Economics evolves into evolutionary economics

The July 2009 edition of Scientific American explores new ways of looking at economics in an article by Gary Stix entitled "The Science of Bubbles and Busts." The article explores the growing acceptance by professionals that people quite often are not rational when it comes to dealing with their finances. We are not homo economicus, as touted by many economists, including Milton Friedman. Our imperfections are many. For instance, we are supremely overconfident. We overrate our ability to make decisions in the market. We are also prone to "herding," following the crowd. We are also overwhelmed by our recall of recent events due to the availability bias. We are creatures who are strictly geared to the short-term. As a result of this mounting evidence establishing that we are not able to rationally deal with the market, new approaches are inexorably working there way into economics. These new approaches include evolutionary economics:

“Economists suffer from a deep psychological disorder that I call ‘physics envy,’ ” [MIT professor of finance Andrew] Lo says. “We wish that 99 percent of economic behavior could be captured by three simple laws of nature. In fact, economists have 99 laws that capture 3 percent of behavior. Economics is a uniquely human endeavor and, as such, should be understood in the broader context of competition, mutation and natural selection—in other words, evolution.

Having an evolutionary model to consult may let investors adapt as the risk profiles of different investment strategies shift. But the most important benefit of Lo’s simulations may be an ability to detect when the economy is not in a stable equilibrium, a finding that would warn regulators and investors that a bubble is inflating or else about to explode.

An adaptive-market model can incorporate information about how prices in the market are changing—analogous to how people are adapting to a particular ecological niche. It can go on to deduce whether prices on one day are influencing prices on the next, an indication that investors are engaged in “herding,” as described by behavioral economists, a sign that a bubble may be imminent. As a result of this type of modeling, regulations could also “adapt” as markets shift and thus counter the type of “systemic” risks for which conventional risk models leave the markets unprotected.

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HVAC sanity in Japan

How often have you gone into a store or business in the summer, where you needed to wear a sweater or coat to stay comfortably warm? Think movie theaters, for example. No doubt, Americans waste a lot of energy over-cooling in the summer and over-warming in the winter. Think of those businesses that keep their doors open in the winter, heat spilling out into the frigid outdoors. When we bought a Christmas tree this year, the lot was using propane heaters to heat the outdoors. As reported by Newsweek, Japan is using common sense in an effort to make itself less dependent on foreign fuel and in an effort to reduce carbon emissions:

In 2005, Environment Minister Yuriko Koike, a pioneering female politician, was seeking ways to slash energy use. And she came up with the Cool Biz campaign. The idea: Government would cut energy bills by keeping thermostats in its buildings at 28 degrees Celsius—82.4 degrees Fahrenheit—during the summer. It quickly produced results and was adopted by the business establishment as well. Since Japan's energy mavens realized that simply unbuttoning a shirt collar can make people feel about 4 degrees cooler, dressing down became part of the Cool Biz mentality. (Here's an ABC News story on the phenomenon.) The only people we met with this week wearing suits, ties, and cufflinks were Americans.

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What if record companies hadn’t been asses?

At Truthdig.com, Danny Goldberg has reviewed Steve Knopper’s book, Appetite for Self-Destruction. According to Goldbert, Knopper asks asks some good questions. Was it really necessary that the record companies had to suffer their massive economic collapses? Here are many of the excuses you hear:

If only they hadn’t charged so much for CDs even after the per-unit manufacturing cost went down; if only they hadn’t abandoned the commercial single when it ceased to be sufficiently profitable; if only they hadn’t cooperated with Best Buy and Wal-Mart at the expense of indie stores; if only they hadn’t sued customers for illegal downloading, etc. etc. Referring to the fact that some of Sony/BMG’s ill-fated watermarked CDs damaged some computers, Knopper writes: “This lack of empathy reinforced Napster-era beliefs that the music industry was more interested in suing and punishing its customers than catering to them.”

Goldberg disagrees with all of this. He points to the newspaper industry, which made none of these mistakes, but is also suffering massive economic losses.

This litany of real and imagined insults to the consumer [caused by record companies] ignores the central reality of what caused the decline of record sales: the ability of fans to get albums free.

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Our incredibly fickle media turns all of its spotlights on Michael Jackson

Check out the home page of MSNBC tonight (click on the thumbnail below). Do you see ANYTHING about the crisis in Iran? Instead we are presented with endless drivel about Michael Jackson, who was an extremely talented entertainer many years ago. But I suppose that there is nothing interesting going on in Iran. And nothing much else going on anywhere else either, apparently. For all you can tell by looking at the MSNBC homepage, the problems in Iran have been entirely resolved. Or maybe the problem is that MSNBC doesn't have anybody on the ground in Iran, and when a tree falls in the forest where there aren't any mainstream media reporters, the tree didn't really fall at all. Even though sustained coverage of Iran is potentially a lifeline for the brave Iranian men and women who are standing up to their government, which apparently stole their national election. And BTW, had we elected John McCain and had he gotten his way to bomb Iran, would our media have tried to present an accurate viewpoint of these young heroes? Or would we have merely seen a reply of the Iraq invasion, lots of videos of bombs being dropped and missiles being launched? msnbc-no-iran MSNBC is merely doing what the rest of the commercial news sites are doing. ALL of the commercial news sites have decided that Michael Jackson is far more important than . . . well . . . everything else combined. See the thumbnails below to see the home pages of CNN and ABC. What do these news priorities say about our commercial news businesses, and what do they say about us as commercial news consumers? I'd suggest that this fickle coverage suggests that the commercial media doesn't take its job seriously. Not at all. cnn-not-much-iran abc-barely-mentions-iran Absolute insanity.

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It’s 2009

The June 8, 2009 edition of Missouri Lawyers Weekly (not available online) reports that only 1 out of the 17 current judges sitting on the United States Eighth Circuit Court of Appeals are women. Her name is Diana Murphy and she was appointed by a Republican. All nine of the appointments to the 8th Circuit since 1994 (when Murphy was appointed) have been men. Each of these appointments is made by the President of the United States. To put this in context, 47% of the people receiving law degrees in 2007 have been women. Another note: Of the 179 total judges sitting on the 11 U.S. Courts of Appeals, 26% of them (47) are women.

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