However, when a story (or narrative) becomes accepted wisdom it pays to challenge its central premise by considering alternatives.

A recent article in The Australian lays out some very compelling reasons why China’s rise may be a rollercoaster.

The basic premise of the article is that:

“With few financial alternatives to beat inflation, Chinese savers buy real estate, even if supply soars ahead of demand.

Between 2006 and 2010, investment in residential property jumped by half, to about 9 per cent of China’s gross domestic product, according to Mr Lardy. During that time, real-estate prices in major cities in China roughly doubled.”

This could have profound impacts on the Chinese economy. But, because of the undeveloped nature of the economy and the high level of domestic savings, it will not have the same consequence as the asset deflation that has occurred in Japan and the US (following their respective housing bubbles popping).

The other major difference between Japanese and US crashes is that the Chinese are not reliant on consumption to fuel their growth. The steady investment in infrastructure is what drives economic growth in China – not relying on house price growth to fuel future consumption.

Don’t believe me? Then try this trivial example.

What did you find? Interestingly, the majority of people are biased towards questions that are framed in the positive rather than the negative. It is a major bias that underpins much of our collective decision making.

As a consequence of this bias, humans are far more likely to believe they will be rich, that they will not die of various horrible diseases, and that they will not suffer a terrible accident.

When it comes to unfounded optimism, entrepreneurs are the worst of a bad lot!

Knowing that the failure rate is over fifty per cent in the first year, and that the majority of people in business just manage to eke out a living, still hoards of entrepreneurs take the plunge and start their own business.

Why? Is it the fancy perks like short work days? I doubt it.

Are they driven by a burning desire for job security? If so, they would be in the public service.

The truth is they need to be optimistic. To face and overcome adversity requires a focus on a positive outcome. Without this focus, you would be unable to achieve success.

The very worst thing an entrepreneur could be is pessimistic. A focus on failure all but ensures it.

I think the human race is better off with optimism as a bias – we are surrounded by such awful events and terrible tragedies ever day that this simple mental trick helps us keep on keeping on. It is a psychic shield to the terror of the cosmos (sorry for that slip into sloppy speaking – bad form for an economist!)

Consider how the words ‘nuclear’ and ‘green’ have influenced recent events. ‘Green’ rationales have been invoked to justify all sorts of rubbish. From the Federal Government’s industry protectionism of the Green Car program (why not simply transfer $100 million to some of those email scammers – there is more chance you’d get something valuable back!)

The Grattan Institute has released a report analysing 300 programs that have been introduced by various Australian governments to ‘respond’ to climate change. Amongst the worst offenders, as reported by the Australian, were:

“The cost of some solar programs was a direct fiscal fraud with estimates of the net cost of emission reductions up to $300 per tonne.

The bipartisan Renewable Energy Target, actually backed by the Grattan report, had its subsidy cost estimated at a high $30-$70 per tonne.”

Contrast this with the focus of the media on the nuclear reactor saga that emerged in Japan after the terrible events earlier in the year.  The fact, outlined by the sometimes good, occasionally repulsive Andrew Bolt, is that the media narrative (driven by our human interests) focused on the unfolding drama of the nuclear power plants while totally ignoring the over 10,000 people whose bodies were being uncovered from the rubble of the catastrophic tsunami.

What is the fixation on nuclear meltdown? It is a high tail risk, something humans are bad at estimating, and something that we can imagine fairly easy.

So it becomes fascinating and ‘newsworthy.’

Growing up in Queensland and particularly in the Gold Coast, there was an intense period of xenophobia directed at Japanese investment. At the time, the fears were that the Japanese were buying up all the land. This got to such monumental levels it launched the One Nation party.  Stupid!

Where would Australia be without Japanese investment? The doldrums. Yet the same concerns are now focusing on Chinese investments in Australian farms. So much so that the Australian Bureau of Statistics will now be collecting data on foreign ownership of agriculture. It has been reported that National’s leader Warren Truss said:

“foreign interests – both government and privately owned – are targeting farms in Australia to shore-up their own food security… In many sectors Australia has already lost effective control over its food supply chain and decisions about our food supply are being made in foreign boardrooms.”

Rubbish! The more other nations invest in Australia the more their long-term prosperity is tied to our continued prosperity. (It’s mutually assured bankruptcy!) After all, if the Chinese government were to direct Australian owned farms to undertake inappropriate action do you really think that the Australian government would stand idly bye?

The true danger of the ‘Yellow Peril’ is that Asian countries will judge Australia as a nation of narrow minded bigots and they would prefer to take their filthy lucre elsewhere.

Would you blame them?

It did not happen by chance.

The reforms instigated by first Hawke, then Keating and then Howard did more to ensure our nation’s current prosperity than the incredible terms of trade we currently experience. After all, Australia has had positive boosts from terms of trade before and every time we squandered it by experiencing a mini boom followed by a major bust.

The major issue of this point in time is the level of political discourse. The money quote is:

“Its (Australia’s) current political leaders are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture…The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults.”

We have a real opportunity to establish our nation as a world leader. The decision is between “enjoy our prosperity now” or “creating a society that continues to create prosperity in the future:”

“They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate.”

The 20011-12 budget brought with it very modest reforms to the extensive system of middle class welfare in Australia. It put in place some measures that would freeze family payments to couples earning over $150,000. Opposition leader Tony Abbott said:

“People who want to get ahead are being screwed over by the Government. It’s a class-war Budget in that sense, and these are class-war cuts that the Government is inflicting on people.”

The way that the opposition carried on you would think that the government was proposing to turn off the lights!

Andrew Robb, the Coalition’s finance spokesman told The Weekend Australian:

“The cost (of cuts to family payments) happens to equate to the blowout in border protection. If you didn’t have this waste and if you took better decisions, then you’ve got more discretion about how you can spend the money you have got.”

This is farcical.

If the amount is so small that it can be found from other public programs then why complain about it? I know, it makes political sense to make a case about it – but any family earning $150,000 should not be getting funding from the government! It fundamentally misrepresents the purpose of the government and means that the funds are not available for those in true need.

The government, in a modern society, can play an important role for helping its citizenry deal with extreme events (like major floods or terrible sickness).

It is simply not possible for every person to receive a cheque from the government. Someone is paying for it!

Malcolm Turnbull, please his political deafness, said at a post-budget lunch in Sydney on the 13^th May:

“We cannot continue to indefinitely expand the welfare burden and the welfare net, if you like, in government.”

Turnbull’s far better approach is to adopt income-splitting.

“That’s why I’ve always been an advocate…of income-splitting, rather than directed payments and the reason for that is you can say the net position is the same, but there is a profound behavioural difference, a psychological difference between saying to someone because you’ve got a bunch of dependents, a lot of children and so forth, you will pay less tax.”

Unfortunately that is never going to happen in Australia. Even the modest freeze (the ‘reform’ was simply not to index the payments! How pathetic can you get?) announced in the Budget have been dropped by a government running scared. The Prime Minister now says:

The government says under its measures, the maximum rate of family tax benefits will be fixed at $726.35 for Part A and $354.05 for Part B until July 2014.

The $150,000 income test on the Family Tax Benefit Part B, the baby bonus and paid parental leave, will also be fixed until July 2014 instead of increasing with CPI.

The Prime Minister went on to say:

“So the family payment system (will) go back to the normal indexation arrangements after that.”

My response is to quote that fine example of a public servant, Sir Humphrey, and say: “Very courageous Prime Minister.”

Take this quiz and see what I mean from a trivial (but illuminating) perspective.

Is Western Australia going the same way? Given the role of the mining sector in the State’s economic performance, and the dominance of China, it is worth questioning some of the underlying assumptions of this view. Centre for Independent Studies Research Fellow, John Lee has an excellent article on China’s growth that is well worth considering.

Lee’s main argument is that:

1. China’s demand for commodities is being driven by property speculation; and
2. As a consequence, China has major ‘ghost cities’ that are being built and are sitting vacant.

The money quotes from his excellent article are:

“Let’s look at the argument that urbanisation is the primary driver of growth in Chinese demand for commodities such as iron ore. We often hear the mind-boggling figure that around 15 million rural Chinese are moving to cities every year. But the urbanisation rate is only slightly above 1 per cent each year. Yet, Chinese consumption of iron ore has increased by 80 per cent since 2003. China’s own economic and social planners estimate that they can reduce steel production by one third and still meet demand resulting from ongoing industrialisation and urbanisation.”

The reason for the gap?

“In the first half of 2010, a Chinese report revealed that 64.6 million urban electricity meters registered no electricity usage. This amounts to unused housing that could accommodate 200 million people. Andy Xie, the former chief economist for Asia at Morgan Stanley, crunched his own numbers and estimated that residential vacancies for commercial housing is around 30 per cent. Speak to Chinese middle class property investors and they will tell you that they buy property not to rent but to hoard as assets – in the same way one buys gold.”

Lee’s basic point is that investors are ‘hoarding’ property and that Chinas voracious demand for commodities is a result of internal policy failings and is not viable in the long term.

I’d highly recommend looking at the entire article.

Don’t get me wrong. I believe that the Chinese industrialisation is powering the HUGE build up in commodity prices. This, in turn, is spurring on business investment and the extraordinary growth of the WA economy. However, it is always worth entertaining contrary views to make valid decisions. To ensure you are not caught up with the herd, ask yourself the following questions:

• What impact would a Chinese economic collapse have on your business? Your personal finances?

From expensive personal experience I’ve found it is always better to ‘measure twice and cut once’ when it comes to major financial decisions. This means, when you hear a narrative gaining traction, always look for the Jeremiah crying it is a fraud. They will generally be wrong, but it will make your decisions that much stronger.

Recent policy decisions at the Federal and various State levels are absolutely appalling. From the in-conceived minerals tax, poor investments ranging from the ‘education revolution’ through to the NBN, and changes in labour agreement arrangements, Australia has become a less productive place to work.

The consequence will be felt by business first (think Green to understand what I mean) but, inevitably, by households. The day of reckoning can be delayed (thank you China!) but it will happen.

This may result in nurses dealing with aggressive patients being paid considerably more than other nurses – but shouldn’t they be compensated for doing more disagreeable work? The fact that a male nurse was stabbed to death looking after such a patient indicates the challenges associated with the role.

Pay them more and ensure whoever volunteers to do the work can do the work. This will involve both males and females (probably more males but not exclusively so). It may result in these nurses being paid a lot more than other nurses – but then they are doing a very difficult job.

Not differentiating pay for much harder work is stupidity.

The case ignited when a male nurse complained to management that he was being discriminated against when he was forced to deal with aggressive patients. It had been the formal operating procedure in many hospitals for male nurses to deal with dangerous patients rather than their female counterparts.

The state bureaucrats have attempted to stop the practice as it is against antidiscrimination laws. In December 13, Darling Downs-West Moreton Health Services District mental health executive director Shirley Wigan told staff:

”There may be instances of directions being provided around managing . . . aggressive behaviour which suggest that some managers prefer male nurses over female nurses. ‘There should not be a standing order in any facility that female nurses should not respond to aggressive patient situations. This must be assessed on a case-by-case basis.”

In response, a female nurse (women make up the majority of nursing staff) stated that the above memo was in breach of occupational health and safety regulations. These antidiscrimination act regulations require employers to work to ensure a safe environment and allow clear exemptions in order to do so.

The complaint read:

”The number of vicious assaults has increased due to the negligence of management and senior medical staff to provide a safe working environment.”

Don’t be mistaken. It is still dangerous for male nuses to look after dangerous patients. They just have (on average) a biological edge.

So: Is it sexism to have force male nurses to deal with dangerous patients OR is it stupidity to not have them do so?

Professor Warwick McKibbin, a Reserve Bank board member, spoke at an inquiry and stated that most economists agreed borrowing was better than taxing to fund recovery from disasters. He went on to say:

”The analogy is the case of a person whose house is damaged after a storm. It does not make sense to stop eating until enough is saved to rebuild. A better strategy is to borrow to rebuild and to reduce consumption a little each year to pay for it.”

Economist Saul Eslake, of the Grattan Institute, said the decision to raise money by a levy rather than borrowing was ”political” rather than economic. Borrowing would have had ”no adverse implications’.” He said:

”The Queensland government is taking on an extra $4.8 billion in debt as a result of the floods. No one is suggesting, and nor should they, that is going to put upward pressure on interest rates.”

The flood levy is a dumb idea.

#NBN #flood #Australia #Queensland |

In the Australian Financial Review (you can access the article via short term subscription), the director of Research and Policy at CEDA, Michael Porter, lays out how simply tweaking the proposed National Broadband Network would enable savings of $15 billion. These savings could come by simply using the existing Foxtel and Austar networks rather than replacing them.

Unfortunately, that would require a ‘sputnik moment’ – and they seem to be reserved for the US!

This week saw a fantastic example of this tendency as Senator Stephen Conroy ducked and weaved in an attempt to defend his white elephant of a national broadband network.

Previously, Senator Conroy has justified the MASSIVE investment that the NBN represents by indicating how successfully IT investment has served South Korea. When, just last week, The Economist’s Economic Intelligence Unit said that South Korea’s broadband network was superior to that proposed for Australia – and it didn’t have anywhere near the same price tag. Suddenly it was not appropriate to compare Australia with South Korea. It’s like comparing ‘apples with oranges.’

Maybe so, but in that case please don’t use the comparison to justify the investment decision. Conduct a realistic cost-benefit analysis and if the investment is objectively justified go for it!

It is deeply suspicious that the Government has not undertaken a cost-benefit analysis at all. Could it be that sometimes not even the confirmation bias can justify a bad decision?

Innovation and government are mutually exclusive words.

Despite being the single largest infrastructure investment in Australia’s history, it has a paper thin business case.

The government has consistently refused to undertake a robust cost-benefit analysis (because: what would that show after all?). Finally, the technology of the NBN is outdated anyway. This has been discussed here, here and here.

Interestingly, today Telstra announced plans to replicate the US approach of delivering high speed broadband – reliant on new 4G technology rather than fixed cables. Telstra plans to triple the speed of wireless downloads starting next year. This is to meet the demands for mobile data which, according to chief executive David Thodey: “… is doubling every year as customers move to adopt data-hungry smart-phones, mobile modems and tablets.”

Humans are a diurnal (daylight living) species and our natural instinct is to go to sleep as the sun sets. The more capacity/inclination that someone has to override this instinctive response the more intelligent they are.

A study linking the sleep patterns of kiddies with their IQ finds a strong correlation. The more intelligent the kid, the later they went to bed. While I think the reasoning is pretty shaky, I can’t help noticing that people in Melbourne start going out in the evenings about the time that Perth residents go to bed. WA should have voted ‘YES‘ to daylight savings.

While Skinner took the idea too far, there is a well proven finding that humans seek reason in randomness.

Take the class action settlement in history that manufacturers of breast implants agreed to in 1994. The $4.25 billion dollar settlement was the largest in history at the time. As part of the deal, women would have to produce medical records showing that they had implants and one of the many diseases said to be caused by the implants. But they didn’t have to produce one shred of evidence that the implants had caused the disease!

Why did the manufacturers agree to such an outrageous deal? The inability of the human mind to appreciate randomness.

There was no evidence that breast implants resulted in any disease. When the case was settled there was no conclusive medical evidence about the danger of breast implants. Rather, according to the Marcia Angell, editor of the New England Journal of Medicine and subsequent author of Science on Trial: The clash between medical science and the law in the breast implant case, “What we saw in the courtroom and in much of the media were judgements based on anecdote and speculation.”

In 1982 a woman in San Francisco sued implant manufacturers, demanding millions of dollars for making her sick. The media reported this case widely, resulting in many more women coming forward with diseases that they blamed on their breast implants.

In 1990, an episode of Face to Face with Connie Chung aired on CBS. Many women tearfully told stories of their pain and suffering. They blamed their implants, as they came first and then the disease followed. Connie agreed.

The publicity grew. Advocacy groups targeted breast implants and congressional hearings were held. Under this intense public pressure, in 1992 the US Food and Drug Administration (who had responsibility for overseeing the implants) required manufacturers to produce evidence within 90 days that implants were safe. The FDA was unimpressed by manufacturers response and banned them in April 1992.

The reason for the huge settlement without proof? A constant stream of women who had breast implants and suffered disease. The intense emotion that these people suffered from must have a reason. Unfortunately, like the poor pigeon, there was no scientific link between the implants and their sickness.

Sometimes, people just get sick.

The central problem for the government is that the budget does not need to be balanced for any reason other than because they said they would. They committed to a surplus to ‘prove’ their fiscal conservatism and they would pursue it regardless of what happens. A flood? No problems, a new levy will fix it.

A bad and unnecessary idea.

Economists have two fantastic terms that the PM should familiarise herself with:

These phrases would have been invaluable because the PM could have said, “Sure, we committed to having the budget in surplus by 2013, but this commitment was made ex ante the worst flooding Australia has seen in living memory. Now, ex post that event, we are going to postpone that date and get on with rebuilding the nation.”

Click here to view the embedded video.

A one off levy might be necessary if Australia had a Greece style financial situation. But we don’t. The Australian government has one of the strongest financial positions in the entire world (Arab oil nations aside).

This flood levy will not end well!

PS. Please don’t call it a ‘mateship’ tax. The charity that was shown to the victims of the floods was wonderful to watch. This tax is like tying someone up in your basement and then calling them your best friend.

The Reserve Bank has been categorical in its concerns that inflation is going to be the biggest policy challenge confronting Australia over the next few years. As a consequence, in Australia we can expect interest rates to begin to rise rapidly. Yeah!

Internationally, the challenge is quite different. Low growth rates, and high levels of capacity under-utilisation, mean that most industrial countries have almost zero chance of inflation in the medium term.

The reason deflation is a problem is that when people throughout the economy begin to expect that prices for goods and services will be cheaper tomorrow than they are today – they save their money today. As a consequence, everyone starts to put off buying anything in the assumption that it will probably be cheaper to buy tomorrow.

A deflationary cycle is a potential challenge for the world economy because as prices fall business make less profits. In turn, they begin to lay off staff, who in turn put off spending on goods and services. As a consequence, a vicious cycle develops where no growth is possible. This theoretical danger actually occurred in Japan and robbed it of growth for over ten years – the 1990s are known as the decade that disappeared. Despite having interests rates at effectively zero percent, Japan experienced no real economic growth for a very long time.

This is  a very real risk for much of the industrialised world – but not for Australia. Here the resources boom is providing a massive stimulus that is generating our inflationary pressure. However, if deflationary pressures emerge throughout the world, then Australia will not be spared.

A few sales  are a good thing. An economy on fire-sale is not!

This is fascinating in that it also extends to not just weights, but also all stimuli such as the intensity of light or colour. It also extends to our capacity to judge the world around us which is strongly biased by its initial conditions. The relationship is so consistent it is known as the Weber Law.

For entrepreneurs, the Weber Law means that people will evaluate buying your decision based on the proportional size of the discount being offered, not by the amount of money you have reduced the price by.

The Boxing Day sales are a classic example. The crowds gush in to the shopping centres as they struggle to get discounted products they would have ignored just two days before. In fact, people have been hurt in the orgasm of consumption the sales unleash. Ironically, if a large purchase (such as a bed or BMW) was discounted by the same amount of money it wouldn’t motivate them to take any action at all but they will brave the restless hoards to save $50 on a pair of shoes.

What does this mean for an entrepreneur? Sales can act as powerful incentives for people to buy something, but they need to be a large proportion of the price of the good or service. If they aren’t, then do not use it to motivate people to take action.

Time

• incredible levels of investment;
• a productive & vast workforce; and
• intensive investment in education

as factors that will ensure China moving up the ‘food chain’ as other industrialising countries (such as South Korea and Japan) have and incredibly improving its own level of wealth while threatening the wealth of the US.

BUT the article overstates the challenges to Western economies. It does so by understating the strength of Western economies and not recognising the frailness of the Chinese economy.

Take Australia for instance. Australia has undergone incredible reform in its economy so that there is a great deal more freedom and flexibility than it has ever before.

Starting in the 1980s, successive Australian governments introduced a raft of reforms, such as floating the exchange rate, liberalising the workforce, and numerous micro economic reforms, that have revolutionised our economy. As a consequence, our economy is far more capable of adjusting to macro economic shocks than ever before. This is why there is not 20 per cent interest rates and runaway inflation due to the incredible resources boom we are experiencing.

In contrast, China has a command and control economy that is very similar to Japan’s or South Korea’s during their industrialisation. This approach works well initially, when you are playing economic catch up, but tends to fall in a heap when confronted with the need to change.

Take Japan which experienced strong growth for decades until it became one of the biggest economies in the world. Yet when things imploded (because of a property bubble) it lost over a decade of economic growth and has yet to really find its feet again. It is still in stagnation and is also burdened by ludicrously large financial burdens.

Western economies have, by in large, a greater capacity to undergo extraordinary change because of their greater levels of freedom. The values of equality make them attractive places to live and will continue to allow greater inflows of migration of the best and brightest from around the world. While there can be a great deal of anxiety as the economy changes, and the change may result in slightly lower levels of prosperity, but they will adjust.

As I write here, consciousness is a very limited commodity and so our brain has shortcuts so that we do not spend all day focusing on irrelevant or trivial issues – like anything on daytime television.

There are two ways we ‘hoard’ our consciousness. The first is our brain learns to ‘take in’ more of the experience of life so as to learn to absorb concepts and ideas at a quick pace. Consciousness is also hoarded by our capacity to automate experiences and habits so that they do not require conscious thought. Both aspects of consciousness expansion help reduce the amount of attention that we pay to advertising.

This is important for anyone involved in marketing. Advertising is not something that humans have always done.

Before we had fast food drive throughs there was no need to advertise the wholesomeness of McDonalds. Before we had cars, there was no need to tout the wares of Jaguar over a Ford or Holden. In fact, since most of humanities history has been one of struggle rather than excess, advertising is a relatively new phenomenon to us as a species.

If you have ever watched an old add, something from the forties or fifties, you will realise how much advertising has changed since then. Rather than telling people endless details about the product, advertising now tends to focus on linking an emotion or value with the good or service it is whoring. It is a ‘profession’ that is evolving.

Advertising is still going through this learning process, particularly as we as a society, adjust to advertising’s demands on our attention. The latest trend is for adds to become shorter than ever. In fact, many ads are now down to just 15 seconds. It was not that the standard for adds was one minute (one whole minute of an add! Perish the thought)

Shorter ads are a result of short attention spans. Our consciousness is so use to mobile phones,Facebook updates or blackberry beeps that it is less possible to hold people’s attention on an ad for as long as it used to be. This Times article notes that the number of 15-second television commercials has jumped more than 70 percent in five years. They made up 34 percent of all national ads in the US on the air last year, up from 29 percent in 2005. The article goes on to say:

“More than half of commercials run by packaged-goods companies and 60 percent of fast-food ads are 15 seconds, according to Kantar. The advertisers simply show a picture of the products, flash a price and the brain knows what the marketer means.

Take the new campaign for Burger King, which is selling its breakfast options. A 15-second ad airing now features a mailman walking down the street carrying a plate of eggs, pancakes and hash browns. There’s no verbal description of the product. Instead he sings: “Did you know that breakfast was served at Burger King? The ultimate breakfast platter. That’s what I call delivering.”

Our brains have been conditioned to interpret visual information very quickly. As a consequence, we see and understand the ideas the advertisers are pushing at a very fast rate.

Many successful businesses use the story of the owners as the basis (think Kentucky Fried Chicken and Colonel Sanders) of their business.

The New York Times has recently run a story on a start up company whose entire business model is based around utilising individual stories to convey a personal narrative to enhance their sales. Their business involves wholesaling drugs to pharmacies across America. They use their grandfather’s personal experience as a pharmacist in the Great Depression as the basis for their business. Some canny entrepreneurs are already using this as the basis of a unique business model. Their story starts with their grandfather, Abe:

“Owned a neighbourhood pharmacy, Polin Drugs, and worked behind the counter. His father and two sons lent a hand. When people could not afford doctors during the Great Depression, they scraped by on Abe’s free advice. He kept the doors open until midnight. He knew his customers by name.”

The web business connects drug companies with pharmacists but uses the individual stories to build a connection. A historian and brand expert from the Harvard Business School, Nancy F. Koehn, described their approach as:

“About humanising the businesses and connecting who they are with the imputed values of their target customer set. That’s a long way from ‘four out of five dentists recommend Trident for their patients who chew gum.”

Given they are about to make $1.5 million in their first year in business, they must be doing something right.

But any narrative needs to be consistent with what you actually do. Without that consistency you are not much more than a cheap used car salesman who would say or do anything to move a rusty old bomb sitting on the lot (talk about a set of implicit assumptions linked to a job!).

A great example of what can happen if you ‘just make up’ a narrative without making it meaningful to your business has recently emerged in the US. It involves a band called the Insane Clown Posse (ICP) who, after 20 years of hard core rap music that exhorted violence and ignorance in profound terms, has recently revealed that they are evangelical Christians.

For the last decade, ICP has not been about encouraging its listeners to rape and pillage. No, their true purpose has been to try and get their listeners into church to pray. Yeah. Check out some of their lyrics and make up your own mind:

I’m hating sluts

Shoot them in the face, step back and itch my nuts

Unless I’m in the sack

Cos I f*** so hard it’ll break their back.

Now ICP is surprised that they are suffering a backlash from their ‘revelation’. What I find most amusing is that they are offended by the backlash! Almost as though they don’t understand why someone would be disappointed after they said they’ve been trying to deceive people for 20 years.

Their ‘business’ problem is a lack of consistency between who they claim to be and what they do (in addition to the undoubted moral problems). They failed to demonstrate consistency between what they represented themselves as (violent rappers who dressed as clowns – literally!) and benevolent Christians who are taught to turn the other cheek…Now they are revealed as real clowns.

A lesson can be learned from business. While a powerful positive narrative can do wonders for your business, it has to be built on truth. People will expect consistency from you. Without that consistency they will turn away from your business faster than you can say ‘Flash Gordon’ and you will be reviled. If it ever emerged that the Body Shop used child labour to test its products on animals (OK – that’s unlikely!) then it would all be over for the company and they may as well shut the doors.

One final piece of advice: if you ever come across a Christian who tells you that you should ‘Shoot a slut’ I’d suggest not believing anything they say and to start walking in the other direction immediately!

Before I answer, I have some good news and some bad news for female entrepreneurs. First the bad news: you are going to die. Before you die, if you are lucky you will lose your good looks and your body will fall apart. Your skin will become wrinkly and your hair will fall out. If you are really lucky this will happen well after all your friends and immediate family have died and you will be alone and very frail when it happens at a very ripe old age.

The not so bad news, but still bad news for female entrepreneurs, is that they face unique challenges from society’s stereotypes of females and the implicit assumptions that are against them. In particular, being an entrepreneur itself is something that is considered to be a male domain.

Think about a doctor. Not your doctor, just the profession. Now, what gender is it that you are thinking about? I can almost guarantee you will be thinking of a man (and he’s probably wearing a white outfit with a stethoscope).

While not as strong, the same assumptions hold for entrepreneurs simply because males in our society typically undertake more risky activities (hence their higher levels of death while young).

Ok, having got that out of the way absolutely anything I say now will be good news. However, the particular good news I have to say is that there are a range of positives about being a female entrepreneur that can more than compensate for the negatives. More than compensate.

Some of the really positive stereotypes are that women are more ‘nurturing’ and more ‘collaborative.’ As a consequence, female entrepreneurs have a real advantage at convincing people that they have great HR skills. (Think of Julia Gillard and her avowed declaration to lead a more ‘inclusive’ government than K Rudd’s dictatorial style of leadership.) Of course, the truth is in the tasting as my grandmother used to say.

More good news is that it always helps to be unique. Having fewer ‘competitors’ enhances your uniqueness and means that you are more likely to get noticed and be interesting to people. So the fact that most people don’t see women as entrepreneurs means that you, Rebecca, are actually at a really strong advantage.

So there are problems for female entrepreneurs. If they play their cards right they can compensate for these problems and learn to lead with their strengths.

One guilty sin (that I am sure you will want to continue indulging once you’ve tasted) is the TV series Mad Men. It is fantastic! One of the best programs I have every watched in my entire life. The show is a farce set in the 1960s. While it is compelling viewing, with tight dialogue and fantastic acting, what I love most is the mindsets the characters portray. There is overwhelming sexism (so much so that you cannot help but root for the first woman in the office who graduates from typing pool into a managerial role), as is the racism and homophobia.

I find it hard to appreciate how much our society has progressed in terms of equality until watching a show like Mad Men where the women are the subject of scorn and abuse. Meanwhile the African Americans are referred to as ‘boy’ if they are even noticed by the characters in the show. Read this quote from a professional reviewer of the show:

“To people who actually lived through the 1960s, the sexism of their culture didn’t seem dramatic; the men who objectified and infantilized women probably bore no specific malice, and the vast majority of the women who found their lives constrained by those men didn’t imagine that things could be different. Their oppression was invisible, because it was normal. In other words, they were like us.”

Perhaps the greatest subject of pity is the wife of the lead actress. She has everything that a woman of the time could aspire to – successful and handsome husband, beautiful house and two kids. She has it all – but the show focuses on her complete hollowness as she tries to live up to social norms rather than live her own life.

While modern Australia has many problems, at least we have the freedom to pursue our dreams and our passions to the limits of our abilities. When you contrast it to what has been before, it is an amazing liberty.

These snap judgements effect everyone, male or female, black or white or any shade between. They are particularly important to the entrepreneur in business, as your customers and those you hope to be your customers will not give you the time of day if you don’t appear to be the type of book they are looking for.

A quirky new study highlighted how trivial things about a person, which have nothing to do with their capacity to deliver a product or service, have profound impacts on the way others perceive them. The study examined beardedness on the perceived credibility of a salesman and on whether consumers purchase from them for a variety of products. No seriously! Apparently a man with a beard is perceived to be more credible and to have a positive influence on someone’s purchasing decision – but this impact only relates to certain products.

These people must be infinitely relieved!

It makes intuitive sense that people will make snap judgements about you as a person. I just never thought something as trivial as a beard would make a significant difference on someone’s decisions.

The current scapegoat is the dreaded focus group. Apparently, according to Rod Cameron on ABC1’s Lateline the Labor implosion was driven by an over-reliance on focus groups dictating their political message.

Rubbish!

The problem that Labor (and to a high degree, but slightly less extent, the Liberal party) experienced, was that it pandered entirely to the focus groups. It failed to develop any policies that were more than responses to what appeared to matter to a small group of people.

The new Prime Minister elect (sort of) went so far as to say:

Labor had heard strong messages during the campaign and MPs would be asked to contribute to a serious review of the election and the party’s future direction.

As a consequence, she is promising a party that is focused on its ‘heart’ and dumping the culture of spin.

Hopefully she means it.

Focus groups provide a very good indication as to what exists in peoples ‘evoked set.’ That is their unthinking responses to ideas and thoughts. These responses dwell in our survival system of thinking. It is important for politicians to understand and deal with these implicit responses. Otherwise they have grand ideas and fail to sell them to the public (aka John Hewson and the GST).

Focus groups tap into our survival brains method of thinking about issue. Unfortunately they utterly fail to engage the conscious and more developed parts of our brains. As a consequence, over time we become conscious of the ‘tricks’ the politicians are playing and switch off from them. This may help explain why this election saw the highest level of informal votes on record.

I believe the absolute failure of both sides of politics to provide a constructive and meaningful narrative is the underlying reason for the hung parliament. Someone I respect described the election result as ‘two vacuums colliding.’ This is a perfect analogy in my opinion.

The whole story goes:

A GROOM accidentally killed three relatives at his wedding in Turkey yesterday when he fired into the air with an assault rifle in celebration.

The Anatolia news agency reported eight other people were wounded at the incident at the village of Akcagoze in the south-eastern province of Gaziantep.

The groom unleashed a volley of rapid aerial shots with an AK-47 rifle to celebrate his nuptials, but quickly lost control of the weapon and accidentally raked the guests with bullets, the report said.

His father and two of his aunts died in hospital.

Hopefully  my advice will stop some future  groom from decimating the bridal party.

Peaceful Muslims should “refudiate” the mosque planned near the World Trade Center site.

Sarah Palin has recently compared her use of the English language with that of William Shakespeare. I’ve previously written about how incompetent people are and how they lack the self awareness to gauge their depths of incompetence…But there is no way I would have thought it was that prevalent! Unbelievable! You simply couldn’t make up it up. Its even better than robot zombies!

If you want to add your version of Palin verse, there are some good entries here.

English is a living language. Shakespeare liked to coin new words too. Get over it!” tweeted the former GOP VP candidate.

An interesting article in the New York Times more accurately describes the evolutionary pressures that resulted in our modern brains when it describes a recent find of 78 flint tools dating back more than 800,000 years ago. The ecosystem in which early humans lived in Great Britain was described as:

The world at the time confronted serious climate change in the form of global cooling. It was the middle of the Pleistocene, the last great ice age that ended 10,000 years ago.

The dense Northern European forests of the Pleistocene ice age contained few animals or edible plants, but food would have been more abundant in the flood plain where the flint tools were found. Mammoth, red deer and elk grazed the grasslands, preyed upon by two species of saber-toothed tigers, the dirk-toothed cat and the scimitar-toothed cat.

The early humans living at this time found themselves filling the role of lower scavenger in this ecosystem. Right behind the giant hyenas that feed off the kills of saber‑toothed tigers.

The world our ancestors grew up in was brutal. Their lives were often short because of it. Our brains capacity to understand the world evolved because  of the pressures this created until such a point that we’ve been able to kill off the saber‑toothed tiger and the giant hyenas. Their legacy resides in how they’ve influenced our brains.

This thinking failure can be used any time the sales process engages peoples’ sense that they already own the product. Whenever they start to make decisions about the product / service and what it will ultimately look, feel and be like, then the sale is much closer to being made.

For example, this technique is used when you go to buy a car and, rather than discuss the price, they ask you what ‘extras’ you want in the car. This involves you deciding what features your car is going to have and the eventual price you are going to pay is eventually dependent on it.

It is also used by good salespeople when you are looking at a house. They should , if they are good, ask questions / posit scenarios where you start to imagine you are already living in the house.

The greater the emotional sense of ownership that is induced by the sales process, then the greater the likelihood that the potential client will become an actual client.

How do you let your customers customise your products or services? And if you do, are you asking them to change their eventual product or are you asking them to change your product?

I suffered from this just the other day when my decision to buy a suit was ‘manipulated’ by a good salesman.

I’ve mentioned before how easily our sense of self merges with that of a ‘tribe’ with significant implications for how we evaluate decisions. Well, it is true for inanimate objects as well.

For instance, I’ve read that people with bumper bar stickers are more likely to express road rage when their car’s ‘personal space’ is invaded. This is irrespective of whether their sticker say’s “god loves” or “magic happens.” These people have made a stronger link between their sense of self and their car. Alas, I cannot find the reference right now. The effect, however, is fairly well understood.

Knowledge isn’t everything. Even though I knew about the thinking flaw, I was unable to recognise it at the time it was being used. While I had a slight sense of ‘unease’ I went ahead with the purchase anyway.

A canny salesman used this thinking heuristic to ‘assist’ me in buying a suit. I went to town with the purpose of buying a new suit, something I do once or twice a year at most. Because of its infrequent nature, I’d planned to try on a wide range of suits and spend a couple of hours doing it. However, the salesman subtly induced my sense of ‘ownership’ and, as a consequence I bought the first suit I tried on!

In this particular case, I’d visited a number of stores to compare sales prices. When it came to trying them on, I went to one I’d been to before as they give good service.

When I tried the suit on it seemed to fit well. The salesman even confirmed the fact! Then he did a cute trick that ‘smoothed’ the purchasing decision. Rather than ask if I wanted the suit, he asked me to extend my leg so that he could adjust the cuff. Implicit, although never stated, was that it would be used by the tailor to make it fit me perfectly!

The salesman even went so far as to say, “It will hardly require any work at all!”

Now, as soon as I extended my leg I’d made a very large commitment to purchase that particular suit. When the pins went into the leg, it became ‘mine’ rather than one off the rack. This made it much harder to back out of the purchase. I did, in fact, make the purchase then and there.

This technique linked my sense of self with the suit in a very mild and subtle manner. Rather than comparing suits for the next few hours, I went with this one. After all, it fit me so well it hardly needed changing!

Entrepreneurs can use the characteristic that we extend our sense of self identity to objects in our possession to smooth the sales process. We are far more likely to pay for something we already own (even if only in our minds) than for something we have no attachment to at all.

We process the world through stories – we process the relevance of information to the degree it fits in the context of these stories or it is ignored. Furthermore, information that doesn’t fit into our preconceived notions is often ignored (it’s called the confirmation bias).

It is vital to know and understand this human tendency if you wish to be successful in business as your clients are evaluating what you do by the story that you tell. Not by the information on your business that you provide.

The narrative of your business will be the way in which the various ‘implicit assumptions’ about what you do and why you do it get combined in the mind of your customers.

Lets pick apart some of the basis implicit assumptions of a businessperson and see how they fit together:

Clearly, a business person is doing what they do to make money. Therefore, the implicit assumption is: ‘they are trying to rip me off.’ Whether someone is or not.

If you are a new entrepreneur, the implicit assumption is that you are not ‘established’ and are somehow ‘risky’.

There will, inevitably, be implicit assumptions derived from your business that are unique and need to be managed. Consider the Body Shop. What does the company stand for? How does it reinforce this message?

Let’s start our consideration of the Body Shop by considering the implicit assumptions of cosmetic products. There is an implicit assumption that an element of ‘narcissism’ is involved with cosmetics – they are about image rather than substance. While this isn’t the only belief about cosmetics, it is summed up by the cultural adage “beauty is only skin deep.”

How does the Body Shop counter this? They focus their business around the story of how they are environmentally sensitive and that their products make the world a materially better place by helping those who are less fortunate. The Body Shop’s narrative is that it is not limited to profit (it doesn’t deny the implicit assumption that profit drives entrepreneurs) but by socially responsible principles. The Body Shop says :

At the heart of our business are our values. In everything we do we are committed to helping protect the planet, defending human rights, activating self-esteem, supporting community trade and remaining strong on our stance against animal testing. It is not just part of our jobs – it is part of our corporate DNA!

The founder, Anita Roddick herself said:

“they would offer a two-for-one sale no other cosmetic company could ever hope to match: buy a bottle of ‘natural’ lotion and get social justice for free.”

They exemplify this strong narrative through a number of key ways; the use of recyclable materials; not testing cosmetics on animals; by campaigning to save Brazilian rain-forests and so on.

All these actions reinforce the central story that the Body Shop is telling. Once this narrative is established in the minds of your customers it will tend to become self reinforcing as they will ‘see’ information that reinforces this perspective in their own minds. The more powerful a story, and the greater resonance it has with your customers, the more they will turn to your products or services rather than those of someone else.

Think about it. The Great Depressions enabled the growth of Communism and lead to the collapse of the Weimar Republic, two key events from the last century. It played a pivotal role in creating the world that we know. Now we are living through a similar experience, the impact of which is likely to be just as profound.

Why? The answer lies in our need for consistency. As I’ve mentioned, we are risk creatures – probably because all our ancestors who weren’t risk adverse were eaten by Sabre-Toothed Tigers. So, when we do ‘accept’ risk we need to be rewarded for it.

Unfortunately, we don’t make very good assessments of risk. This means our risk ‘assessment’ is highly dependent on our beliefs about the world. (See this blog on the global financial crisis for a further discussion of this issue).

The European debt markets at the moment represent this well. The whole ‘collapse’ of Greece has served as a moment to mark in your diary, but not in a good way, it has served to make debt markets reassess sovereign risks.

The GFC and the Greek sovereign debt crisis will cause an ongoing reassessment of risk which will, I predict, result in very slow economic growth over the next few years. The period of ‘stable’ economic conditions, which drove down interest rates around the world, has transformed into a period of highly unstable economic conditions.

Its going to be a bumpy ride!

This newspaper article on perceptions of pay equality found a huge gap between the genders. According to the survey, 85 per cent of women thought that there was a pay gap  in the financial sector. In contrast, only 26 per cent of men agreed.

The contrast was even greater when survey respondents were asked if the fight for equality had been achieved. Almost 71 per cent of men thought companies had taken appropriate action to achieve equality while 72 per cent of women disagreed with the statement.

The reason for the discrepancy? Its because of the way in which we recognise and express bigotry. I’ve blogged about how people subject to biases are more aware of them than ‘the majority’ and  the ‘majority’ also hoards available resources for itself.

Its not just about race.

I sound like a goddamned hippie but you have to be emotionally and spiritually dead not to watch this and not feel some deep qualms about what our civilization is doing to its environment and to itself. The addiction metaphor – even used by George W. Bush by the end of his term – is the only apposite one. We’re like junkies trying to find a new vein. It keeps us alive and growing, but that simply brings into sharper focus the moral and spiritual costs of exploitation of the earth rather than prudent stewardship.

This comment is in response to emerging evidence of the environmental impact of the BP oil spill in the Gulf of Mexico, such as:

[A] bird has a natural repellent in its feathers that keeps the water out. That’s a little area – a little cushion – that keeps it cool. Well, this oil here gets on those feathers, and they lose that little insulation. And then, when you have this oil at 100+ degrees, the bird experts say, it begins to literally cook the birds.

It gives you pause to think.

To put this to a simple test, think of your husband or wife and think: Are they going to be on time or late to an appointment? Given how well you know them, will you be on time or late because of it?

Here is a less trivial example: How would you respond if the car in front of you was swerving down the street? Our lives rely on every other driver being consistent on a daily basis.

Why we value consistency is because humans are risk adverse. This means we, other things being equal, tend to want more than a dollar in return to gamble a dollar. When we perceive the risks to be high, we actually require much more than a dollar to risk a dollar of our own. We really value ‘low risk’ in other people as well. This desire for consistency in other people is not a modern phenomenon, Publilius Syrus the 1^st century BC Roman author said:

“A good reputation is more valuable than money.”

The strong social pressure to be consistent creates a very strong internal pressure to be consistent. This has POWERFUL implications on our economic behaviours. To describe this, I will detail a simple study about how it influences our risk assessments. Then I will describe other studies that have examined how it can be manipulated to fundamentally change our behaviour.

It has been found that the act of making a decision will change how confident people are about the decision. Before they lay the bet, punters at a racecourse describe themselves as being uncertain as to which horse will win. After they have placed the bet they become a lot more confident in their choice. Even though nothing has changed!

The punter’s confidence in their decision comes because we have a strong desire to be perceived as being internally consistent. As a consequence, whenever we make a decision or a stand on something, we then justify our earlier decision as being the ‘right’ one!

References:

Knox and Inkster (1968) Postdecision dissonance at post time, Journal of Personality and Social Psychology, 8, 319-323

As tribal creatures whose success in life, and whose very existence, is highly dependent on the behaviours of those around us, we have a strong desire to ensure they act in a manner true to their stated beliefs. Think of the fallen politicians – those who campaigned on honesty, or family values, while behaving in completely the opposite manner in private. They hold a certain place in the public’s mind.

Two of the most colourful examples come from (where else!) the US.

Consider Rod Blagojevich who was Governor of Illinois, elected on a platform of cleaning up corruption after the previous Governors had been indicted. He was charged with corruption trying to sell off a Senate seat vacated by Barrack Obama. He was recorded as saying that the Senate seat is “a bleeping valuable thing. You just don’t give it away. … I’ve got this thing, and it’s bleeping golden.”  This was just a tip of the iceberg in terms of his shenanigans.

Eventually he was forced from office and had charges pressed against him. Throughout it all he maintained great hair.

Another excellent example of how society treats inconsistent people is the case of New York Governor Elliot Spitzer who was forced to resign from this position when details of his involvement with high price prostitutes emerged. While his activities with prostitutes may not have been  technically illegal, he eventually said:

“I cannot allow my private failings to disrupt the peoples’ work. Over the course of my public life, I have insisted — I believe correctly — that people take responsibility for their conduct. I can and will ask no less of myself.”

When people fail to act with consistency, we as a society tend to inflict significant costs on them. This is in part to protect ourselves. If we have to rely on their judgement, we want to be confident that they will act in accordance with how they state they will.

This could be why Kevin Rudd is in trouble!

References:

“Consistency and Ethics” Developed by Manuel Velasquez, Claire Andre, Thomas Shanks, S.J., and Michael J. Meyer,

Huge emotional differences emerge over a stupid sporting game (ok, I don’t follow soccer, but I’d be prepared to admit the World Cup is somewhat of a ‘big deal’). This is nothing compared to what happens when bigotry is institutionalized. A study in America found an increase in depression, alcohol use and other psychiatric disorders in gay and lesbian people living in States that instituted bans on same‑sex marriage.

The impacts were pretty substantial too. The level of anxiety that gays and lesbians reported living with increased by up to 200 per cent. The impact of institutionalised bigotry is FAR more significant than failing to kick a ball into a net.

Are you looking for a job or a calling?

It was poised by the author of the excellent ‘liars poker’ (which tracked the rise of junk bonds) and he, Michael Lewis, went on the say:

“A job will never satisfy you all by itself, but it will afford you security and the chance to pursue an exciting and fulfilling life outside of your work. A calling is an activity you find so compelling that you wind up organizing your entire self around it — often to the detriment of your life outside of it.”

(To my mind the difference is between a job and a vocation. A calling implies you are answering something and, once answered, the question or query is over. A vocation, on the other hand, represents a ‘job’ that has no end except for itself.)

It’s an interesting thought, one that can be discussed in terms of economic theory. Economics would say that a job requires pay to compensate you for doing it – and so you get ‘utility’ from the things that the pay allows you to buy. Like food and a roof over your head when it rains. A vocation, on the other hand, represents a task with intrinsic positive marginal utility (satisfaction) associated with it. A complicated way of saying that you enjoy doing it for its own sake.

This means that a vocation has the capacity to be all consuming, particularly if the marginal utility of doing it is consistently positive (ie you feel just as good working on your 23^rd hour as you did on the first hour of the day). In contrast, other life activities can be positive and negative, but you rarely get pure positive benefits associated with them. Not even sex. So a vocation will take you away from many areas of life that the rest of us tend to find positive.

Not so a job.

Some friends of mine are teachers and its clear that it is a vocation for them. They spend their weekends preparing for classes and working with troubled kids. They take groups of kids away on tours during their holidays. He has friendships with ex‑students that stretch back decades. She has a commitment to excellence in her teaching that burns so bright you can practically see it in daylight. I find them beautiful because of their devotion to their vocation. They give far and away more to their students than their wage warrants.

In some ways the rest of their life suffers – they have less time for friends or hobbies. But for them that is recompensed by the benefits they get from teaching.

I guess I can answer this question for myself. What about you?

But you’d be wrong.

WA’s Strategic Energy Initiative (SEI) did not even consider nuclear energy, stating:

“The State Government does not consider nuclear power to be a viable component of the State’s energy mix.”

Apparently, nuclear energy does not have sufficient commercial viability to be considered in WA. This justification is wrong on two counts.

The first is that developments in the US, where nuclear power plants generate 20 percent of the countries energy requirements, will result in a significant expansion in these generators. In particular, there is a dramatic expansion in the small nuclear generators that would be suitable for Western Australia and would be available for commercial application well within the 2030 time-frame of the SEI.

Further, the SEI is considering what frameworks should apply to a range of renewable energies. Even though few, if any, make a significant contribution to energy production anywhere in the world, nor do they have proven commercial viability. The very reasons nuclear energy is not being considered!

Stanford psychologist  Robert Zajonc has found that people  experience an emotional reaction to a word, phrase or decision prior to rationally evaluating it. Because the feeling comes first, it shapes and colours the thoughts that follow.

This is particularly true of nuclear power. People have a negative emotional reaction to the word ‘nuclear’ and think of the high risk associated with the outlying outcomes.

This might suggest that the SEI is  not considering nuclear energy because people  link highly negative emotions to it and do not compensate them with the positive benefits it can bring.

This is significant for WA as it means the State will lack the legislative and regulatory framework to leverage from its vast nuclear resources because of simple emotional evaluations of risk.

Reference:

“Small Reactors Generate Big Hopes” in the Wall Street Journal on February 18, 2010, http://online.wsj.com/article/SB10001424052748703444804575071402124482176.html

That’s crazy talk!

People were willing to spend up to twice as much simply because they had the option to pay by credit card. Clearly, having the ability to access more money than what was in their pocket meant a lot to their purchasing decision. If my purchases now and for the rest of the week are limited to my wages then I am more likely to ‘ration’ my money to ensure it lasts. With a little left over for a rainy day.

But if I can access not only this weeks pay, but every future pay period over the course of my entire life, then I am more likely to say ‘yes, I’ll take it!’ This finding links with a fairly famous behavioural economics finding about the fungibility of money. Something that I’ll blog about soon…if I remember!

Fienberg, Richard A. (1986) ‘Credit cards as spending facilitating stimuli: A conditioning interpretation,’ Journal of Consumer Research 12, pages 384 – 356.

Now to say why!

MBA students were lured into a particularly cunning study by posters that promised $2 and an opportunity to buy National Basketball Association tickets. On entering a room they were directed to by the poster, the students were given an instruction sheet that described prizes associated with the study and how the tickets to the NBA would be sold.

What the students didn’t know was that two types of sheets were handed out, in a random fashion. The first sheet said that payment had to be in cash. These students were asked if they had access to ‘a local cash machine’ to access the funds necessary to buy the NBA tickets.

The second type of sheet distributed stated that payment was to be made by credit card. These students were asked to identify the type of card that would be used to purchase the tickets, its expiration date, and to write down the last three digits of the credit card number.

Those students that had the option to pay for NBA tickets via credit card were willing to pay up to twice as much for it as those that had to rely on cash.

What may have been going on is that students made their purchasing decisions from a perspective of how much money they had ‘available.’ Now, in the cash transaction, the purchasing decision was limited to the amount of cash that they typically carry in their  wallets or have in their transaction account between pay cycles. In contrast, those that were able to purchase the tickets through their credit cards had access to a much larger amount of wealth. As a consequence, they were willing to pay a lot more  for the please of seeing sweaty basketball players run up and down a court.

Apparently, the rabbit whisperer’s:

“rabbit-pacifying skills are in much demand in Cornwall, where he has helped to relax them before they are treated by a vet.”

The article goes on to say:

“That Mr Penrose’s work had been invaluable. (He) uses a relaxation technique that induces the release of endorphins, making the rabbit feel relaxed. It allows a close examination of the rabbit without discomfort, but it is not totally asleep, just completely chilled out. It is a great tool for coping with rabbits that have behavioural problems because it makes them feel less stressed.”

The world is a truly wondrous place.

PS. the rabbit  whisperer shouldn’t be confused with the confused man who used a rabbit as part of a hold up. Resulting in the improbable  headline, “Shoppers  menaced by lop-eared rabbit.” (Monty Python anyone?)

Increasing life  expectancies  have resulted in an amazing phenomena:

In 19 countries, from Singapore to Iceland, people have a life expectancy of about 80 years. Of all the people in human history who ever reached the age of 65, half are alive now.

Unfortunately implicit racism can have a much more significant impact than just feeling bad.

Consider the infamous ‘beer summit’ that occurred in the early part of Barrack Obama’s presidency. The ‘beer summit’ occurred in July 2009, when President Obama and Vice President Joe Biden invited Sgt. James Crowley and the famous African American scholar Henry Louis Gates Jr. to the White House. They were there to discuss the controversy surrounding Crowley’s  arrest of  Gates.

The incident started when a 911 call was made about ‘two black men’ apparently breaking into a home in the exclusive Cambridge, Massachusetts home. A local police officer, Sgt. Crowley, responded and proceeded to charge Henry Gates Jr. with disorderly conduct and citing, in the police report, Gates’ behavior as loud and erratic.

Henry Gates, on the other hand, had just returned to his home after a trip to China to research the ancestry of Yo-Yo Ma. Gates found the front door to his home jammed shut and with the help of his driver tried to force it open. In an interview published in The Root , Gates said that when Crowley first asked him to step outside onto the porch:

“The way he said it, I knew he wasn’t canvassing for the police benevolent association. All the hairs stood up on the back of my neck, and I realized that I was in danger. And I said to him no, out of instinct. I said, ‘No, I will not’ “. “He demanded that I step out on the porch, and I don’t think he would have done that if I was a white person.”

There were a large number of discrepancies between the two men’s stories of the incident it was as though they were describing two separate events. These discrepancies can be explained by the fact they were both probably acting from their primitive brain (as Gates fear suggests in the quote above, and as could be imagined Sgt. Crowley responding to a potentially dangerous situation). The gap between the two stories was possible wider because of the unconscious way people who have implicit racism behave around the subjects of their racism.

The new President, Barrack Obama got involved when he said that police in Cambridge, Massachusetts, had “acted stupidly“. Fortunately alcoholic beverages were able to simultaneously resolve the worst of  the animosity and provide  a photogenic  media story. So everyone was happy.

While the charges for Henry Gates were dropped, not all  African Americans subjected  to police profiling are amongst the most celebrated academics in the country. One in 15 black adults are in jailed in the US, and this statistic becomes even worse for young black men with one in nine in jail between the ages 20 and 34.

I commented on how irrational a lot of the fears surrounding the ‘great swine flu outbreak of 09′ was – well it turns out that the UK has hundreds of millions of dollars worth of extra vaccine just lying about.

So – just because I so rarely get the chance -

I TOLD YOU SO!

“The Brisbane District Court was told Hoe Thai Nguyen attacked his uncle, who he was training, with such force he severed through the largest bone in his forearm…The court was told the wound to the forearm was so deep it cut through Pham’s skin, muscles, tendons and ulner – the largest bone in the forearm – and required urgent and extensive surgery to repair….”

The reason given for the brutal attack? The uncle chose the “wrong apples” for use in pastries.

Two women tried to get their dead husband/father aboard an airplane. Fortunately he was strapped to a wheelchair (so he wouldn’t flop about – don’t cha know?). When confronted by an air steward they said, “He always sleeps like that.”

While the recently widowed woman and the stepdaughter insisted that he was moving and breathing on the way to the airport, airline staff called a medical team after noticing the old man was cold and motionless.

I particularly liked the quote from the airport worker who was instructed to ease the man from the front of the seat on the minibus into the wheelchair:

“I did my best to help by carefully lifting the man from his seat. To my horror his face fell sideways against mine — it was ice cold.”

But the gift keeps on giving when he went on to say:

“I knew straight away that the man was dead but they reassured me that he always sleeps like that. So I placed the body into the wheelchair and pushed the man to the back of the easyJet queue.”

LOL – no ROFL.

A word of advice to the  women in question: in the future just check him in as hand luggage!

Once we eliminate necessity, we need reasons to think that our minds are of the right sort; after all, the humble Giraffe is well adapted to its environment, but will never come to understand particle physics or the workings of its own neurophysiology. How are we to know that we are not like Giraffes, only with considerably wider possible-knowledge horizons? A simple response is that we haven’t failed yet. The theories we build in order to explain the universe around us are remarkably, even distressingly successful.

This is a topic that Paul Davies talks on often – the miraculous nature of existence and our capacity to understand it. Paul Davies writing has two key tenents:

• That the world exists in a form that can be understood is a pure fluke; and
• That our existence with the capacity to comprehend the world is also almost as unlikely as the worlds existence in the first place.

Leaving aside the first point, the second is about how humanity has sufficient  intelligence to perceive and understand the world and to be challenged by the task. The endeavour to understand the world is such that it engages our brightest minds, and challenges them to their limit in terms of ingenuity and capacity to understand.

Our ability to model and represent the universe around is yet to be limited.  It takes us to every greater understanding of the material world.

What I find fascinating about behavior economics is that it hints as systemic ways we ‘make love’ up our collective actions. That is, our behavior is very rational and so on, but we have some critical perception and behavioural characteristics that undermine our ability to actually organise our societies in an optimal way.

A cursory review of history shows how uninsightful that view is – how many wars and disturbing events must happen to shake one’s belief in humanities’ potential? And yet, here we are. Reading flickering thoughts on electronic screens, shared across the ether.

Amazing.

A gang in the remote Peruvian jungle has been killing people for their fat, police charged Thursday, draining it from their corpses and offering it on the black market for use in cosmetics.

Wasn’t this a subplot of Fight Club?

I remember, as a young man, being told about how one of the great powers (Russia from a friend with conservative parents and the US from one with liberal parents) were using subliminal programming to control their opponent’s population.

Having just watched Patrick Swayze trying to liberate America in Red Dawn, I thought the idea of subliminal programming being an integral part of the cold war as being entirely reasonable.

Alas, it was a case of my primitive brain driving thinking. The persistence of the urban myth about subliminal programming occurs because we are hardwired to believe such stories. They have an intuitive logic that is compelling to our primitive mind, even if completely wrong.

One day in September 1957, market researcher James Vicary announced the results of a study in which the purchasing behaviours of cinema goers had been altered after they were exposed to messages saying ‘Drink Coke’ and ‘Eat Popcorn.’ Although the audience was unaware of the messages (they were subliminal after all), sales of Coke and popcorn increased by 18 per cent and 58 per cent respectively. Thus the urban myth of subliminal programming was born.

Unfortunately, it was born out of bad research as subsequent studies found absolutely no proof that subliminal programming had any effect at all. Vicary himself eventually confessed (in 1962) that his story had been leaked to the media far too early. In fact, he had only collected the minimum amount of data needed to file a patent, and admitted his studies were far too small to be meaningful.

Ironically, our brain is too sophisticated to be influenced by quickly flashing a message on a screen but not sophisticated enough to reject the idea that it can be influenced by flashing messages!

I LOVE the warnings on this website. Apparently subliminal programming goes way beyond images in cinemas urging us to buy popcorn and now includes the following commands:

In printed material such as magazines and newpapers, the words SEX, SLEEP, OBEY, GAY, KILL, …, and so on are embedded (lighly written) in the background of ads and pictures. The word SEX is omnipresent, and occurs as a mosaic several thousand times on the average page. SEX is usually written much like a person would write the word with a pen – thin lines. SLEEP and GAY are also ubiquitous. However, GAY and SLEEP are generally written much larger than SEX and have a cloud like (puffy font) appearance.

No explanation is given as to why puffy font is used for GAY programming.

Research

Moore, T. E., 1992, Subliminal perceptions: Facts and fallacies, Skeptical Inquirer Number 16, pages 273‑281.

Brooks sums up the philosopher’s perspective when he says:

In Homer’s poetry, every hero has a trait. Achilles is angry. Odysseus is cunning.

In this view…each of us has certain ingrained character traits. An honest person will be honest most of the time. A compassionate person will be compassionate

This suggests a simple understanding of what it means to be human – the ‘good’ boy in Sunday school is going to be a good man when he grows up. The noisy and rambunctious boy in Sunday school is going to peddle drugs (or politics!) when he grows up.

It may sound simplistic, but you hear this kind of perspective all the time. “My child is like X…” We seem to constantly be defining those around us with immutable traits that determine how they behave now and what their future is likely to be.

Heck, who hasn’t thought of themselves in these terms? It’s the whole basis of most personality programs.

Brooks goes on to describe the psychologist’s perspective as:

The psychologists say this (that we don’t have a fixed character) because a century’s worth of experiments suggests that people’s actual behavior is not driven by permanent traits that apply from one context to another. Students who are routinely dishonest at home are not routinely dishonest at school. People who are courageous at work can be cowardly at church. People who behave kindly on a sunny day may behave callously the next day when it is cloudy and they are feeling glum. Behaviour does not exhibit what the psychologists call “cross-situational stability.”

The psychologists believe that we are made up of “wide variety of unconscious tendencies that get aroused by different situations. At the top, there is the narrow story we tell about ourselves to give coherence to life.”

• Next blog – some of the neurological challenges to being ‘consistent’ (or reasons why being insane is just a state of mind).

The Productivity Commission had recommended that Australia allow cheaper books into the country (under the odd notion that cheaper books would be a good thing for consumers). This notion was resisted by vested interests who gain an awful lot from the decision.

It just goes to show you don’t need to manhandle a cow to have your way politically – but it helps!

ARGH!

I recently posed the question:

Is a dwarven theme park an oblique form of exploitation or is opportunism on behalf of the dwarfs in question?

So far, the comments suggest that there is a universal rejection of the idea that the dwarfs are being exploited. A survey of one may not be the best indicator!

On one hand, that people are willing to pay the dwarfs to see their ‘fairy tale’ village indicates some of the implicit beliefs that surround dwarfs. Clearly, they are perceived as, at least, ‘odd’ or ‘freaky’. Given the ‘fairy village’ began as a segregated compound where the dwarfs could go to avoid being bullied, it represents a pretty extreme situation. According to the groups spokesman, Fu Tien, said:

“As small people we are used to being pushed around and exploited by big people. But here there aren’t any big people and everything we do is for us.”

In fact, initially, no one was allowed into the village who was taller than four feet and three inches. Not even the police or fire brigade. Now, of course, they are allowed in – so long as they pay the entrance fee!

In my opinion, the ‘fairy kingdom’ is not a place that I would visit, but it represents an incredible example of people dealing with their limitations and trying to make the best of them. As a commentator at the GoKunming newspaper said:

“They (the dwarfs) can’t work anywhere, they are disabled people, so we have a village for them to live and be happy in. No one would hire a dwarf. In China we have villages like this for all kinds of people, like fat people, disabled people. This way they can get a steady income every month since people come and see them perform.”

In Australia we have the luxury of not tolerating such awful conditions. While here it would be exploitation, in China it represents opportunism on behalf of the dwarfs.

It was taken at a recent political protest about changes to the level of protectionism provided to European farmers.

While there are a wide range of arguments to be made against protectionism (from the pragmatic – it promotes inefficiencies – to the more humanitarian – it disadvantages the poorest) one of the best is that it inevitably creates special interest groups. These special interest groups end up having FAR more to gain through protest (and corruption!) than the general population have in eliminating their benefits.

For instance, the European Commission will spend 600 million euros (that’s $LOTS AUD) on propping up the price of butter and skimmed milk prices. That means the Commission will spend tax payers money to make prices of butter and skimmed milk MORE expensive!

How stupid is that! Unless, of course, you are a milk producer. In that case, a more than enough of the 600 million euros will be going your way to pay for the higher prices that you personally have to pay for butter.

Who is protecting the poor cow from this kind of abuse?

Sigh.

Perth is currently experiencing a similar situation – restricting retail trading REALLY benefits a few companies (IGA! IGA!) while slightly disadvantaging the majority of households. So they (IGA! IGA!) are able to run big campaigns to keep their favoured position.

Life is just not fair sometimes!

Anyway, apparently conservatives in America are rewriting the bible to remove ‘liberal bias‘. They define such bias as:

Liberal bias has become the single biggest distortion in modern Bible translations. There are three sources of errors in conveying biblical meaning:

• lack of precision in the original language, such as terms underdeveloped to convey new concepts introduced by Christ
• lack of precision in modern language
• translation bias in converting the original language to the modern one.

Of these three sources of errors, the last introduces the largest error, and the biggest component of that error is liberal bias.

In the past I’ve blogged on how our own preconceptions will make us evaluate arguments according to our preconceived notions…Well the ‘conservatives’ are taking this just one step further and eliminating any source of disagreement – or insight for that matter.

God, I LOVE America!

It is an interesting question. If I was to ask, which of the faces looks more American? What would your answer be? Honestly.

The suitably interesting answer is that the majority of subjects to an experiment conducted by Psychologist Mahzarin Banaji (whose work on implicit assumptions I’ve cited before) cite the Englishman Hugh Grant as being more American than Connie Chung. This is despite the fact that Connie Chung is a well known American news anchorwoman.

Mahzarin Banaji was exploring biases against Asians and found that white Europeans are considered to be ‘more American’ than non-white Americans in most minds.

Disturbing!

Research

Devos, T., & Banaji, M. R. (2005). American = white? Journal of Personality and Social Psychology, 88, 447-466.

Today’s blog is going to be in the form of a question. A recent newspaper article highlighted the plight of an innovative group of Chinese men and women.

They dressed themselves up as though they belonged to a fairy kingdom.

While this might not do much for your or my job prospects, it did wonders for these people – because they are dwarfs and have created their own ‘theme park’.

Is this exploitation or is it opportunism?

My view next week – but feel free to voice yours below!

However, it does not actually describe the reality of the great majority of us in the industrialized world.

Surveys have consistently found, both across time and across nations, that personal happiness is uncorrelated with physical wealth. Beyond a very basic level of wealth after (just a few thousand dollars above the minimum poverty level) increases in material passions do not affect well off people feel. (Check out this video – wealth discussed at 4:16 point).

If you are reading this blog, then the odds are that more money will not make you happier. At least not significantly. Consider the level of ‘happiness’ reported in the US. While ever individual in the US is now considerably better off than they were, their subjective happiness has not significantly improved.

On this basis, our constant fixation with GDP is a mirage. Strong growth in GDP will not suddenly make us happy. GDP growth is not a fairy godmother with a magic wand and a desire to set us up with the most eligible bachelor in the kingdom.

Don’t discount the importance of GDP growth – it allows us to address many of the problems and challenges we face in life. Its just not the be all and end all of life. Wealth does allow us, as a society, to address greater problems and challenges than ever before. Without the amazing technological progress that was made in the last century, we would have no capacity to address global warming. Of course, we might not have global warming without it…

To reiterate, one of the greatest events to have ever occurred in human existence is the industralisation of China and India. Hundreds of millions of people are experiencing dramatic improvements in their material conditions as a consequence. Their physical condition is still desperately poor compared to the West, but it is vastly improved to that of their grandparents. Together, these countries economic growth has, probably, done more to improve the quality of human life than the vast majority of economic growth that occurred in the West during the entire second half of last century.

Resources: Myers, G., Happiness. Excerpted from Psychology, 7th edition. New York, Worth Publishers, 2004.

Wow, how right this research was.

Read the following paragraphs about a new book called, Speech-Less: Tales of a White House Survivor, written by a former speech of GWB:

“The portrait of George W. Bush….(is of) a bully who cannot stand to be contradicted, who thinks he knows everything despite being grossly ignorant most of the time, and who browbeats those beneath him into agreeing with him.”

and

“One of the things that Latimer (the author) talks a lot about is the importance of the president’s mood, which appears to have gyrated wildly. Apparently, the best way to get on his good side was to pretend to be stupid so that Bush would seem like a genius by figuring out some simple point for himself. Latimer says that national security adviser Stephen Hadley was very good at doing this.”

It is a relief that we only had two wars, the wide-spread degradation of civil liberties, and the largest economic disaster since the Great Depression.

PS. I just had to reinsert this picture of myself with a wax image of GWB – which I suspect had greater self-awareness than the original.

The announcement I am referring to is that the companies financing the Gorgon gas project gave it their final tick of approval.

While the Gorgon project represents the biggest investment decision in Australia’s history, it is not enough, purely of itself, to lift WA out of the GFC.

What it does, however, is provide a critical signal to everyone thinking about investing or expanding their business in WA. This impact will be even larger than the actual dollars of the investment itself!

Gorgon’s go ahead signifies the narrative that has been operating since the GFC hit was over.

Before the GFC, businesses were making investment decisions based on the ‘China super cycle’ narrative. The industrialisation of China was going to create 30 years of expanding demand for resources.

This narrative came to a screeching halt in November 2008 as the GFC finally hit WA’s shores. It caused a major spike in the cost of credit, people became risk adverse and many questioned all their investment decisions. The fear was palatable.

The decision to invest in a mining project that will last for decades is difficult and involves many many different factors. While you might expect people to make a rational decision, many of them will use simplifying heuristics (rules of thumb) to make their decisions.

In the throws of the GFC, investment decisions were perceived to be very risky as the future is perceived to be more ‘uncertain’ than previously.

Gorgon represents a key signal about the future that many people will refer to in making their own decisions. They will rationalise: “If Chevron is willing to invest so much money, then clearly they know something that the rest of us don’t.”

Gorgon represents a return to the China super cycle narrative. So WA will emerge from the wreckage of the GFC before the rest of the world.

Brace yourself!

Recently a US company announced that it had finished the first stage of development for a biomass engine system designed to power a robot. The robot was being designed as an autonomous platform able to perform long‑range, long‑endurance missions without the need for manual or conventional refuelling.

Interesting application of science or world threatening development?

Well apparently enough people thought that this development meant the company had developed a zombie robot that it issued a press release denying the rumours, stating:

“We completely understand the public’s concern about futuristic robots feeding on the human population, but that is not our mission,” stated Harry Schoell, Cyclone’s CEO. “We are focused on demonstrating that our engines can create usable, green power from plentiful, renewable plant matter. The commercial applications alone for this earth-friendly energy solution are enormous.”

This sounds like corporate weasel words if you ask me…I, for one, do not believe them and I am already planning how to appease our coming robot zombie overlords (or is it zombie robot overlords?).

Note the classic game board, complete with ‘evil’ lurking character!

What lifted this game from the status of ordinary and dull board game into the fantastic category was because of my baby brother’s subsequent reactions. He started, after just a few games, prominently pointing his finger and yelling “stranger danger” at the top of the voice every time he saw someone he didn’t know. This was particularly funny when out shopping as my long-suffering parents had to deal with the mildly offended looks of other customers.

Tragically, this well intended board game’s life advice for my baby brother was critically flawed (meanwhile, the board game makers achieved their purpose by playing on my parents fears and selling more products).

If your kid is in distress, then they should be encouraged to approach an adult and ask for help. In contrast, if a stranger initiates contact then your little ray of sunshine should point their finger and scream ‘danger stranger!’ at the top of their shrill little voice.

The key is that your child is the one that initiates the approach! If your little bundle of joy is the one to do the selecting, then they are far and away more likely to pick one of the vast majority of people who will, when approached by a small child in distress, stop what they are doing and try and help out the kid.

The reason the common parental advice to children to avoid contact with strangers is utterly wrong is that it ignores the basic goodness in human nature because of fear about the highly rotten nature of a few individuals.

If, after all this, you are still worried about ‘little Johnny’ approaching one of humanities’ bad apples, then I suggest you should wrap him in cotton wool and carefully place him on the shelf where he is safe from all of life’s woes.

The sorry truth is he is FAR more likely to die from much more preventable dangers such as not wearing a seat belt or a poor diet leading to early onset diabetes!

Happy thoughts.

It is the ‘Thudgard’ and no decent parent would allow their toddler outside the crib without it!

Until 2008, the 30 industrialised countries of the world consumed the majority of the world’s power and fuel. In 2008, the poorer developing world consumed 51 per cent of the world’s power and fuel.

This is a profound shift that cannot be understated. There is no greater proxy for wealth than energy consumption, and no better indication of the rise of wealth in the developed world than the rise in its level of fuel and power consumption.
In 2008 the demand for energy fell by 1.3 per cent in the developed world while the developing world increased its demand for energy in line with its expanding material wealth.

It should be noted that the industrialised world still consumes a disproportionate amount of global energy, on a per capita basis. It is this gulf in energy consumption, and the expectation that it will dramatically diminish in the near future, that is driving global warming fears.

According to the BP Statistical Review of World Energy global oil consumption in 2008 declined by had slipped by 0.5 per cent, to 84.4 million barrels a day. It added that demand in the 30 industrialised countries of the OECD had declined by 3.5 per cent, with US consumption of oil falling by 6.4 per cent. Oil consumption in Africa, China and the Middle East continued to expand quickly, representing their strong economic growth.
This shift in global energy usage is in no way a bad thing – it is leading to a more equitable world. It does however, increase the challenges around the world’s finite resources and dealing with the implications of global warming.

The tendency of social trends to start out in small groups and then, suddenly, ‘take off’ is an interesting human phenomenon that has been widely researched. It comes down to the ‘bandwagon effect’, where we jump on board the side that’s winning or join a group that seems to be popular.

The seminal study into the bandwagon effect involved up to nine college students. All of whom were provided with two large cards (see diagram below) and were asked to identify the matched lengths. The differences between the two were sufficient to never leave the issue in doubt (in fact, when left to their own devices, the test subject would get it wrong only one per cent of the time). However, the study was not about whether the students could get it right, but whether they could withstand group pressure to conform to an obviously wrong answer.

The way it worked was that the group of students would be asked the simple question of comparing line lengths between 12 and 18 times. The expermenter would go around the room asking each participant to state which of the two lines matched.

Everything would go smoothly for the first two rounds. Then, starting with the first person, the participants would begin to give a patently incorrect answer, with all the other participants agreeing. The exception was the final participant, who was the actual test subject. This student had no idea that the others were colluding in the test and were frequently noted as experiencing severe emotional distress as they began to question their own judgement.

In the face of the group pressure, participants would provide the wrong answer 36.8 per cent of the time. Considering the right answer was obvious and staring them in the face, that is a large percentage of the time to get it wrong.

In effect, the bandwagon effect works because we tend to accept that something is ‘true’ because other people do, we presume they have knowledge that we lack.

How else could you explain the fashions of the 70s?

Resources

http://www.panarchy.org/asch/social.pressure.1955.html

My mother in law explained her anxiety by citing a recent horrific kidnapping and assault that occurred in a nearby shopping centre. She expressed the fear that, unless she kept her eyes on them all the time, something awful might happen to her own grandchildren.

It is a horrible though, but her fear was completely misplaced. Her grandchildren are far more likely to die in a car accident than to be abducted or molested by a stranger. In the US the likelihood of being killed by a stranger is 1 in 1.5 million. In contrast, the number one way a child dies is as a passenger in a car.

The reason for my mother-in-law’s mistake (a common one of parents everywhere) is that we, as humans and as parents, are pretty lousy at objectively evaluating risks. Events that are easily imaginable and horrific (remember swine flu?) get much more attention than higher probability, but more mundane, events such as car accidents.

The reality is that the vast majority of children are perfectly safe. In fact, despite the seeming rise in reported cases of child abuse, they are actually in less danger of child abuse these days. Society simply notices and reports behaviour that would not have been acknowledged in the past. There is also a bias towards ‘news worthy’ stories that attract attention and strong feelings (like revulsion) over more ‘mundane’ events like a car accident.

The consequence is a shift in social activity:

I grew up in the Houston suburbs in the ’70s and ’80s. Back then, we kids waited for the school bus without our parents. Now, in that exact same neighborhood, parents always wait at the school bus stop with their kids, although the neighborhood has not changed significantly.

I am glad to say my nephew and niece rode home safely (and wearing seat belts!)

The experienced Wall Street Journal columnist Peggy Noonan (whose work experience includes Ronald Regan’s White House) wrote a stunning rebuke of 2008 Vice-Presidential hopeful Sarah Palin. The money quote was:

In television interviews she was out of her depth in a shallow pool…She couldn’t say what she read because she didn’t read anything. She was utterly unconcerned by all this and seemed in fact rather proud of it: It was evidence of her authenticity.

What Sarah Palin had in self confidence and photogenic sense, she completely lacked in awareness of personal limitations.

In the previous Bliss of Ignorance blogs, I cited the study findings that when people become aware of their ineptness in an area they tend to be able to judge themselves better. That is clearly not always the case. Sometimes they lack the capacity for self awareness to dawn. As Peggy Noonan goes on to say:

She (Sarah Palin) experienced criticism as both partisan and cruel because she could see no truth in any of it. She wasn’t thoughtful enough to know she wasn’t thoughtful enough. Her presentation up to the end has been scattered, illogical, manipulative and self-referential to the point of self-reverence. “I’m not wired that way,” “I’m not a quitter,” “I’m standing up for our values.”

It would appear that a degree of personal maturity that allows you to be wrong is critical to growing your capabilities.

The story, as reported by the Australian is that:

“The Australian Industrial Relations Commission ruled on Monday that the Health Services Union was within its rights to dismiss three employees because it had fewer than 100 staff, the trigger point for unfair dismissal coverage under Work Choices.”

In contrast, as of today, the new laws introduced by the Rudd government, all employees will be protected by unfair dismissal after six months’ employment, or 12 months in the case of a small business with fewer than 15 employees.

The new industrial relations regime has trouble written all over it. I’m confident to make the prediction that labour market issues will, again, be a major issue in Australian politics at the next election.

The power we, collectively, wield to defeat tyranny….The way technology enables us greater freedom leaves me in awe. There are challenges and dangers ahead. Who knows if more people will die, but if there are, there will be fewer than in Iraq.

When I worked at the Reserve Bank, a colleague of mine was an Iranian emigrant. Actually, he was the son of an Iranian who had fled the Iranian revolution of 1979. Ali Pashier’s father had gone from being a Professor with a good income and comfortable life, to leaving all his belongings and working in a florist in Australia so that his three sons could grow up in freedom.

This week, something fundamental has changed in Iran. Something that, no matter how things go in the immediate future, will forever be marked in the history books.

Read the following blog post: Before The Battle (imagine, we are reading the thoughts of someone involved with overthrowing a dictatorship in the midst of the revolution on the other side of the world…WOW! Technology, if it doesn’t kill us has so much potential!)

“I will participate in the demonstrations tomorrow. Maybe they will turn violent. Maybe I will be one of the people who is going to get killed. I’m listening to all my favorite music. I even want to dance to a few songs… My mind is very chaotic. I wrote these random sentences for the next generation so they know we were not just emotional and under peer pressure. So they know that we did everything we could to create a better future for them. So they know that our ancestors surrendered to Arabs and Mongols but did not surrender to despotism. This note is dedicated to tomorrow’s children…”

Reading these words brings tears to my eyes. My hopes and prayers are with those brave people who are prepared to sacrifice so much for what we take for granted – freedom.

It is insane how we dramatically overreact to a threat like a ‘global swine flu’ and utterly fail to address more prosaic but actually dangerous diseases.

For instance, bowel cancer is far more likely to kill Australians than the swine flu and many of its deaths are easily preventable. In both men and women bowel cancer is the second largest killer (after prostate and breast cancer respectively).

It is also highly preventable.

It has been estimated (see the above link) that two Australian deaths from bowel cancer could be prevented each day if those in at-risk groups were screened every two years.

In comparison, how many Australian’s have died because of the Swine Flu? ZERO!

Sure, you might argue, the swine flu has the potential to mutate into a highly lethal disease that can wipe out vast swathes of the population. But so can any influenza flu. While there may be a great chance for Swine Flu to be dangerous, given how little immunity there is in the population, the reality is that this is an extreme event.

Part of the reason we don’t focus more on bowel cancer is because it’s less photogenic than images of foreign people in foreign places wearing face masks.

The other part of the reason is described in my past blogs:

• What Are The Chances Of That Happening? Part 1
• What Are The Chances Of That Happening? Part 2

Whenever I present on behavioural economics, the audience reacts the same way. People generally accept that humans behave irrationally, as audience members sagely nod their heads. In fact, there is generally universal agreement that economics is pretty stupid to use ‘rationality’ as a basic assumption for modelling the behaviours of humans.

Then, as we do an exercise to point out our individual heuristic failures, some of the audience get quite shocked when they realise that it applies to them! Sometimes they have an almost physical reaction, as though they have been slapped in the face.

You see, we all, to some degree or less, have a tendency to overestimate the irrationality of others and underestimate it in ourselves.

A survey was conducted of doctors to assess how much they believed the gifts of drug companies, like golf trips or holidays, influenced their decisions. The survey found that 61 per cent of doctors thought they were not influenced by gifts, but only 16 per cent were as convinced by their peers.

Another test had people conduct a test in pairs and asked them to undertake a “social intelligence” test. The test was completely fake.

One of the participants was, randomly, given a high score and the other a low score. Then the participants were asked whether they thought the test was an accurate measure of social intelligence. In most cases the person who got the high result said that the test was fine, but the participant with the low result thought otherwise.

This is an example of the “self-serving” bias at work. A fact that was explained to the participants, who were then asked if this bias influenced their decisions. The majority of participants said that it did have an influence – but on the other participants assessment of the test, not on their assessment!

It’s like we all secretly believe that we are the only sane person in the whole crazy world. Fortunately for me I know I am – even though I have concerns about you!

References:

Dana, J., Loewenstein, G., October 2006, A social science perspective on gifts to physicians from industry, www.jama.com

The difference in wages helps explain one of the largest migrations in human history – from the Chinese country side to its cities. There are massive domestic demand issues in China, as they need to build a city the size of Perth every month just to house this migration. It also helps explain why Chinese officials are very concerned that economic growth remains above 6 per cent in China, the amount of growth they need just to mop up the growth in urban population.

International trade has not just benefited the Chinese people – it has also significantly benefited Australians. Consider the growth in real gross domestic income per person in WA. It has gone from around $33,000 per person in 1991‑92 to just shy of $65,000 per person in 2006‑07. Over that time the Chinese economy has also increased by more than 600 per cent, with the average wages of Chinese workers increasing more than tenfold over that period. A big part of our gain has been because of the economic growth in China. It’s a win-win scenario.

Nations specialise, and in so doing produce a heck of a lot more of value than they would otherwise. My family is English and so my natural skin tone has the lustre of porridge. Possibly no group of people have benefited more from trade than the descendents of that little rainy island. England enjoys one of the highest levels of income in the world, yet it’s not exactly the land of milk and honey. Without a high degree of exposure to international markets it would fall in a heap.

While the world economy is a little sick at the moment, it will get much worse if protectionism rises around the globe.

So, while Kevin Rudd is advocating a “new” international order on the world stage, domestically his “green car” initiative is anything but new. Its pure old fashion protectionism at its most incompetent.

This scheme (whereby K Rudd transfers huge sums of money to a failing General Motors) is a hideous idea. It is taking money (via taxes) from productive areas of the economy and shovelling it into a dying business while encouraging other countries to increase their level of protectionism.

Knowing how humans make decisions can be incredibly powerful. Then again, it is often said that a little knowledge is a dangerous thing!

Consider the case of Wollongong University Professor Brian Cambourne. He recently flooded the office of NSW Education Minister Verity Firth with a chain email. Professor Cambourne was unhappy that the NSW Minister is actually testing the results of his teaching theories. Perish the thought!

In his chain email, Professor Cambourne suggests using framing theory to link one of the methods of teaching literacy to “failed theory, practice, programs and metaphors/analogies which can be linked to ‘failure’ in the minister’s mind, at an almost subconscious level”.

We’ve discussed how the framing heuristic contributed to the global financial crisis.

Professor Cambourne seems to overestimate the ability of framing to influence decisions. “We rely on the cognitive science framing theory, to frame things the way you want the reader to understand them to be true – framing things that you’re passionate about in ways that reveal your passion.”

Unfortunately this statement does not do human decision making justice. When we are aware of the importance of a decision we tend to make pretty good ones.

In terms of influencing political decisions, using the framing heuristic is not particularly innovative. Sir Humphry Appleby would constantly use it whenever his minister was considering a ‘courageous’ decision. However, Sir Appleby understood human nature, and so could convince his Minister.

The key difference between the two attempts at influencing of Professor Cambourne’s and Sir Appleby was that the latter’s used framing subtly so not to alert the target’s conscious mind of what was going on. Professor Cambourne’s emails were anything but subtle. Consequentially, the NSW Minister for Education is primed to consciously focus on the chain emails and judge their content accurately.

If I was to ask you a question that you didn’t know, like “how many quokka’s live on Rottnest Island?”, then you’d have to guess.

I could significantly influence your answer by mentioning an unrelated figure before I ask the question. If I were, for instance, to say to one group of test subjects, “there are 700,000 more people alive today than there were yesterday”, and another group of test subjects, “BHP has a market capitalisation of $50 billion,” and then ask the quokka question, there answers would be different.

The group subject to the higher meaningless figure will give a significantly higher estimate for quokka’s than the first group. Why? Because unconsciously our brain uses that figure as part of the estimation process – even though it has absolutely nothing to do with the issue at hand.

This bias can have a significant impact on meaningful things. Studies have found that customers will spend more at a café called ‘Café 190’ than they will at one called ‘Café 19.’ Even though it is the same café with only the name changed!

It certainly has had an influence in the “Great Swine Flu Panic of 09″.

When the new virulent strain of influenza influenced the World Health Organisation to raise the world alert to the disease, it was ‘put into context’ by discussing the Spanish Influenza outbreak that followed World War One. This pandemic has been estimated to have killed over 70 million people.

My work is done!

I’ve already influenced how risky the Swine Flu is. I’ve given you the ‘context’ in which to evaluate it. You cannot escape it.

You might reason, rightly, that we have made great strides in medicine since the 1920’s. You would be right. Our collective body of knowledge has gone from not even knowing what a virus is to, probably very soon, being able to map the genetic code of one. While you might counter reason that the world is far more integrated now, with great strides having been made in transportation, the reality is communications technology has come even further. So health organisations can respond even faster.

Irrespective of whether you give greater preference to the ‘preventative’ or the ‘contributing’ factors, I’ve established the context that a pandemic will kill 70 million people. You will either estimate a higher or lower figure, but it will be based around 70 million.

That alone is justification enough to panic!

“To speak of many things…”

In particular, to talk about the probability that you or I may keel over tomorrow because of ‘the dreaded swine flu’.

We, as a species, are absolutely appalling at estimating the probability of highly unlikely events (called ‘long-tailed events – because they occur at the extreme end of a probability distribution). A little time ago, as geologists measure time, humanity went through a choke point where only a few thousand of us were alive in the whole wide world (real estate would have been pretty cheap!). This is why humanity has so much in common, at a genetic level we have almost everything in common! It also explains why we can mate with any human on the planet and produce viable offspring.

Our brains have been programmed to survive by the mere fact that those that didn’t encourage survival didn’t survive. The philosophers probably tended to meet an untimely end. The ancient humans that sat and pontificated as to whether those plumes were an approaching fire or simply a mirage caused by the heat were not amongst our ancestors. Our forbearers, on seeing the hint of a fire off on the horizon, are the ones that immediately high‑tailed it out of there.

Consider this in light of the recent panic about swine flu. While governments and their citizenry across the world have panicked (my favourite reaction was Afghanistan quarantining its one pig), less than 200 people have died from it. In an average year, over 36,000 Americans alone lose their life to the everyday, ordinary type of flu.

There are two behavioural economic reasons for this disproportionate reaction.

The first is our biased estimation of the probability of extreme events. The more dramatic or unique the event, the easier it is to imagine, then the higher the probability we assign it. While these factors contribute to excellent survival strategies when the world was younger and there was lot more leg room, these days it is what we economists call ‘sub‑optimal’. A better word is ‘stupid’!

The other reason has to do with framing.

Reference:

When Humans Faced Extinction
Dr David Whitehouse http://www.freerepublic.com/focus/f-news/926315/posts

“No passion so effectually robs the mind of all its powers of acting and reasoning as fear … To make anything very terrible, obscurity seems in general to be necessary. When we know the full extent of any danger, when we can accustom our eyes to it, a great deal of the apprehension vanishes. Every one will be sensible of this, who considers how greatly night adds to our dread, in all cases of danger, and how much the notions of ghosts and goblins, of which none can form clear ideas, affect minds which give credit to the popular tales concerning such sorts of beings.”

Edmund Burke

Fear is a key trigger of our smaller brain and this part of our brain is bad at making decisions. So, next time you are faces with a scary decision and your adrenalin is pumping, don’t make it. Take a break.

It can take up to 15 minutes for a strong emotion to dissipate. So go for a walk and come back and make that decision with a cool rational mind.

Because of the bandwagon effect (discussed in an upcoming blog) having the appearance of winning the debate is just as important as actually winning the debate in the public arena.

• Studies in the US have found that people who have not yet made up their mind in an election were up to twice as likely to vote for the winner over the perceived follower.
• It has also been found to influence peoples decisions on significant issues such as abortion and Quebec’s constitutional future by between five or seven per cent.

This may be due to the fact that there appears to be three types of people when it comes to engaging in social interactions, those that take, those that give and those that follow whichever of the preceding two dominate (called the Machiavellians). But this is a conversation for another day…

When it comes to changing the highly conservative culture of Perth, it is going to take everyone who cares moving this city forward. Specifically, tell everyone that everyone we know is also going to be voting Yes as well (even if it’s a lie for you, at worst it would be a venial sin not a mortal one).

While there may be only a slim margin in some of the polls, if we all push it, the impact on public opinion may be significant.

References:

Goidel, R. K., and Todd G., 1994, The Vanishing Marginals, the Bandwagon, and the Mass Media:
http://www.jstor.org/pss/2132194

Just yesterday I was giving a presentation to Economics students at Curtin University on Vibrancy when one of them stated:

“Perth is a small town, why should we try and change who we are?”

I was completely shocked. I couldn’t believe I heard this from an Economist – maybe an Accountant (a profession that focuses on numbers, not concepts), but not an Economist!

In the first instance, Perth is not a small town. It is a very large city with a large number of people, only a reflexive cultural cringe could think of it as being ‘small’ (many cities in the US are well known to us, even though they have equivalent or smaller populations, ie Portland).

In the second instance, change is a function of living. An inability to accept it or adjust to change is a sign of senility.

Perth has an incredible future ahead of it. Potential business investment (a key component of economic growth) is well over $170 billion for WA, this is far more than the current economy!

Perth has a desperate need for the highly skilled people who drive economic growth and will ensure the future prosperity of the State. Currently, the conservative mindset and unwillingness of the state to adapt means that the ‘best and brightest’ young people in the State are the ones most likely to move east.

Investigating the demographics of migration show that people in their early 20’s to early 30’s are the ones most likely to migrate away from Perth. They may come back, but it is to settle down and spawn.

The constant rejection of change (by the whole state through referendums of daylight savings or deregulated trading hours, or by local governments stopping businesses simply innovating and investing in new ventures) is an implicit message that change is unwelcome. That ‘new fangled’ concepts should remain ‘over East’ where they came from.

Irrespective of your personal preference about the time of day, it is about showing the rest of the country that WA is capable of embracing change.

The forecast jobless rate would be as high as 10 per cent without the stimulus measures the Government has put in place according to Treasury advice, Prime Minister Kevin Rudd says.

“This Treasury advice finds that if the Government had done nothing, national unemployment in Australia would have been forecast to reach 10 per cent,” Kevin Rudd said.

The Treasury analysis was focused on a completely useless and irrelevant issue. No one in Australian politics is suggesting that the Government should take no action.

The real debate is about the best way to use the nation’s wealth to achieve two objectives:

• to stimulate the economy through the current down-turn; and
• to invest in the long-term prosperity of Australia.

Research attempting to address that question would be worth reading. (Note the power of defining the context of the discussion: it has an inherent criticism of current fiscal policy approaches that anyone who has to balance a book or invest in their personal future would recognise.)

The real issue is not 10 per cent unemployment of ‘not taking any action’ and comparing it with alternative action that the government could have taken. It’s based on the ‘opportunity cost’ of the current approach (a deep economic concept that I will discuss some day).

Unfortunately, it would seem that K Rudd has watched the way John Howard was able to play ‘silly buggers’ with economic data (think first home buyers grant after the dot.com crash) and is attempting to use a similar approach to the current crisis.

If you’re planning to give your Mother a voucher then you should probably rethink the time frame of your gift. Research has found that a voucher with a highly limited timeframe is much more likely to be used than one with a longer one.

So, buy your Mum a day spa treatment that is valid for only this month rather than one that’s valid for a whole year. She’ll be more likely to use it then.

It is part of ensuring that she ‘commits’ to using the gift. Oddly, humans are both very poor and very good at delaying gratification. We’ll not only put off doing a hard task, but a pleasurable one as well! We’ll constantly find we are ‘too busy’ or ‘don’t have time’ to use the voucher and, since it lasts a whole year, we hypothesise that a mythical time in the future will develop when we can use it.

It’s the same principle that helps explain why a tourist is more likely to visit local attractions than the local. The local never develops a sense of urgency about seeing the site and so never does.

When it comes to your mum this Mothers Day, using a shorter timeframe to pressure her into actually using your gift will help ensure she enjoys it – and that you haven’t effectively flushed your money down the toilet!

Hands up, gentle readers, those of you who are subsistence farmers. I’d be surprised if anyone who survived purely by the work of their hands would ever have the spare capacity at the end of the day to read a blog like this one. Not to mention being unable to afford an internet connection or a computer in the first place!

We all gain enormously by developing skills in one activity and trading them with each other to supply what we need from life. Much of the improvements in life that you and I enjoy over our forbears are because of the far greater level of specialisation that can occur in a modern economy. In fact, to know anything useful about almost any field of endeavour requires significant amounts of effort and energy.

Heck, if we took away all the support of other people’s specialisations – from electricians to farmers to engineers – I know I’d have a hard time surviving and I suspect you would too. Even subsistence farmers are specialists of a limited sort.

While it seems pretty damned obvious to me that we gain from trade, some may still argue that it steals jobs from Australians.

Despite the protests over the off-shoring of Bonds’ workers, they are still wrong. Australia does not lose jobs to overseas. It loses some jobs, often high profile ones, but gains others. The gains are often not clear at all.

Sure, international trade may result in certain jobs being lost to Australia. But even domestic trade ‘costs’ jobs. Consider the trivial case of an expert builder working to plans drawn up by a professional engineer who uses equipment built by a third (or fourth, or fifth) party. They can build a house at a much faster pace than a hoard of ignorant peasants using nothing but their bare hands.

Our standard of living would be much lower if we did not engage in international trade. Far more jobs would be lost than a small textile factory in Sydney or Melbourne if we had to build and produce everything in Australia.

So buy undies made in Indo-China. The Australian workers who would have made them will soon be redeployed to other parts of the Australian economy. The real role of Government is not to stop Bonds off-shoring its workforce, but to help retrain those that lose their jobs.

Alas, it has a serious impact on what people want governments to do and how they assess their performance.

For instance, people see violent acts of terrorism that fundamentally shake up their perception of safety and expect the government to take precautions. This is natural and reasonable. However, the response that is expected is disproportionate to the probability of death through violent terrorist actions.

Rest assured, you and I are far more likely to die of numerous mundane causes than because of terrorist attack! (I hope that makes you feel good.)

If a proportion of the resources that have been devoted to combating terrorism were devoted to something else, say preventative health care measures, our society as a whole would be better off. By that I mean fewer people would die.

That’s not to say the government shouldn’t fund anti-terrorist activity. It’s an important activity the government can undertake. It is to say that many of the measures meant to diminish terrorism don’t seriously impact it (think of airport security and the fact that kids can carry on armed weapons – despite all the money spent on trying to beef up security) and are a complete waste of money, relative to what that money could be doing spent elsewhere.

Sure, you say, why not do both? Answer: resources are limited! There is only so much to go around. While we are far wealthier than at any time in Australia’s history, there is still less resources than there are ways to spend it!

We can hope that as the memory of terrorist atrocities fade, we as a society can have a more rational approach to our collective security.

At least Australia did not participate in torture.

The French mathematician Blaise Pascal attributed the development of a key concept underpinning insurance to a monk at Port‑Royal who said, “fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event”. This idea underpinned Pascal’s concept of probability theory, published in his Ars Cogitandi in the seventeenth century.

Probability theory allowed the fledgling insurance industry to develop reasonable prices for insurance.

Unfortunately it does not apply particularly well to human beings who suffer from the availability heuristic. While the unnamed monk’s statement makes intuitive sense, what we actually do is assess the likelihood of a risk occurring by how easily similar examples come to mind.

The result is that our probability estimates are biased by two factors – how recently an event has occurred and how dramatic it has been.

Something that has been in the news recently, a flood or fire, will be considered more likely to happen again than something that hasn’t occurred recently.

Further, something that has happened to us personally will be considered much more likely to happen again. So if you’ve ever experienced a bush fire you are more likely to believe it will probably happen again than if you haven’t.

Finally, vivid and easily imagined events (like burning in a bush fire) are often thought to be more likely than less vivid causes of death (like death by asthma attack) even though the reverse is true.

These cognitive faults explain why, for instance, if floods haven’t occurred lately then people living on a flood plain are less likely to buy insurance. After a flood, insurance policies increase sharply and then decline as memories fade. What is more, if you know someone who’s had a bad experience in a flood then you are more likely to buy insurance against it, even if you face no flood risks yourself.

The world has been treated to an extraordinary proof of that statement recently in the form of George W. Bush.

Like a slow motion car crash that horrifies but ensnares you so you cannot look away, the presidency of George W. Bush was absorbing until the last moment. (Please note the impact of my opinion on my interpretation of the following facts

Consider for a moment the following litany of infamy:

• a failure to heed intelligence advice that leads to the most deadly attack on US soil;
• a further failure of intelligence results in the US invading a country in search of ‘weapons of mass destruction’ that never existed;
• an invasion designed to stymie Al-Qaeda occurs in a nation where they have absolutely no presence – until after the invasion – which has created the perfect recruitment drive;
• the war in Iraq is declared ‘Mission Accomplished’ – before the nation descends into bloody anarchy and years before stability is achieved;
• the supervisor of the Federal Government’s response to hurricane Katrina is described as performing ‘one heck of a job’ (while the death toll from rises and it becomes one of the greatest natural disasters in American history); and
• the assessment that the economy is doing well, just weeks before the largest whole‑sale nationalization of the financial sector ever seen in the US.

This is merely a precursory list, and fails to capture the extreme levels of incompetence displayed by the 43rd President (space limits me). Perhaps the most appalling element of this litany of woe has been the inability of ‘W’ to appreciate the magnitude of his errors – or to ever acknowledge them at all. Perhaps we now know why

A promising contrast is provided by the response of Barack Obama when, in response to an important supporter and high ranking appointee was found to have evaded taxes, he stated:

“I screwed up.”

There is hope that the 44th President is competent enough to appreciate his incompetence. Particularly as the global victims of the last one’s ignorance try to extract themselves from Bush’s ‘bliss.’

…never knowing that you are ignorant! There is a widely reported phenomenon that we all, as humans, tend to overestimate our abilities and how good we are compared with others.

A study into people’s abilities at self assessment turned up some interesting results that have powerful implications. It is also a widespread phenomenon with research suggesting that socially incompetent teenage boys have been found to be largely unaware of their lack of social graces, and the same holds true of college students.

Psychologists Justin Kruger and David Dunning put this well known tendency to the test and found some interesting conclusions. In their study, participants were required to complete a series of tests and then rate how well they performed and also how well they performed relative to others undertaking the same test. The worse someone did in an area, the greater the disparity between how well they believed they performed and how well they believed they performed relative to other people.

Interestingly, Kruger and Dunning found that people who were good at a task underestimated their relative performance. That is, they tended to think that everyone performed the task as well as they did. This study suggests is that we are not particularly clear of either our strengths or our weaknesses.

Think of the awkward uncle you ran into at the family Christmas gathering. He insists on being loud and obnoxious every year, persisting in the mistaken impression that he is quite debonair and charming! The skills that would transform your uncle into someone you’d talk to outside of public holidays are the same ones that would allow him to realize that he’s quite the bore. However, your uncle may be highly accomplished at tasks unrelated to entertaining relatives, but he probably is not aware that he’s much better than other people at such tasks.

References

Kruger, J. and Dunning, D., 1999, ‘Unskilled and Unaware of it: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments’, Journal of Personality and Social Psychology, Volume 77, Number 6, pages 1121-1134.

Evolution And The Current Economic Crisis (PDF – 800kb)

I love the cartoon saying, “Daddy, where does money go when it dies?” It is fantastic because it sums up one of the greatest losses in wealth that the world has ever seen. Wealth has been lost because asset prices have plunged everywhere as perceptions as to the assets’ values have fundamentally changed.

Recently, perceptions have fundamentally changed! The chart tracking stock markets in the US and Australia shows a definitive trend – straight down! The value of stocks has effectively halved over the course of one year in Australia. This means that trillions of dollars in perceived value have been written off.

Why? Once again I am glad you asked.

Chart 9 shows the level of interest charged between banks. It tracks what is referred to as ‘counterparty risk’ (or the risk that the other person is not going to pay you back) between large financial institutions. What is interesting is that there are three broad levels of counterparty risk in the graph. These are:

• a long period of very low and stable levels of counterparty risk;
• a sharp jump in July/August 2007; and
• a very sharp jump after October 2008.

There are some interesting dynamics underlying each period that I will blog on later. For the moment, I’ll describe them briefly. The first period was when credit was relatively cheap. This period was facilitated by massive capital surpluses in Asian countries and trade deficits in a number of industralised ones (notably the US and the UK). The cheap credit led to an extensive build up in credit in a number of industralised countries (notably the US and the UK), with more being lent to more than ever before.

Part of the justification for this extensive expansion of credit was that new financial products (such as securitized lending) helped manage risk more effectively and spread it over a wider pool of investors than ever before. The latter was certainly proved true!

The second period began in truth after the announcement by a French Investment Bank that they could not value how much their investment portfolio was worth. It had been common knowledge that there was a growing concern with a product called a ‘sub‑prime’ loans. However, many commentators (including yours truly) had believed that the biggest problem would be that governments cracked down with heavy‑handed regulations that would gum up the credit markets. This quickly became an irrelevant concern as credit markets seized up around the globe (the ‘diversification of risk’ managed to ensure everyone was effected).

The second period is punctuated by increasingly drastic actions from increasingly worried regulators and governments. With little impact. Credit market practitioners knew that, ‘Something was wrong in the State of Denmark.’ It was commonly known that a very large player in the sub-prime market was going to ‘go down’ and no one wanted to be left dealing with their corpse. The sick man appeared to be Bear Stearns and, after its failure, things seemed to calm down. It seemed the government was willing to step in and ensure a smooth transition in the market. So markets slowly began to work again – albeit at high risk levels.

All this changed when the Federal Reserve decided to let Lehman Brothers go bankrupt rather than bail them out in some fashion. Credit markets had been constrained before, now they seized up completely. This third period has been typified by further bankruptcies and financial difficulties (such as the financial giant Citi Bank) and increasingly broad action from central banks and governments. As a consequence, interest rates have been slashed across the globe and government budgets massively expanded.

Evolution And The Current Economic Crisis (PDF – 800kb)

Western Australia has been in the throws of unprecedented growth. In fact, for the last five or six years WA has been expanding somewhere between an industrialized country (like the US) and one of the developing South East Asia. This is deceptively phenomenal.

The South East Asia economies (they were popularly referred to as Asian Tiger economies before they experienced an economic crisis of their own around 1997) are far less developed than Australia. As a consequence, they have much higher levels of unemployment and far poorer capital – both in terms of buildings and in terms of the education of their populace. They have lots of slack and so can grow very strongly as this excess slack gets used up in productive pursuits.

Western Australia, on the other hand, has a highly developed economy. Therefore, the economic expansion fueled by the resources boom that has occurred first sucked up all the available resources and then started stealing them from other industries So the economic expansion that has occurred from around 2000‑01 to 2007-08 saw the WA economy expand by almost 50 per cent. Huge!

Why you ask? That is a good question and one that lets me segue seamlessly into the next topic: Why WA has grown so strongly!

Almost everyone living in WA has heard the China story. In a nutshell, China is going through the industrialization process that England went through 200 years ago. This is a fascinating topic in itself (why is China industrializing now and not 2,000 years ago?) but not one for today.

What I will briefly mention is the impact that China’s growth has had on WA.

Since China joined the World Trade Organisation in the early 1990s it has grown at a very fast pace. Their economy has essentially doubled every six or seven years. They were coming off a very low base, and so it was not that significant at first. However, beginning in the early parts of this century, China started to develop enough economic gravity that its growth represented a substantial impact on world markets.

China certainly has had a massive impact on WA. The sixth chart shows how China has become the most significant trade partner for Western Australia, supplanting Japan sometime in 2006-07. This is because of the fantastic complimentarity of what China needs to fuel its growth and what WA exports (resources and energy).

By 2007-08 this story of perfect trading partners was running into some challenges, such as a lack labour and a supply chain stretched to breaking.

This economic fairytale continues in the next blog.

When we describe ourselves on our CV we are really describing our proactive persona.

Very few people write in their CV that they have a fear of strangers and react extremely to perceived emotional threats. Hardly! People describe themselves at their very best – at least mine certainly does! Also, our proactive side is capable of changing and adjusting to new circumstances. It is us at our very best.

In contrast, if you are ever unlucky enough to be fired, it will be because of the reactive part of your brain. Because of its limited computational capacity, and its unswerving focus on personal survival, this part of our brain has little capacity to grow and change. It is unable to evaluate: at its most basic, everything becomes a matter of survival, and so there are strong emotional drives associated with cognitive evaluations. It is unable to forgive: someone who hated you (and proved it by hurting you in some way) is bound to continue to do so. Therefore, never forgive and never forget.

You might say you marry someone’s proactive brain and divorce their reactive brain.

A tragic example of what happens when your reactive brain controls your decisions occurred when, as the prosecutor told the court, Christopher Debroy Summers “allowed his anger and his upset to drive (his) car.” Christopher Summers got into his car in a state of extreme anger, having just had a fight with his wife. With his car traveling at over 130 kms, the policeman stood on the road to slow the car down. Apparently Christopher Summers did not even take his foot off the accelerator. He let his emotional, reactive brain drive him. As a consequence he ploughed into and killed a policeman.

This is a furphy. There is no deterrent effect in enacting a death penalty but there is one for enforcing the death penalty.

Economic journals have been publishing evidence that there are large deterrent effects – in the order of anywhere between eight to twenty-four murders prevented by each execution – when death penalties are enforced. (The same is true for all crime – if people know it has high costs they are less likely to do it.)

This would seem to suggest that capital punishment is a highly effective policy for reducing the level of murder. It is.

What this argument misses is that the deterrent effect occurs regardless of whether the right person is executed or not! The link is between enforcing the death penalty rather than in justly enforcing the death penalty. Therefore, if your objective is to maximise the deterrent effect of capital punishment, focus on getting convictions as opposed to getting the right person convicted.

If taken to its logical conclusion, this approach would ensure that someone is convicted and severely punished every time there is an infraction of the rules. Irrespective of whether they are guilty or not!

References

http://www.cjlf.org/deathpenalty/DPDeterrence.htm

Dezhbakhsh, H., Rubin, P. H., and Shepherd, J. M., 2003, Does Capital Punishment Have a Deterrent Effect? New Evidence from Postmoratorium Panel Data, American Law and Economics Review, Volume 5, Number 2, pages 344-376.

Here are two tongue-in-cheek views on the issue. Which is more reasonable?

Pro-Capital Punishment: The position of right-wing nuts who believe that an ‘eye for an eye’ represents appropriate social justice:

• Capital punishment is the only effective way to deal with violent criminals;
• These scum are going to be a drain on public finances for their entire lives;
• The violent offenders will only go on to commit more crime – unless they are executed;
• It acts as a discouragement for further violent crime;
• Capital punishment provides a measure of justice for the victim; and
• Banjo music is ‘OK’ but best enjoyed with your cousins and a fiddle as well.

Anti-Capital Punishment: The position of latte-sipping elitists, who wouldn’t know a hard day’s work unless it hit them in the face with a shovel, is:

• Capital punishment does not actually have an impact on the level of violent crime;
• The justice system is frequently wrong which would result in innocent people being executed;
• Violence does not solve problems, it only perpetuates them;
• Resources should be spent on rehabilitating people rather than executing them;
• Individuals should not be consigned to the social scrap heap because of one action, there is possibility for redemption and change when given the right opportunity; and
• Can I have my chia tea with goat’s milk?

The idea that we evaluate issues from our pre conceived biases adds new weight to the old adage:

“A man convinced against his will is a man of the same opinion still.”

(Personally, I think that all the banjo playing red-necks who advocate capital punishment should be rounded up and shot!)

Lord, Ross and Lepper (1979) sorted a group of students into two teams, based on their opinions about capital punishment. These two teams, composed entirely of members who were either for or against capital punishment, were asked to objectively evaluate different opinions about the topic.

The students in each team found that the evidence, on balance, favored their pre-existing position! That is, rather than objectively evaluate our positions, we all have a tendency to give preference to arguments that already support their position and to discount those that don’t!

“Sure,” you might say, “of course we evaluate ideas based on our own biases. That is common sense.” Common sense it may be, but it is far from widely accepted. After all, the basis of our democratic pluralistic society is that the public engages in a ‘vigorous debate’ about important issues and the best ideas are the ones with the widest support.

The reality seems to be our opinions, or at least the opinions of the vast majority of people, are already set. We are ‘convinced’ by the person who thinks like we do.

References

Lord, C.G., Ross, L., & Lepper, M. R., 1979, Biased assimilation and attitude polarization: The effects of prior theories on subsequently considered evidence. Journal of Personality and Social Psychology, 37, 2098 2109.

In one study, conducted by Finch and Cialdini (1989), subjects were told that they either shared or did not share their birthday with the infamous historical character, Rasputin. An irrelevant and false linkage made people favorably disposed to Rasputin. Those people who thought they had something in common with Rasputin were more lenient in judging his character than those who had no perceived commonality.

This false ‘bond’ was used in a prisoner’s dilemma study where some people were told they shared a birthday with the other person and some were not (Prentice and Miller, 1992). Since the prisoner’s dilemma depends on people trusting the other person not to “do them in”, sharing a birthday was predicted to have a big impact.

And it did.

Those who believed that they shared a birthday with the other player (which was false) would cooperate much more than those who did not think they had anything in common with the other test subject.

On a personal note, when I was a struggling door to door salesman in London, I accidentally stumbled on this phenomenon as a sales strategy. When I was just starting out, I ran into some Javanese Indonesians to whom I said, “We’re neighbours!” They ended up inviting me into their home and making tea for the whole family as we talked about the differences in the UK and being one of my very first sales.

These days I actually do call some Indonesian’s neighbors! They run an excellent restaurant called Sweet Java. If you ever find yourself hungry in Mt Lawley, Perth, I recommend it.

References

Finch, J.F., & Cialdini, R.B., 1989, Another indirect tactic of (self-) image management: Boosting. Personality and Social Psychology Bulletin, 15, 222 232.Prentice, D., & Miller, D. T., 1992, The psychology of in group attachment, Paper presented at the conference on The Self and The Collective, Princeton University, Princeton, NJ.

“Recognize the difference between wealth and money. Wealth is the progressive realization of worthy goals, the ability to love and have compassion, meaningful and caring relationships.

We have a culture where we spend what we haven’t earned to buy things we don’t need to impress people we don’t like, and now the situation is such that we are being drawn to find the real meaning in our lives.”

Regardless as to the quality of Deepak Chopra’s other works, I love this comment.

It really puts things in perspective and highlights the relative insignificance of Consumption.

It also puts into context why the industrialization of countries such as China and India (where some people estimate almost 500 million people have recently left subsistence level poverty) is so important. It means there are an amazing number of people capable of being creating and developing meaningful lives rather than focusing every minute of the day on getting enough food to survive the day.

Sure, there will be greater challenges arising from their industrialization, but there will also be enormously more people capable of addressing the challenges and developing meaningful lives for themselves.

I think it’s exciting!

That is a statement that I never thought I’d say. After all, despite seven years of formal economic education, the only class I ever fell asleep in was marketing. This was despite the fact that I had economic professors with personalities of porridge and presenting styles to match!

Yet, economics could learn that jargon is significant and has ramifications as what we focus our attention on and measure has a tendency to grow. In economics, we pay a lot of attention to what we jargonistically call ‘Consumption’.

Now consumption is more than stuffing food into your gob, which is what it initially sounds like! It also involves a range of things, like building a home for yourself and your family, to educating your children so that they can have a better life, to giving to someone less fortunate than yourself.

All these things bear the ignominious label of consumption.

Yet the word consumption seems to suggest a digestive process – it suggests the absorption and breakdown of a produced thing for personal satiation.

This is reflected in our culture which has, in many ways, come to glorify hedonistic consumption. The objective of economic growth is to make greater and greater levels of consumption available.

Personally, I think that economic growth (at a personal or national level) allows for greater freedom and greater capacity to take on larger challenges. If I had more time available, I could research behavioral economics to my little hearts content! (My inner nerd jumps for joy at the thought.) If Australia had greater amounts of wealth, we could make larger contributions to fight global warming, or do more for the poor (as examples).

Shakespeare once pondered if a rose, by any other name, would smell as sweet.

I wonder what should we measure if we aren’t measuring ‘Consumption’? Any suggestions?

Pure economics would suggest we have discrete preferences that, even if temporal, we refer to when trying to maximize our pleasure in allocating our available time and money.

Not true.

The reality is that our preferences in terms of how questions are framed. Questions 3 & 4 are classic examples of this framing problem.

Humans have a defined tendency to be both risk adverse and also loss minimizing. However, our framing mental fallacy means that we assess loss and risk based on the way a decision is framed rather than what the decision contains.

It even has an impact on experts who should know better. For instance, when doctors are told that ‘ninety of one hundred are alive’ after an operation, they are more likely to recommend the operation than if told ‘ten of one hundred are dead.’ The advice of these doctors is being fundamentally altered based purely on an insignificant reframing of the consequence!

Framing matters because people tend to be somewhat mindless and passive as decision makers. Their reactive, smaller brain makes emotional assessments based on the way a decision is framed. Meanwhile, their more cognitive parts of the mind do not do the work that would be required to check and see whether reframing the question would produce a different answer.

Framing has played a pretty critical role in facilitating the sub-prime financial crisis turning into ‘the next Great Depression’.

Reference

Tversky & Kahneman, 1981, The Framing of Decisions and the Psychology of Choice, Science 211, pages 453‑58.

The Minister had recently announced that Australia would be cutting back its immigration intake in the face of the global financial crisis and subsequent downturn in economic activity. This is exactly not what Western Australia needs!

We are very fortunate to have a Minister who understands the business conditions in WA. Senator Evans is very pragmatic about the role that migration plays in Australia’s economy – and its politics! The economic conditions in NSW and Victoria are driving the Government’s decision to reduce migration as expanding our intake of migrants does not play well with the punters.

Ironically, every skilled migrant who relocates to Australia boosts overall economic activity in real per capita terms. This means, economically speaking, that we should increase our level of migration when faced with economic difficulties!

At some time during the meeting, after listening to Senator Evans pragmatically acknowledge the benefits and the difficulties associated with migration it struck me – how enormously grateful I was not to have a national disgrace for an Immigration Minister!

While I may not always agree with Senator Evan’s decisions, I’ll appreciate that he is being driven by very valid political and pragmatic reasons rather than any ideological bent or short term spasm of xenophobia.

Neurologically we are primed to spend more money on credit cards than if we were to use cash. This is probably no surprise to anyone who has ever undertaken the ritual of cutting their credit cards, but it highlights a critical failure in our mental faculties.

We link a certain amount of pain to the physical act of handing over cash in exchange for goods or services. Not many people enjoy exchanging a $20 bill for a fiver and change. There is a physical act to accompany the purchase – and so a greater emotional awareness of the impact of our purchasing decisions.

The situation is vastly different with credit cards.

With a credit card we hand over a piece of plastic and swipe. The little pieces of paper we sign are no different if we spend $10 or $1,000! There is no emotional sense of having spent money – particularly because credit cards have ‘interest free’ periods. It is almost like they are giving you free money!

Personally, my uptight Scottish Presbyterian upbringing reduces my exposure to this particular mental failing (I have strong negative emotional connections with spending).

But there is no denying credit cards can be tricky business.

Practice enables you to rise above the fallacies of your monkey mind and to make insightful decisions that elude those with less mastery than you.

Malcolm Gladwell calls this the 10,000 Hour Rule. In his latest book, Outliers, he describes this phenomenon as:

“Studies suggest that the key to success in any field has nothing to do with talent. It’s simply practice, 10,000 hours of it — 20 hours a week for 10 years.”

When confronted with problems, less well rehearsed people will be falling back on their monkey minds more frequently. The more practiced individual, who has achieved a certain mastery over their field of expertise, is much less likely to fall into cognitive traps.

In economics we discuss the consequences of this 10,000 Hour Rule as part of the advantages that flow from ‘specialisation’. I am never going to be as proficient in the kitchen as Gordon Ramsay. But he is unlikely to be as knowledgeable about behavioural economics as I am. So we have the basis of a trade. I can do something better than him and he can do something better than me.

Fortunately, our economy is sufficiently complicated that I don’t have to try and trade my behavioural economics knowledge with Gordan Ramsay for a meal. If I were to try it, I suspect that he would only give me a few choice words in return.

The growth in knowledge and expansion of technology ensures that all of us have the opportunity to be highly successful. As long as we practice at what we are good at!

The 10,000 Hour Rule reminds me of the Proverb from the Bible:

“A man’s gift brings him before kings.”

All it takes is practice!

Consider the case of the feminist Linda and her job at the bank. Why do so many people get this question wrong? It is because people are driven by the narrative of the description rather than by the logic of the analysis. The narrative subverts the conscious mind, leaving the brain to say, “But surely Linda is more likely to be involved in the feminist movement in her part time?”

When there is a seeming internal logic to events, people innately try and link them. The trait seems to be a relic from the dark nights when we would huddle around fires and hear stories that explained the world. Having nothing else (like the empirical standards of science) to guide themselves by, our forbearers were reduced to assessing reality through the internal logic of stories.

“This trait can be seen in the success of Hollywood. Incredible amounts of energy and creativity are spent to transform someone’s imagination into electronic dreams that we can all share. Then we huddle together in dark rooms and watch the flickering frames transport us into other worlds.

Economically, these narratives are incredibly important. They determine the way that the vast majority of us determine the risks and probabilities associated with investments of all kinds. Only those who have mastered the arcane arts are immune from being influenced by the power of the narrative.

Stock markets are ruled by Bulls and Bears. The bulls think prices are going up, and they always have a really good reason for it – think of the ‘new economy’ of the dot com era or the ‘enhanced risk management’ story that underpinned the sub prime expansion.

At the moment, financial markets are ruled by the Bears – those who think that recession is just around the corner and that the entire financial market may collapse. Hence the HUGE falls in prices around the world’s stock markets.

To be successful in the stock market you must rise above the narrative that is being played in the stock market and use your rational capacities to assess what is going on. This may mean taking advice from a number of people, or it may mean really researching conditions for yourself rather than relying on catch phrases (the ‘China story’, the ‘Greater Depression’, etc) to determine your decisions.

As we said before, our mind has evolved to assist our survival. As a consequence, it tends to get triggered more often (and with more ‘validity’) in highly stressful situations. This is particularly true when we are dealing with a situation that is unfamiliar to us. How hard it is to use your bigger brain will depend on how well you know it. When you master a topic or issue, you tend to have greater access to your cognitive abilities.

This is very important when dealing with highly charged situations about which we are unfamiliar. The more raw emotion involved, the more likelihood that people will be thinking with their little brain rather than their big one.

There is no issue more pressing right now than the global financial crisis. With the stock market up and then down by record amounts every other day, anyone with financial assets must be worried.

The New York Times summed up the dominance of emotions effecting peoples decisions at the moment by saying:

“Fear can be seen at every turn — in headlines raising questions about another Great Depression, and in the crowds gathered around office televisions to track stocks or to parse the latest pronouncements from the Federal Reserve chairman, Ben S. Bernanke, or the Treasury secretary, Henry M. Paulson Jr.”

When the emotion is up, people start thinking with their little brain. This leads to poor decisions. It is also why Warren Buffet said, “When the markets are greedy, I am fearful. When the markets are fearful, I am greedy.”

Warren Buffet is someone who has spent his life buying businesses. He has mastered the art of understanding business value. He is someone who knows how to use his big brain when it comes to investing. It has made him one of the richest men in the world.

Which brain is driving you?

Our brain has evolved two systems of thought (at least!) that focus on very different things and that arrive at conclusions in very different ways. The first is a survival system and is centered in our amygdale. This reactive system constantly scans the external environment and prompts the brain to react to it. It can reach conclusions very quickly, and if there is a sense of personal survival involved, then your thoughts will be highly emotive.

In terms of mass, the grey matter of the reactive system is broadly equivalent to that of a Labrador.

Our second system of thought is very different. It is more developed and represents our species’ greatest asset – the ability to think rationally and intelligently. This is our big brain.

Unfortunately our little brain is very quick at processing. This is hardly surprising since it evolved, in part, to keep us out of danger. It wouldn’t really do for our survival reflexes to kick in after we’ve had time to sit down and think about it.

When we are confronted with a situation that challenges our survival, our small brain says, “Crap, that’s an enraged grizzly bear, I’m out of here!” Then, without conscious thought, it pumps our bodies full of adrenaline and sets our heart and our feet racing. Meanwhile, our big brain is saying, “Hmmm, I wonder what the optimal response to this emerging challenge may be?” Then, a short conflict with an enraged bear later, it says, “ARGHHHH.”

The challenge is that we, as humans, do a fairly poor job of differentiating the two systems of thought. In fact, people frequently completely fail to realize that their initial judgment of a situation is completely wrong.

Review Question 1. (See previous blog Are You A Monkey?) When most people see this question their little brain prompts them, “The answer is $1.00 for the bat and $0.10 for the ball.” This is an intuitive response that arrives in our brain.

It is also wrong!

Those who got the question right would have had a slightly different experience. Their brain would have registered the immediate thoughts of the little brain, but they would have said, “Hang on a minute, that doesn’t make sense! If the ball is is $0.10 and the bat is $1.00 more than that then the bat alone would be $1.10 and combined they would be $1.20. I need to think this through a bit.”

Question 1 was a trivial example of a very profound human experience. It is scary how many people do not stop to think things through. It is particularly scary if you come to realize how often you don’t stop to think things through. I sure know I found it scary.

The current economic crisis has its origin in this basic failure to understand human nature. Alan Greenspan stated in his Congressional testimony in October 2008, he was “shocked” that markets did not work as anticipated. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.” Self interest was not enough because it is based on flawed decision making.

Before discussing the interaction between behavioral economics and the current financial crisis, I am going to pose a series of questions. I challenge you to take the following short test and find out whether you make decisions like a monkey or like a rational decision maker.

Question 1

A bat and a ball cost $1.10. If the bat costs $1.00 more than the ball, how much do they each cost individually?

Question 2

As a student, Linda is an outspoken feminist and highly involved in student politics. After Linda graduates, which is more likely?

a) Linda works in a bank; or
b) Linda works in a bank and is active in the feminist movement?

Question 3

Australia is expecting an outbreak of the Asian flu that is expected to kill 600 people. There are two programs to combat the disease. (Assume exact probabilities are known). The programs are:

a) If adopted, 200 people will be saved; Or
b) If adopted, 1/3 probability that 600 people will be saved, and a 2/3 probability that no one will be saved

Which program do you choose?

Question 4

It is the same disease, but this time the two programs have the following expectations:

a) If adopted, 400 people will die
b) If adopted, 1/3 probability that nobody will die, and a 2/3 chance that 600 people will die.

Which program do you choose now?

To find out what type of investor you are, email your answers to nathan.taylor@cciwa.com with the words “Monkey Business” in the subject field.

Theoretically, a company’s stock price represents all the expected future cash flows from the business discounted for its associated risks. So if people were rational decision makers, then it would be quite extraordinary to find that expectations have so fundamentally altered over the course of a year without some major catastrophe fundamentally altering the risks or profitability of all businesses.

Unfortunately, neither you nor I make particularly rational decisions. In particular, our perceptions and judgments of risk and of probabilities are highly flawed.

Last weekend I had the pleasure of delivering a presentation on the systematic ways in which people, as frail humans, fail to make rational decisions. The seven ‘deadly sins’ of human decision making (I presented on three of them) are:

1. Having two systems of thought;
2. Narrative evaluation of risk and probability;
3. Being influenced by how decisions are framed;
4. That the availability of an event in memory will influence its relevance;
5. A bias to the status quo;
6. We are loss adverse; and
7. That we have a bias towards information that confirms our preconceived ideas.

The presentation also touched on how these thinking flaws contributed to the current economic malaise.

Knowing how mistakes are made allows you to make better decisions. If you can make good decisions while all about you people are making poor ones, then you will be well positioned to make money and be successful.

Over the next couple of blogs I will outline the basis elements of the presentation, Monkey Business: Evolutions Taint and the Current Economic Crisis.

But before beginning, I want to ask you a question:

What kind of investor are you?

The reasons CCI & I believe that tight labour markets are going to be a feature of life are:

• Economic prospects: WA has an enormous amount of resource related projects that are ‘in the works’. These projects are very long lived, so while some may fall by the way side, they will only free up resources for the more profitable ones. There is over $170 billion in committed or possible investment projects in Western Australia alone;
• Technology: has changed the way we do business. Karl Marx predicted that continued investment in physical capital (ie machinery) would result in masses of unemployed who would eventually rise up and overthrow the ruling capitalists. Well, things didn’t quite work out as he’d predicted! Instead, economies have focused more on services rather than on manufacturing, making people more important!
• Education: individuals are better educated than ever before, meaning they have greater control over their ‘personal capital’ and are also relatively free to relocated where their skills are in demand; and
• Demographics: in 2011 the first cohort of baby boomers will begin to retire. From this moment on the relative size of the Australian labour market (the number of people of working age) will begin to shrink.

These reasons, and others, are elaborated on in a recent discussion paper that CCI released, titled Perth’s Vibrancy and Regional Liveability. This discussion paper makes a very strong case (OK I must confess I wrote large sections of the paper) that the tight labour market conditions that currently exist are going to be a part of the business environment for the foreseeable future. And by foreseeable future, I mean the next twenty to thirty years.

In tomorrow’s labour market, it is going to be good to be a seller.

They say that 60 per cent of the effort involved in walking is spent on the first step – overcoming inertia. Thereafter, it takes a fraction of the effort to maintain existing momentum.

The same is true in our professional and personal lives. We can tell our future by the momentum of decisions that determine where we are right now. If we were to ‘stop’ taking action, we would continue to drift along in the same direction (your sales would continue for a while, your friendships would last for a while, you’d keep putting on weight) until you started to take concerted action.

Nowhere is the power of the great Mo more pronounced than in social decision making. Mo is important because we tend to extract ‘information’ from the perceived decisions of others. If everyone is doing it, then how bad/dangerous can it be? Something must be right!

That is how property bubbles develop. Two guys get together and talk about how a third made a killing in selling his house. Before you know it, house prices have trebled all across the Western world.

While that is mildly facetious, it does help to explain the huge build up in housing starts (people building new homes) that occurred in the US. There, housing starts rose by 47.5 per cent from 2001 until the beginning of 2006. Then people started to clue into actual risks involved in buying houses and since then the number of new starts dropped by over 150 per cent.

We call this dawning awareness the sub prime crisis – and the momentum of that crisis is fundamentally altering economic activity throughout the world today.

1. That critical technological developments to facilitate the transition to a low carbon future will occur;
2. There will be a global response; and
3. There will be no leakage from Australia.

While I am hopeful of the first, it has a reasonable chance only if there is global agreement on an appropriate response. If there is a global agreement, then vast amounts of creativity will be applied to the challenge.

My lack of confidence in the Treasury model arises because of the vested interests involved in getting any sort of world‑wide agreement. Sure, everyone benefits if climate change is mitigated or averted altogether. However, who has to pay the costs is not decided.

The developing world has the very valid argument that they, on a per capita basis, use considerably less energy. Furthermore, they could argue, they are not going to make their fledgling industries pay taxes that they cannot afford. Therefore the developing world should be exempt.

Industrialised countries can counter with the argument, “Sure we use more energy per person, but as far as total energy consumption goes, the developing world uses far and away more energy.” (Fact: China will soon replace the US as the largest consumer of energy and it is projected to become far and away the largest contributor to carbon in the world).

There is the very real potential that the world will not be able to find common cause to mitigate climate change. Without this agreement, I doubt that there will be enough of a focus on innovation to fundamentally alter the way society works.

If there is no global agreement, then the impact on resource rich states like WA & Queensland will be profound.

Treasury’s model makes the statement:

“There is little evidence of carbon leakage.”

This is a reassuring statement so long as you don’t think about it. After all, only the Euro Area has any form of EMT, and Australia’s economic reliance on primary industries is vastly different to that of Germany and France. There is great scope for primary industries (read mining, agriculture and so forth) to relocate to developing regimes that do not tax carbon. The result would be that Australia’s carbon footprint would go down, but not the world’s (in fact it may go up if the developing countries have less stringent environmental standards).

The EMT has the potential to rob Western Australia of considerable economic activity and prosperity. In Western Australia, industries directly related to the resources (such as mining, resource related manufacturing, heavy industry construction and so on) account for almost half of the economy. The Treasury model acknowledges that WA will suffer disproportionately to the rest of the economy. I suspect it underestimates how much the state will suffer.

This potential leakage is made worse at the moment when the global financial crisis is forcing businesses to reassess their investment decisions.

Access Economics has estimated that there is approximately $170 billion worth of business investment under construction or under consideration for Western Australia. Considering the WA economy is only around $130 billion, this represents a hefty amount of business investment in anyone’s books. But more than half of that investment, approximately $90 billion, is “under consideration”.

With global capital so mobile, Western Australia has the most to lose from the EMT.

In the long run, however, the world as a whole has the most to lose from not having an EMT or equivalent mitigation program. The greatest hope is that the creative capabilities of the entire globe can be brought to the challenge of climate change mitigation. That would be a cause for optimism!

I am not convinced. I suspect the costs will be much higher, particularly for a resource dependent state like WA, than the modelling would have us believe.

With the world in the grip of a financial crisis that has the potential to turn into a prolonged economic recession, now does not represent the most fortuitous time to consider a new tax on carbon. Particularly as it has the potential to dramatically alter business investment decisions at a time when every sane person must be re‑evaluating their investment decisions. With the looming recession depressing consumer sentiment and retail sales, investment is a more important prop than ever for Australia’s economy.

While an EMT is probably necessary, and is a positive step for many reasons, I have some critical concerns about the assumptions underlying the Treasury’s modelling. The major assumptions that are of concern are that:

1. Critical technological developments to facilitate the transition to a low carbon future will be developed;
2. A global response will be adopted; and
3. There will be no leakage of business activity from Australia.

I actually agree with the first assumption, to a degree. I believe that there is incredible scope for improving energy efficiency and have great confidence in the innovation of individuals and countries when they have the right incentives. However, it will take a concerted effort to effect the social and economic transformation that will be necessary to significantly reduce our energy footprint. This effort will require the innovation of people throughout the world, which leads directly to the second assumption.

I am not at all confident that the second assumption will hold. In fact, it is the fatal flaw in the EMT.

From a certain perspective, the history of last century can be seen as a conflict between people holding slightly different views on the best ownership of the factors of production. The clash between capitalism and communism comes down to disagreement over whether physical resources should be owned collectively or individually.

Communism argued that the factors of production should be owned by the masses – and so the government was charged with the responsibility of ownership on behalf of them. It also argued that the growth in physical capital would displace human input into production, leading to masses of dissatisfied people waiting to ‘throw off their chains and unite’.

This idea wasn’t as stupid as it now seems. After all, early communists witnessed hoards of people thrown off the land as their backbreaking labour was replaced by much more efficient machines.

But as far as economic forecasts go, communism couldn’t have been more wrong!

Just look in the ‘jobs’ section of the West Australian. There are loads more people looking for people to work for them than there are people looking for people to work for.

The perspective of capitalism was that individuals, acting in their own interest, are able to adjust their behaviour and maximize the benefits for the entire society. Consider the story of the pencil.

The last century unequivocally shows capitalism got much closer to the truth.

Incomes and lifestyles in the capitalistic West improved at tremendous paces. Not always evenly, not always smoothly. But you and I have longer life expectancy and far better material goods and services than anyone who has come before us.

Breathless commentators have been speculating that the current economic crisis has been heralded as ‘the end of capitalism’ and the dawn of a new age of socialism.

I suggest such commentators have a nice cup of tea and take a good lie down.

The reality is that we are experiencing some of the rough patches of rationality.

As regulation of the financial system and broader economic activity adjusts to account for the ‘boundaries of rationality’ then, hopefully, incidents like the current crisis will be less common.

The financial crisis highlights the importance of understanding the limits of rationality – even if they appear to be about ‘minor’ issues.

It would seem that there is a willingness to appreciate the limits of rationality. Consider these words from one man who is probably more responsible than anyone else for the lax state of regulation in the US, Alan Greenspan.

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms. I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”

What is obvious to anyone who has ever passionately supported a sporting team is that your emotional state can be significantly altered by their success.

Our ‘social identity’ is frequently linked to the sporting teams we support. What code of football do you support? Rugby, Aussie Rules, Soccer or Rugby League? Your answer may well say a great deal about your socio economic background.

Interestingly, sport is a fantastically civilized form of tribalism, with its own dress, and code of appropriate behaviour. We also have tribal chants, a pantheon of minor deities to worship and follow and an overweening sense of our own moral superiority when compared with our competitors.

I remember watching Australia play New Zealand in the third and deciding game of an international series. I stayed glued to the television for what felt like ages as the lead see-sawed back and forth until finally I won.

It was the first, and last, time I ever watched woman’s netball, yet it made me incredibly excited at the time.

Scientists may be able to explain why I felt so good because Australia’s netballers beat those pathetic and morally reprobate New Zealanders. Scientists have found that the levels of testosterone (the male sex hormone associated with virility and aggression) increased by over 25 per cent in those men whose sporting team won. Those men who suffered the ignominy of associating with the losing team suffered an equally significant decline in testosterone.

Researchers, from Georgia State University, took saliva samples from men in Brazil and Italy when both countries were competing in the finals of the soccer World Cup. They found that: “Testosterone, and the feeling of power associated with it, increases as subjects bask in reflected glory and decreases as they experience vicarious defeat.”

The researchers noted subtle differences in behaviour as well: “Some Brazilians were arrested for riotous celebration in the streets.” While, “the Italian men looked depressed and apathetic. They were disheartened by the loss.”

Oh those silly foreigners!

According to psychologists Henri Tajfel and John Turner, we have a tendency to form shared ‘social identities’. This theory suggests that people have an inbuilt tendency to categorize themselves into one or more in-groups, building a part of their identity on the basis of membership of that group and enforcing boundaries with other groups.

For instance, I am a Catholic, Labor Party supporting, Western Australian. These tribal memberships will influence what actions I take and also say quite a lot about me as an individual.

Tajfel and Turner’s theory was based on studies in which participants were divided arbitrarily into two groups, based on trivial and almost completely irrelevant basis. The participants did not know other members of the group, and had no reason to expect that they would interact with them in the future. Yet members of both groups began to identify themselves with their group, preferring other members of their group and favoring them with rewards that maximized their own group’s outcomes!

We have just witnessed an example of this ‘social identity’ being played out on a very grand scale with the Beijing Olympics.

Millions of Australians, and many, many more people around the world, tuned in to watch their teams compete on the world stage. And for what? Small pieces of gold, silver or bronze? I’d suggest not. They watched, in part, to see if their tribe would win.

The strength of the Chinese team was frequently equated with the growing strength and power of the Chinese people. Not least by the Chinese themselves.

In a way, the ritualised warfare of politics is extended to the national stage via sports. To my mind it is far better than the alternative!

References:

Tajfel, H. (1970). Experiments in intergroup discrimination. Scientific American, 223, 96-102. homepage.ntlworld.com/gary.sturt/tajfel.htm

Our ego takes almost no time to form groups on the slightest of whims.

In a 2002 study University of Washington psychologist Anthony G. Greenwald had 156 people read the names of four members of two hypothetical teams, Purple and Gold, then spend 45 seconds memorising the names of the players on just one team.

Next, the participants performed two tasks in which they quickly sorted the names of team members. In one task, they grouped members of one team under the concept “win” and those of the other team under “lose,” and in the other they linked each team with either “self” or “other.”

The results of this study were that after a mere 45 seconds, a person began to identify with the fictional team. This was shown by the participants implicitly viewing its members as ‘winners’.

This group formation is never clearer than in democracies. The political process in Australia is a wonderful drama where two tribes compete against each other and try to ‘win over’ the few people who have yet to decide which tribe they belong to. The result is that the major competing political tribes in society get access and control over resources.

You don’t think it matters? Think union’s contributions to Kevin Rudd and the subsequent demise of ‘Work Choices’.

A slightly more blatant example of this tribalism occurs in Kenya where political fighting has resulted in the death of over 350 people in a once stable democracy. One of the competing political parties ran with the slogan, “Our turn to eat”.

I prefer Australia’s slightly more genteel form of corrupt tribalism.

The good news is that you don’t have to worry about rampaging grizzly bears. On the down side you do have to worry about rampaging homo sapiens. Particularly on a Friday night in Northbridge!

While our physical safety is based on the actions of those around us, the greatest threats we face are social ones.

You’ve probably heard the oft touted statistic that people fear public speaking more than they fear death.

As a rational economist this strikes me as absurd. However, as someone who has been an adolescent I am well aware that while you can only die once, you can suffer shame and social humiliation for a subjective eternity.

Not only are we social critters, but our success or failure will depend on those around us. You are my greatest source of competition for jobs, for a partner, and so on. It pays to be vigilant.

Since most of human history has involved small family units competing with other small family units for resources, we are hardwired to eschew the different and the other.

Apparently we take in this ‘racism’ with our Mother’s milk.

In a recent study psychologist Luigi Castelli of the University of Padova in Italy examined racial attitudes and behaviour in 72 white Italian families. They found that young children’s racial preferences were unaffected by their parents’ explicit racial attitudes, but those children whose mothers had more negative implicit attitudes toward blacks tended to choose a white over a black playmate. They would also ascribe more negative traits to a fictional black child than to a white child. Children whose mothers showed less implicit racial bias on an implicit bias test were less likely to exhibit such racial biases.

Furthermore, psychologists M. Banaji, and Yarrow Dunham found that white preschoolers tended to categorize racially ambiguous angry faces as black rather than white while they would not do the same for happy faces.

It appears (from further studies) that implicit racism is absorbed into our brain by the age of six years old.

It is disconcerting to think that you will act in ways contrary to what you value and believe to be important. At least it is for me. Perhaps an intuitive understanding of how implicit assumptions can guide judgements prompted Socrates to say, “The unexamined life is not worth living.”

Here, the unemployment rate has been below four per cent for well over two years. For perspective, it has never been anywhere near this low since I could autonomously poop!

Despite all the doom and gloom scenarios that are going around, last month the state created 10,000 full time jobs. That’s a LOT! And yet there is heaps more demand for people out there still.

The Chamber of Commerce and Industry in WA (where I work) has forecast that over the next ten years, WA’s economy will be short of 150,000 workers of the 400,000 it needs. At first flush this sounds like a good thing – particularly for workers in WA.

After all, if there are 10 economist jobs going but only 5 economists in the State, it means companies will bid for existing economists and my wages will go up. Eventually only 5 companies will be able to afford an economists and the rest will miss out. This would be good for me, but bad for everyone else as the important work that the other five economists would have done will not happen.

OK that’s not a reasonable example, as I suspect that no one will even miss those five hypothetical economists. Replace economist with engineer/tradesperson and “important work” with hospital/bridge/school and you begin to get a sense of why WA needs people.

One rough estimate of how much of this “important work” there is comes from the Access Economics Investment Monitor. According to this monitor, there is approximately $160 billion worth of investment that could take place in WA. The ENTIRE State economy is currently smaller than this.

The reality in WA is that economic conditions are very good and we need LOTS more people!

In a second study, Rudman and Ashmore measured the resource allocation implications of implicit racism for Jews, Asians and blacks. Participants in their study were asked to examine a budget proposal ‘under consideration’ at their university and to make recommendations for allocating funding to student organisations.

There was a very strong correlation between the implicit racism of students and how much money they allocated to different organisations. So if a student unconsciously disliked blacks, Jews or Asians, then they would provide these groups with lower levels of funds than those without those biases.

This matters. The consequences can mean the difference between political and social empowerment and death.

Consider the case of Jesse Helms and the spread of AIDS. Now Jesse Helms is someone who exhibited quite a bit of implicit and explicit bigotry (a description he embraced. Once, when university students staged a vigil in response to Martin Luther King, Jr.’s assassination, Helms remarked: “They should ask their parents if it would be all right for their son or daughter to marry a Negro.”

In a classic example of preferring your ‘own’ at the expense of the ‘other’, Helms twice endorsed amendments prohibiting federal funds for AIDS education materials. He said he was: “Trying to get some equity for people who have had heart trouble.” Senator Helms had undergone open heart surgery three years earlier.

In this case, the bias of one individual cost many more their lives.

References

Laurie A. Rudman and Richard D. Ashmore (2007 Rutgers University) Psychologists

Shop-worn ethnic jokes are the standard fare of countless, “Big book of jokes”. They also serve as the basis for reinforcing social stereotyping and status.

As the old saying goes: “There is no smoke without fire”.

Someone who frequently tells a lot of ethnic jokes is also likely to engage in a wide variety of less benign discrimination throughout their everyday life. According to studies by Rudman and Ashmore (2007) such people, when they exhibit high levels of implicit racism, will also avoid and exclude minorities, utter racial slurs along with the jokes, and insult, threaten and potentially physically harm those they have bias against!

We have talked about how African Americans have a fairly good estimate of someone’s implicit racism through there non-verbal cues. Minorities tend to be more sensitive to the putdowns levelled at them and to take them seriously even when the person saying them believes, “They are only kidding.”

It would appear that they have every reason to take such comments seriously. While political correctness may be a unique form of madness, it may have some method to it after all!

References

Laurie A. Rudman and Richard D. Ashmore (2007 Rutgers University) Psychologists

In an interesting experiment, a number of job applications were sent out by the economist Dan-Olof Rooth of the University of Kalmar in Sweden. The job applications were on behalf of two men, both identical in every way except that one mythical job applicant had a Swedish name while the second had an Arabic sounding name.

Dan Olof’s study involved measuring the number of responses from human resource staff to these job applications and then studying their level of implicit racism.

After giving the human resource staff enough time to respond to the applications, Dan Olof tracked down the 193 HR staff that had evaluated the applications and measured their implicit and explicit biases towards Arab-Muslim men.

The study found a very significant correlation between the HR staff’s implicit bias and the likelihood that they would not respond to a job application. The larger the employer’s unconscious bias, the less likely they were to call an applicant with a Muslim sounding name for an interview. In contrast, explicit racism played no part in the decision to call up a job applicant. This may have been due to reluctance on behalf of the HR staff to acknowledge explicit racist beliefs. What it does show is that implicit bias has a material impact on minority’s job prospects.

If implicit biases can play a significant role in determining whether a job applicant receives a simple phone call, how likely are they to influence the success of individual’s in the labour market all the time?

I wonder what impact changing the name from male to female or from ‘Anglo-Saxon’ to ‘Arabic’ would have in an Australian context?

References

Carlsson, M., and Rooth, D., September 2006, Evidence of ethnic discrimination in the Swedish labour market using experimental data, Discussion paper for the Institute for the Study of Labour.

For instance, in a 2007 study by Harvard psychologist Mahzarin R. Banaji, 287 doctors were presented with a photograph and brief clinical vignette describing a middle-aged patient who arrived at the hospital complaining of chest pain. Some of these doctors were provided with a photo of a white man and others a photo of a black man. The medical conditions of the patient were always the same.

The majority of the doctors acknowledged no conscious racism, but testing revealed a racism that ranged from being moderately biased against black people to being substantially biased against black people. The greater this implicit racial bias, the less likely the doctor would be to give a black patient clot-reducing thrombolytic drugs!

This is a staggering result as it suggests racism will influence critically important decisions made by people who are not consciously racist. It is particularly concerning when you consider that in 2000, the death rate from heart disease was 29 per cent higher among African Americans than among white adults, and the death rate from stroke was 40 per cent higher.

Thank god there is no racism in Australia nor anyone willing to exploit it for political purposes!

References

Green, A. R., Carney, D., R., Pallin, D. J., Ngo, L. H., Raymond, K. L., Iezzoni, L. I., and Banaji, M. R., September 2007, Implicit Bias among Physicians and its Prediction of Thrombolysis Decisions for Black and White Patients, Journal of General Internal Medicine, Volume 22, Number 9, pages 1231-1238.

Such a situation prompted civil-rights leader Jesse Jackson to state:

“There is nothing more painful to me at this stage in my life than to start thinking about robbery – then look around and see somebody white and to feel relieved.”

In the US there are strong social stereotypes connecting black men with violent crime. Very strong stereotypes that subtly influence peoples’ behaviour towards blacks.

Yale psychologist John F. Dovidio conducted a study in 2002 of how implicit assumptions altered the behaviour of 40 white college students. These students were asked to chat with one black and then one white person while their interactions were secretly recorded.

The study found that the student’s explicit views about racism and equality (held by the rational part of the mind) determined their conscious behaviours, such as the friendliness of their conversation. However, their non-verbal signals, such as the amount of eye contact they made, were determined by the unconscious racism embedded in their implicit assumptions.

The result was that whites and blacks came away from these conversations with very different impressions of how they had gone. The whites typically thought the interactions had gone well but the blacks, who picked up the nonverbal signals, thought that the whites were racists.

As we discussed in Are you a Woman or an Asian? implicit assumptions can have a much more significant impact on behaviour and performance than merely being a poor conversationalist!

What kind of hope is there for strong relationships to develop when one party is unaware of their cold and demeaning attitudes while they are very clear to the other person?

References

Dovidio, J. F., Gaertner S. L., and Kawakami, K., 2002, Implicit and Explicit Prejudice and Interracial Interaction, Journal of Personality and Social Psychology, Volume 82, Number 1, pages 62 68.

Question one asked: A bat and a base-ball cost $1.10 together. The bat costs $1.00 more than the base-ball. How much do the bat and the base-ball cost individually? (Did you give it a go?)

Almost everyone who is asked this question reports that the answer that immediately comes to mind is that the bat costs $1.00 and the base-ball costs $0.10. However, if you ‘think’ about the question for more than a moment it becomes clear that this cannot be right as it would result in the bat costing $0.90 more than the base-ball.

Academic Shane Fredericks (2005) found that many intelligent people yield to their first impression and give the wrong result to this question. In one study of Princeton University students 50 per cent gave the wrong answer and in another study of University of Michigan students 56 per cent!

The correct answer is that the bat costs $1.05 and the base-ball costs $0.05.

This question highlights how lax we can be in our conscious monitoring, and how easily we trust a plausible judgement that comes quickly to mind. Generally these intuitive ‘answers’ are based on implicit assumptions. The wide-spread lack of mental monitoring is kinda scary when we move away from questions of base-ball prices and address questions of racism, sexism and the many areas of life where our decisions are guided by implicit assumptions.

The next two questions were in the same theme.

Question two asked: If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?

The answer is 5 minutes, but many people respond by saying 100 minutes. It seems right at an intuitive level.

Question three asked: There is a lake suffering from a blue-green algae bloom. Every day the size of the bloom doubles. If it takes 48 days for the bloom to cover the entire lake, how long would it take for the patch to cover half the lake?

The intuitive answer tends to be 24 days. It is wrong.

The correct answer is 47 days.

Fredericks also found that people’s answers to these questions were highly correlated with certain behavioural traits. For instance, people who answered all three questions right tended to be more patient and more willing to wait to be rewarded. Fredericks’ subjects were asked another question: would you rather $3,400 this month or $3,800 next month?

The students who got all three questions wrong then 65 per cent went for the $3,400 this month. In contrast, of those who got all three answers right, 60 per cent decided to wait a month and take $3,800. The two different amounts equate to an implied discount rate (the interest rate a bank would have to pay you on $3,400 to make it worth $3,800 in a month) of 280 per cent!

How did you go with these simple questions? Should I lend you some money for the month? (You wouldn’t happen to have $3,400 sitting around would you?)

References:

Frederick, S., 2005, Cognitive reflection and decision making, Journal of Economic Perspectives, Volume 19, Number 4.

Epstein, S., 1994, Integration of the cognitive and psychodynamic unconscious, American Psychologist, 49, 709-724.

Chaiken, S., and Trope, Y., (Eds) 1999, Dual-process theories in social psychology, New York: Guilford Press.

Kahneman, D., 8 December 2002, Maps of bounded rationality: A perspective on intuitive judgement and choice, Noble Prize Lecture.

1. A bat and a base-ball cost $1.10 together. The bat costs $1.00 more than the base ball. How much do the bat and the base-ball cost individually?

Bat costs:_____________ Base Ball costs: ___________

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? (A widget is an economic euphemism for ‘product’ or ‘thingie’ – there is a reason that economists are not engineers)

How long?____________

3. There is a lake suffering from a blue-green algae bloom. Every day the size of the bloom doubles. If it takes 48 days for the bloom to cover the entire lake, how long would it take for the patch to cover half the lake?

How many days? ________________

Technically, implicit assumptions are ‘simplifying heuristics’ which is a fancy way of saying, ‘decision shortcuts.’ Our brain makes sense of the world by making mental models to explain it and how the different parts of our world interact. We can also think of our brain as a squishy machine that is constantly sorting information from our environment to try and keep us safe while also helping us reach our ‘objectives’, be them ever so humble or grand.

We also come to develop models for how different elements of our world interact. For instance, we first come to identify a ‘tree’ and then we learn how it interacts with the rest of its environment. This knowledge gives us an understanding of ‘trees’ such that we can identify them wherever we are in the world and can have a fairly good understanding of what the individual tree we are staring at will do.

A key ‘component’ to our mental models is how we interact with the world around us and how the world around us is likely to interact with us (for instance, the tree is probably more likely to interact with us than a rock, but less so than a dog). Most of these mental models are unconscious (we don’t need to think about flames being hot to know not to put our hands in the fire) but they significantly influence our behaviour and opinions.

What is interesting is how easily the mental models can be influenced by social norms and stereotypes that we may not personally agree with or even be conscious of. There is a pretty serious amount of research into the various ways our unconscious Implicit Assumptions influence our understanding of ourselves and others at an unconscious level and this will form the basis of the next few blogs.

Dianne Odell had spent the previous 58 years with a two meter machine completely enveloping her body to keep her alive. This machine, a 340-kilogram iron lung, was a cylindrical chamber with a seal at the neck that completely enveloped her body with only her head exposed. At the age of three, Dianne was struck down with the debilitating disease polio. Her life was dependent on a machine developed in 1928 that produced positive and negative pressure on her lungs to induce breathing. Because of a spinal deformity from the polio that made it impossible for Odell to wear a more modern, portable, breathing apparatus she had to use the older machine.

Her unique deformity meant that she had to spend her life lying on her back, looking up at the ceiling. She was believed to be one of the last, if not the last, survivor of polio to live with the support of an iron lung. She lived with the support and care of her family, with her mother and father, who were over eighty years old, refusing to have her institutionalised.

In many ways Dianne Odell was unlucky. Just three years after she contracted polio a vaccine was developed that effectively wiped out the crippling disease. She was also unlucky because a spinal deformity arising from the polio made it impossible for Odell to wear more modern, portable breathing apparatus that generally replaced the iron lungs in the 1950s. She was also unlucky because so few people suffered from her condition that little attention was paid to alleviating it.

In one crucial way, however, Dianne Odell was very lucky. Dianne did not have the distractions and clutter perspective that occlude my and many others understanding of the world. Nor did she have any illusions as to her circumstances. She was in a stark position and confronted with conditions that many of us, and most definitely I, would find intolerable.

Dianne Odell was lucky because her life was stripped back to a simple decision, how to respond to her circumstances and create the most meaningful life possible. The life she made is one worthy of respect.

The ability to take challenging circumstances and transform them into positive life experiences is a unique one. However, almost every day you and I are confronted with decisions and situations where we can choose to react or respond creatively and consciously. The Naked Ape is dedicated to exploring and celebrating our collective achievements despite our very, very human limitations.

Dianne Odell was one of the unique individuals who, despite tremendous challenges, was determined to rise above them and live a full-life. Dr. Walton Harrison, Odell’s paediatrician just after she was diagnosed with polio, said that she had beaten the odds to live as long as she had. “I didn’t think she would last through puberty because her lung capacity was so limited,” he said. She earned a diploma from Jackson High School and an honorary degree from Freed-Hardeman College.

Dianne loved to talk with people and had a mirror installed so that she could make eye contact with visitors who entered her room. She loved having visitors, and particularly enjoyed encouraging younger children with disabilities to go for their dreams. In a 2001 interview with the Associated Press, she said she wanted to show children, especially those with physical disabilities, that they should never give up. “It’s amazing what you can accomplish if you see someone do the same thing,” she said.

She also wrote a book, the work of years. In an interview with the STAR Centre, Dianne said, “I have had two dreams in my life. The ability to “write without the help of others” and “to write my own letters and perhaps books.” She continues, “My dream of writing a book without help has come true. I had started a children’s book over 12 years ago. The computer I had then gave me nothing but frustration. It must have been three years before I realized that the method of voice recognition that I was using would never work for my voice. It broke my heart to think of all the wasted money people had contributed for my benefit.”

It would not be until another decade before Dianne could purchase a voice activated computer of suitable quality to write her children’s book, “Blinky Less Light”. The story goes:

“Not so long ago, in a distant corner of the heavens, there was a tiny, almost invisible star. His name was Blinky. His parents loved him very much, although they knew Blinky was different. He was very small and gave off only a dim light, almost like that of a firefly,”

Eventually, the small star manages to become a wishing star, despite tremendous obstacles, and eventually grants a wish that saves a young child’s life.

For her 60th birthday a celebratory gala was held to raise funds for her healthcare. More than 1,100 people attended, including the actor David Keith and former Vice President Al Gore. Odell was rolled onto an ambulance for her ride to the gala wearing a sequined gown designed by a local seamstress with a tiara adorning her head. When she was wheeled into the room, with an American flag draped over the machine, she received a standing ovation. Some of the people who attended knew her well, but others had heard about her determination and spirit and wanted to meet her.

As Francis Bacon remarked, quoting from a speech by the Stoic philosopher Seneca, “The good things which belong to prosperity are to be wished, but the good things that belong to adversity are to be admired.”

On hearing of Dianne’s response to life’s adversity, it is impossible not to admire her spirit and character and marvel at the love she gave and received.

References

Csikszentmihalyi, M., 1991, “Flow: The psychology of optimal experience”, page 200.
Photographs used in this post are from http://66.78.165.185/index.php?option=com_content&task=view&id=63&Itemid=108

More valuable links:
http://www.onlineathens.com/stories/022002/hea_0220020028.shtml
http://orig.jacksonsun.com/photogallery/20070217odellbday/pages/A-DianneOdellSociety-km.htm
http://66.78.165.185/index.php?option=com_content&task=view&id=63&Itemid=108

We all tend to believe that we have fixed attributes and that our abilities are absolutes. We might be bad at “doing the books” but we are great at selling customers on the benefits of a new product.

Alternatively, we may see ourselves as being highly creative while also being efficiently organised. Sure, we might have a bad day and “score” a little lower in one of our skills than we generally do. But generally most of us believe we know our true potential and abilities.

Unfortunately nothing could be further from the truth.

50s stereotyped woman

One ridiculously simple way in which basic qualities we would presume to be immutable are influenced was revealed in a study of implicit assumptions. In a cunning study, some exceptionally cunning academics decided to test the mathematical abilities of Asian-American women to determine which social stereotypes would influence their behavior more – being Asian (have the word Asian or being female (a shortfall presumably made up for by superior washing skills?).

This study explored the influence of conflicting stereotypes on performance, that of being Asian with presumably superior mathematical skills with the stereotype that woman are presumably inferior in the same area (Shih, M., Pittinskyl, T.L., and Ambady, N. 1999, ‘Stereotype susceptibility: identity salience and shifts in quantitative performance’, Psychological Science, vol. 10, no. 1, pp. 80-83).

The study involved one mathematical test, two surveys (one evoking the subjects femininity, the other their ethnicity), and some willing volunteers (female and Asian preferably!)

The women who were randomly assigned to the survey that reminded them of their ethnicity scored significantly higher on a math test than those who first completed a survey that evoked their gender. What this means is that the mathematical abilities of these test subjects were significantly altered by having their attention indirectly focused on a social stereotype that they may or may not believe in.

It is not like they were told, being Asian = being good at maths while being female = being bad at maths. Nor is it like these study subjects were told about the stereotypes and then told, “Hence you will be good/bad at maths” – the stereotype that directly and significantly influenced their mathematical prowess was buried in their social programming. It is not reflective of how the women in question perceived themselves.

This is a pretty incredible outcome. It means your abilities and skills are sufficiently malleable that simply having you think about a topic related to a social stereotype will significantly influence your performance. Even when the stereotype is more suitable to the 1950s than to the noughties, they still have a significant power to influence us.

Maths nerd

Considering that the individuals were randomly assigned the surveys, it shows how much our performance can be conditioned by what we consciously or unconsciously focus on. It may also go some way to explaining the MASSIVE disparity between the numbers of male and female engineering students, despite female university students outnumbering males, particularly amongst younger cohorts of graduates.

The next blog will explore how race influences academic success and social interactions and the ramifications for Australia’s appalling gap in conditions between indigenous Australians and the rest of the population.

It will also suggest how women (at least the non-Asian women) can improve their inability to do maths!

I am willing to wager that not only are you a misogynistic racist, but you have a “thing” about people who are gay and/or fat. This is a bet that I’m willing to make, irrespective of your skin pigmentation, the shape of your privates, even if you are just a tiny bit fabulous or festively plump, because of a concept called Implicit Assumptions.

We live in a society that has embraced the principles of freedom and equality and done an awful lot to remove the external trappings of bigotry and misogyny.

This is an unparalleled adventure in equality and social justice that has never been trialled before in history. While this amazing experiment is still a work in progress, it has come a very long way in just a short time. Only a short century ago women were treated as property, unable to vote, and only recently have they entered the workforce on equal footing with their male peers. Aboriginals were not even recognised in the census in Australia until 1967 (up to this point people with more than 50% Aboriginal blood were excluded from official population figures, let alone being able to vote! Racism against migrants has been an ingrained and accepted part of society and still has unwelcome expression. And if you were unfortunate enough to be gay or lesbian, just forget about equality – they are just getting around to removing the discrimination from the laws, starting in 1972. but still ongoing.!

Despite this rapid ripping down of the external bulwalks of bigotry, society still has quite some to go. Regardless of whatever conscious beliefs you or I may hold, irrespective of whether or not our deepest values are those of acceptance and tolerance, we as individuals still have quite some way to go.

The reason I say this is because of the implicit assumptions that lurk within your squishy grey cells.

At your very core is a highly reactionary part of your brain that has beliefs and values that you would never ever consciously believe, let alone act on. The reason is that we, all of us, have implicit assumptions that are hardwired into our brains at a very fundamental level. They come from the part of the animal mind that enabled our ancestors to see a “Saber Toothed Tiger” and leap without questioning whether what they say was actually a Saber Toothed Tiger or its harmless cousin, the Tofu Toothed Tiger (sadly now extinct). Those individuals whose brains question which type of tiger they saw were weeded out of the general population. Pretty quickly too.

The consequence is that we all have implicit assumptions hardwired into our brains to facilitate decision making as an evolutionary imperative to ensure cognition does not lead directly to extinction.

Considering that in today’s modern world, where humanity has cemented its place at the top of the food chain, the majority of “threats” that confront us are not from Saber Toothed Tigers, but other people. As a consequence, our mental shortcuts, our implicit assumptions, form a very basic element to most of our social interactions. They are a critical part of our unconscious decision making processes that have a MAJOR impact on our behavior towards others.

Over the next couple of weeks I will begin to pull apart the concept of implicit assumptions, covering the following topics:

• How your performance is determined by what type of stereotype you hold about yourself.
• How to change these implicit assumptions
• The role of implicit assumptions in a Presidential election
• Freud was right, blame your Mum!
• The divided brain
• Pulling it all together – a comprehensive discussion on implicit assumptions and how they fit into a “whole of personality” perspective.
• Now, let’s take that bet – how racist are you.

The Naked Ape

But when you think about it, making a pencil involves a wide number of activities to be undertaken throughout the world, and each step in producing it involves many ancillary activities to make them happen. For instance, the pencil’s wood may have been harvested in an Indonesian rainforest, while the lead composite that constitutes the pencil (or whatever the alternative now is!) may have been mined in Latin America. Meanwhile, the tools to harvest the lumber and mine the lead substitute have all been made by someone else. The petroleum will need to be refined in the Middle East and made into tyres and petrol to transport the wood, meanwhile a saw is needed to chop down the trees has to be created by a mill, which itself involves many component parts. The process goes on in an incredibly complex set of activities that are required to produce pencil and all the products that contribute to it being in my hand (or more often in my mouth).

Why did the newsagent conveniently happen to have one sitting there waiting for me? The answer was because I paid for it. I wanted that pencil more than I wanted the loose change floating around in my pocket. Free and voluntary exchange meant that all along the production process individuals exchanged their aspirations, their wishes and their dreams to labour and produce my pencil. All I had to do in order to thank them was pay 10 cents (this was back in the day…).

The economic insight behind the odd statement was that price transmits sufficient information to motivate numerous people throughout the world to put their personal plans on hold, to adjust their behaviour and lifestyle and to cooperate in an intricate process just so I could have something to write with and to occasionally chew on.

Now that may sound like a mundane insight, and in many ways it is common sense. However, it was also very profound when appreciated within the context of the time. In the late 1980s, when I was a young(ish) man the world was divided into two philosophical camps and the world locked in the last stages of a cold war (Gen Y: to understand what I am talking about click here). When I was growing up, science fiction books postulated frightening apocalyptic scenarios of world wide destruction and there were an amazing tension in global affairs (and were themselves rather effective propaganda tools).

It was, at times, kinda scary!

The insight that price is able to profoundly motivate people to alter their behaviour and cooperate throughout the world without complex centrally laid plans was very significant. It turned out to be the Achilles heel of the communist system.

Economics was able to provide a very basic and fundamental insight into the power of democratic political systems over totalitarian regimes.

Since then the world has moved on, and move on very fast. The problems and challenges confronting us as individuals and our communities, not to mention our nation, are profoundly changed.

However, technological breakthroughs have provided fresh insights into human behaviour in a number of fields of study. Neuroscience and behavioural economics are providing breathtaking insights into what it means to be human and what is involved in that most basic of human activities – deciding what the hell we are going to do with ourselves.

The blogs that follow will delve into Pandora’s Box of the human mind and unfold some of the emerging insights into human nature.

This blogs will explore many of these emerging insights and put them in the context of our daily life. These insights will improve your understanding of what drives human behaviour, how societies make decisions, and your own mind through an exploration of one of the most exciting fields of study: behavioural economics.