Wednesday, 10 August 2016

Common Cognitive Biases

A number of bloggers, such as Chris Dillow or writers such as Danny Finkelstein write insightful stuff which blends economics, politics with cognitive biases.  I found the following table of commonly studied cognitive biases from Wikipedia very helpful as a summary:


Fundamental attribution error (FAE) Also known as the correspondence bias (Baumeister & Bushman, 2010) is the tendency for people to over-emphasize personality-based explanations for behaviours observed in others. At the same time, individuals under-emphasize the role and power of situational influences on the same behaviour.
Confirmation bias The tendency to search for or interpret information in a way that confirms one's preconceptions. In addition, individuals may discredit information that does not support their views.[29] The confirmation bias is related to the concept of cognitive dissonance. Whereby, individuals may reduce inconsistency by searching for information which re-confirms their views (Jermias, 2001, p. 146).[30]
Self-serving bias The tendency to claim more responsibility for successes than failures. It may also manifest itself as a tendency for people to evaluate ambiguous information in a way beneficial to their interests.
Belief bias When one's evaluation of the logical strength of an argument is biased by their belief in the truth or falsity of the conclusion.
Framing Using a too-narrow approach and description of the situation or issue.
Hindsight bias Sometimes called the "I-knew-it-all-along" effect, is the inclination to see past events as being predictable.

Thursday, 28 July 2016

More on how regulation can get in the way of competition

A follow up to

The CMA's inquiry into banking is coming to an end.

The challenger banks have written, Letter from 8 challenger banks, to say the main problem is their disadvantaged funding, via a regulatory formula that means they have to set aside much more capital than a large bank, something they thing is tied up in the Too Big to Fail Category. They say

In reply, Letter from Professor Alasdair Smith to 8 challenger banks, the CMA say two things.

First, "it is an important provisional finding of the CMA investigation that the funding advantages of the incumbent banks derive in large part from the inertia in the customer base. I believe that the remedies package we have put forward will create a more fluid market"

But second, in response to the regulation question they delegate it to others.

"In our view the issue should be taken forward by the bodies which have primary responsibility for the safety and soundness of the banking system"

" It would be in no one’s interests to create ambiguity about regulatory responsibility in this area in particular given the international context in which reform will be required. This is also the case for addressing the ‘Too Big To Fail’ issues you raise, which are being tackled by the Bank of England and the Financial Stability Board’s reforms to the resolution regime for global systemically important banks."

I had hoped the CMA inquiry was going to be a chance to address the Too Big To Fail issue. It would seem not.

(See also this exchange of letters with Sir John Vickers, Sir John Vickers (11.7.16) CMA response to Sir John Vickers (11.7.16)).

Examples of how basic research affects real products

From Gianni de Fraja, paper in the current Rand Journal of Economics
Optimal public funding for research: a theoretical analysis (pages 498–528)

Nelson's early work (1959) already reports many examples of basic research projects that illustrate these characteristics. Among the cases studied more recently, Moody (1995) describes in detail the numerous strands of basic research which allowed the creation of the ubiquitous CD. A Global Positioning System (GPS) navigation system would be far too inaccurate to be of any practical use without corrections of gravitational effects central to the theory of relativity (Haustein, 2009). The abstract mathematical problem of covering a surface with tiles lies at the foundation of our understanding and exploitation of superconductors (Edelson, 1992). Gauss's investigation into the distribution of prime numbers has led, with the contributions of some of the best mathematical minds over the course of two centuries, to the possibility of unbreakable cryptographic codes, without which e-commerce would not be possible (du Satoy, 2003).10