerd Gigerenzer
    45. 45. Heuristics can work well some of the time but not all of the time!
    46. 46. I’ll get good health advice from the Daily Express………….
    47. 47. I’ll get good health advice from the Daily Express………….
    48. 48. I’ll get good health advice from the Daily Express………….
    49. 49. I’ll get good health advice from the Daily Express………….
    50. 50. I’ll get good health advice from the Daily Express………….
    51. 51. I can tell instinctively how high a bridge is…….
    52. 52. I can tell instinctively how high a bridge is…….
    53. 53. If I post a letter by 4pm it tends to get there tomorrow
    54. 54. Life-affirming example of the power of heuristics
    55. 55. Network Economics
    56. 56. Network dynamics vital in understanding behaviour
    57. 57. Will London Black Cabs still be dominant in 2017?
    58. 58. Will Facebook still be dominant in 2017?
    59. 59. Copying behaviour is intuitive in networks
    60. 60. A person often decides to change his or her preferences simply on the basis of what others do
    61. 61. “We are going to Nando’s……..are you coming?”
    62. 62. Smart businesses mix economic & social incentives
    63. 63. Smart businesses mix economic & social incentives
    64. 64. Smart businesses mix economic & social incentives
    65. 65. But after my last purchase on Amazon ……….
    66. 66. “Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.” Tim Harford The economics of TRUST and SHARING
    67. 67. Great brands play capitalism’s “long game”
    68. 68. How much trust do you have in public figures? Politicians Bankers Technology Companies Doctors
    69. 69. How do you decide whether to trust a taxi driver?
    70. 70. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    71. 71. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    72. 72. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    73. 73. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    74. 74. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    75. 75. How do you decide whether to trust a taxi driver? Brand reputation Previous experiences “The Knowledge” Referral Longevity Religious icons
    76. 76. When trust is low we make defensive purchases
    77. 77. Returns from the sharing and trusting economy….
    78. 78. Social dimensions of the sharing economy…….
    79. 79. Social dimensions of the sharing economy…….
    80. 80. Heuristics Network Behaviour Signalling and Trust in Markets
    81. 81. Accountants and Actuaries
    82. 82. Accountants and Actuaries Lawyers
    83. 83. Accountants and Actuaries Lawyers Contrarian Economists
    84. 84. Happy to help with UCAS Advice and Extra Support in your Economics! G.riley@etoncollege.org.uk @tutor2u_econ

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