Interesting article by Richard Thaler on encouraging good citizenship by making the desired behavior more fun:

Lotteries are just one way to provide positive reinforcement. Their power comes from the fact that the chance of winning the prize is overvalued. Of course you can simply pay people for doing the right thing, but if the payment is small, it could well backfire. …

An alternative to lotteries is a frequent-flyer-type reward program, where the points can be redeemed for something fun. A free goodie can be a better inducement than cash since it offers that rarest of commodities, a guilt-free pleasure. This sort of reward system has been successfully used in England to encourage recycling. In the Royal Borough of Windsor and Maidenhead outside of London, citizens could sign up for a rewards program in which they earned points depending on the weight of the material they recycled. The points were good for discounts at merchants in the area. Recycling increased by 35 percent.

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Idealistic approaches, however well motivated, rely on top down determination of what is right.

In the idealistic approach, the leaders of an organization set out an ideal future state that they wish to achieve, identify the gap between the ideal and their perception of the present, and seek to close it. This is common not only to process-based theory but also to practice that follows the general heading of the “learning organization”. Naturalistic approaches, by contrast, seek to understand a sufficiency of the present in order to act to stimulate evolution of the system. Once such stimulation is made, monitoring of emergent patterns becomes a critical activity so that desired patterns can be supported and undesired patterns disrupted. The organization thus evolves to a future that was unknowable in advance, but is more contextually appropriate when discovered.

Dave Snowden

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In the reign of Queen Elizabeth, an official named Gresham observed that where different metals were in circulation as coinage and some were better than others of the same nominal value, the coins made of the inferior metal tended to drive the better out of circulation. The better coins were either hoarded or melted down and sold as bullion, were used in the fine arts, or were absorbed in the foreign exchanges. In other words, what Gresham discovered was that cheaper money tends to drive out dearer; that when people begin to discriminate between two coinages, they will invariably pay out the inferior and hoard the better, thus removing the better from circulation. This phenomenon once generally observed came to be described as a “Law,” and was identified with Gresham’ s name, since it was Gresham who was first successful in drawing public attention to it. Amongst money-changers, Gresham’ s Law of the precious metals is better known than the Ten Commandments.

Something analogous to Gresham’s Law will be found to obtain in the case of competing standards in Industry. Assuming there is indifference in the matter of choice between competing commodities or services, but that in the case of such commodities or services the labor standards involved vary, the inferior standard, if brought in this manner into competition with a higher standard, will drive it out, or drag the higher down to its level. This is effected by the opportunity of under-selling which comes, where in such cases human well-being is sacrificed to material ends. The superior standard, not being recognized or demanded, is unable to hold its own, and in time disappears. This Law is just as real and relentless in its operation in Industry as Gresham’s Law of the precious metals is with respect to money and the mechanism of exchange. Indeed, a more accurate exposition would describe both as manifestations of one and the same law, which I propose to call the Law of Competing Standards. I see no reason why economists should not recognize the existence of such a law, and incorporate it immediately in economic science as being quite as significant as the Law of Supply and Demand, the Law of Diminishing Returns, or any other Law accorded a place in its nomenclature.

The Law of Competing Standards is doubtless a part of the general Law of Competition, under which the cheaper of two commodities gains in competition a preference over the dearer. What Gresham discovered was an important sequence of the Law of Competition as applied to coinage; namely, the disappearance, in the course of time, of the superior metals. Observance of a like sequence in the case of standards in Industry is highly desirable. As respects labor standards, I believe that recognition of the operation of the Law of Competing Standards over ever-widening areas would do more than aught else to clear up the most baffling problems with which Industry is confronted, and to point the way to a solution of many situations which hitherto have seemed incapable of solution.

I came across that passage while reading “Industry and Humanity,” by former Canadian Prime Minister Mackenzie King. We’ll add this to our previous knowledge on Gresham’s Law.

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William James famously wrote “Ninety-nine hundredths of our activity is purely automatic. All of our life is nothing but a mass of habits.”

James, according to Jonah Lehrer writing in the WSJ, “was pointing out that, though we give habits little thought, they define our lives: how much we eat, save or spend, how often we trek to the gym and what we say to our kids each night.”

But habits are not hard-wired into the brain at birth, they develop over time. What if habits were simply an extreme form of learning? After all, habits let us reserve brainpower for things that can’t be predicted in advance. This would conserve brain power for the things we need to think about and relegate the routine nature of tasks.

Lehrer reports with some interesting findings towards this theory:

In a new paper, the neuroscientist Joe Z. Tsien and colleagues at Georgia Health Sciences University describe a mutant strain of mice that were incapable of developing new habits. While ordinary mice quickly developed the habit of pressing a lever to get a food pellet (leading to overeating), the mutant mice stopped pressing the lever as soon as they felt full.

These mice were missing a protein known as an NMDA receptor on their dopamine neurons. Normally, these receptors help to generate a big electrical response when an animal is repeatedly exposed to a rewarding cue, such as a food pellet. According to Mr. Tsien’s data, this specific response is what transforms ordinary learning into an automatic behavior. It doesn’t matter if we’re learning to overeat or to spray Febreze. That big signal from the NMDA receptor makes the difference.

This isn’t the first time that Mr. Tsien has tinkered with NMDA receptors. A few years ago, he created a mouse strain with too much of the receptor and created a freakishly smart rodent—Mr. Tsien nicknamed it Doogie—that could learn and remember far better than a normal mouse. He has also showed that younger brains have significantly more of this receptor, which is why they absorb new information and acquire new routines so much more rapidly.

Still Curious? Read The Power of Habit.

Source

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Matt Ridley with an excellent column in the weekend Wall Street Journal on why we feel uncomfortable about using honesty when face to face with other people but seem to have no problem being brutally honest over the net.

In many monkeys and apes, face-to-face contact is essentially antagonistic. Staring is a threat. A baboon that fails to avert its eyes when stared at by a social superior is, in effect, mounting a challenge. Appeasing a dominant animal is an essential skill for any chimpanzee wishing to avoid a costly fight. Put two monkey strangers in a cage and they keep well apart, avoid eye contact and generally do their utmost to avoid triggering a fight. Put two people in an elevator and the same thing happens—with some verbal grooming to relieve the tension: “Cold out there today.”

So writing does not feel like a confrontation, whereas having to look someone in the eye and tell them the exact same thing does. Writing lacks the social cues that would otherwise tell us to back off because we’re being too frank. We’re also missing the normal social hierarchy — it feels like a peer relationship.

The phenomenon has a name: the online disinhibition effect. John Suler of Rider University, who coined the phrase, points out that, online, the cues to status and hierarchy are also missing. Just like junior apes, junior people are reluctant to say what they really think to somebody with authority for fear of disapproval and punishment. “But online, in what feels like a peer relationship—with the appearances of ‘authority’ minimized—people are much more willing to speak out or misbehave.”

Continue Reading

Still Curious? Matt Ridley is the author of the excellent book The Rational Optimist.

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Skepticism, if by that we mean cautiousness, is the balance wheel of civilization. Most of the present acute troubles of the world arise out of taking on new ideas without first carefully investigating to discover if they are good ideas.

— My Life and Work

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…Students might consider taking the questions in the back of the textbook chapter and try to answer them before reading the chapter. (If there are no questions, convert the section headings to questions. If the heading is Pavlovian Conditioning, ask yourself What is Pavlovian conditioning?). Then read the chapter and answer the questions while reading it. When the chapter is finished, go back to the questions and try answering them again. For any you miss, restudy that section of the chapter. Then wait a few days and try to answer the questions again (restudying when you need to). Keep this practice up on all the chapters you read before the exam and you will be have learned the material in a durable manner and be able to retrieve it long after you have left the course.

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The prisoners’ dilemma is the best known strategy game in social science. The game shows why two entities might not cooperate even when it appears in their best (rational) interest to do so. What is rational for the individual in certain circumstances is not rational for the group — that is, pursuing a strategy that is rational for you leads to a worse outcome.

With applications to economics, politics, and business the game illustrates the conflict, which can sometimes arise, between individual and group rationality.

From Greg Mankiw’s Economics textbook:

The prisoners’ dilemma is a story about two criminals who have been captured by the police. Let’s call them Mr Black and Mr Pink. The police have enough evidence to convict Mr Black and Mr Pink of a relatively minor crime, illegal possession of a handgun, so that each would spend a year in jail. The police also suspect that the two criminals have committed a jewelery robbery together, but they lack hard evidence to convict them of this major crime. The police question Mr Black and Mr Pink in separate rooms, and they offer each of them the following deal:

Right now we can lock you up for 1 year. If you confess to the jewelery robbery and implicate your partner, however, we’ll give you immunity and you can go free. Your partner will get 20 years in jail. But if you both confess to the crime, we won’t need your testimony and we can avoid the cost of a trial, so you will each get an intermediate sentence of 8 years.

If Mr Black and Mr Pink, heartless criminals that they are, care only about their own sentences, what would you expect them to do? Would they confess or remain silent? Each prisoner has two strategies: confess or remain silent. The sentence each prisoner gets depends on the strategy chosen by his or her partner in crime.

Consider first Mr Black’s decision. He reasons as follows:

I don’t know what Mr Pink is going to do. If he remains silent, my best strategy is to confess, since then I’ll go free rather than spending a year in jail. If he confesses, my best strategy is still to confess, since then I’ll spend 8 years in jail rather than 20. So, regardless of what Mr Pink does, I am better off confessing.

In the language of game theory, a strategy is called a dominant strategy if it is the best strategy for a player to follow regardless of the strategies pursued by other players. In this case, confessing is a dominant strategy for Mr Black. He spends less time in jail if he confesses, regardless of whether Mr Pink confesses or remains silent.

Now consider Mr Pink’s decision. He faces exactly the same choices as Mr Black, and he reasons in much the same way. Regardless of what Mr Black does, Mr Pink can reduce his time in jail by confessing. In other words, confessing is a dominant strategy for Mr Pink.

In the end, both Mr Black and Mr Pink confess, and both spend 8 years in jail. Yet, from their standpoint, this is a terrible outcome. If they had both remained silent, both of them would have been better off, spending only 1 year in jail on the gun charge. By each pursuing his own interests, the two prisoners together reach an outcome that is worse for each of them.

To see how difficult it is to maintain cooperation, imagine that, before the police captured Mr Black and Mr Pink, the two criminals had made a pack not to confess. Clearly, this agreement would make them both better off if they both live up to it, because they would each spend only 1 year in jail. But would the two criminals in fact remain silent, simply because they had agreed to? Once they are being questioned separately, the logic of self-interest takes over and leads them to confess. Cooperation between the two prisoners is difficult to maintain because cooperation is individually irrational.

* * *

Michael J. Mauboussin writes:

The classic two-player example of game theory is the prisoners’ dilemma. We can recast the prisoners’ dilemma in a business context by considering a simple case of capacity addition. Say two competitors, A and B, are considering adding capacity. If competitor A adds capacity and B doesn’t, A gets an outsized payoff. Likewise, if B adds capacity and A doesn’t than B gets the large payoff. If neither expands, A and B aren’t as well-off as if one alone had added capacity. But if both add capacity, they’re worse off of than if they had done nothing.

* * *

Avinash Dixit offers:

Consider two firms, say Coca-Cola and Pepsi, selling similar products. Each must decide on a pricing strategy. They best exploit their joint market power when both charge a high price; each makes a profit of ten million dollars per month. If one sets a competitive low price, it wins a lot of customers away from the rival. Suppose its profit rises to twelve million dollars, and that of the rival falls to seven million. If both set low prices, the profit of each is nine million dollars. Here, the low-price strategy is akin to the prisoner’s confession, and the high-price akin to keeping silent. Call the former cheating, and the latter cooperation. Then cheating is each firm’s dominant strategy, but the result when both “cheat” is worse for each than that of both cooperating.

* * *

Warren Buffett provides some illumination as to how the Prisoners’ Dilemma plays out in business in the 1985 Berkshire Hathaway Annual report.

The domestic textile industry operates in a commodity business, competing in a world market in which substantial excess capacity exists. Much of the trouble we experienced was attributable, both directly and indirectly, to competition from foreign countries whose workers are paid a small fraction of the U.S. minimum wage. But that in no way means that our labor force deserves any blame for our closing. In fact, in comparison with employees of American industry generally, our workers were poorly paid, as has been the case throughout the textile business. In contract negotiations, union leaders and members were sensitive to our disadvantageous cost position and did not push for unrealistic wage increases or unproductive work practices. To the contrary, they tried just as hard as we did to keep us competitive. Even during our liquidation period they performed superbly. (Ironically, we would have been better off financially if our union had behaved unreasonably some years ago; we then would have recognized the impossible future that we faced, promptly closed down, and avoided significant future losses.)

Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on-investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses.

But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industry-wide. Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic.

Thus, we faced a miserable choice: huge capital investment would have helped to keep our textile business alive, but would have left us with terrible returns on ever-growing amounts of capital. After the investment, moreover, the foreign competition would still have retained a major, continuing advantage in labor costs. A refusal to invest, however, would make us increasingly non-competitive, even measured against domestic textile manufacturers. I always thought myself in the position described by Woody Allen in one of his movies: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly.”

For an understanding of how the to-invest-or-not-to-invest dilemma plays out in a commodity business, it is instructive to look at Burlington Industries, by far the largest U.S. textile company both 21 years ago and now. In 1964 Burlington had sales of $1.2 billion against our $50 million. It had strengths in both distribution and production that we could never hope to match and also, of course, had an earnings record far superior to ours. Its stock sold at 60 at the end of 1964; ours was 13.

Burlington made a decision to stick to the textile business, and in 1985 had sales of about $2.8 billion. During the 1964-85 period, the company made capital expenditures of about $3 billion, far more than any other U.S. textile company and more than $200-per-share on that $60 stock. A very large part of the expenditures, I am sure, was devoted to cost improvement and expansion. Given Burlington’s basic commitment to stay in textiles, I would also surmise that the company’s capital decisions were quite rational.

Nevertheless, Burlington has lost sales volume in real dollars and has far lower returns on sales and equity now than 20 years ago. Split 2-for-1 in 1965, the stock now sells at 34 — on an adjusted basis, just a little over its $60 price in 1964. Meanwhile, the CPI has more than tripled. Therefore, each share commands about one-third the purchasing power it did at the end of 1964. Regular dividends have been paid but they, too, have shrunk significantly in purchasing power.

This devastating outcome for the shareholders indicates what can happen when much brain power and energy are applied to a faulty premise. The situation is suggestive of Samuel Johnson’s horse: “A horse that can count to ten is a remarkable horse – not a remarkable mathematician.” Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company – but not a remarkable business.

My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

* * *

Mauboussin adds:

Our discussion so far has focused on competition. But thoughtful strategic analysis also recognizes the role of co-evolution, or cooperation, in business. Not all business relationships are conflictual. Sometimes companies outside the purview of a firm’s competitive set can heavily influence its value creation prospects.

Consider the example of DVD makers (software) and DVD player makers (hardware). These companies do not compete with one another. But the more DVD titles that are available, the more attractive it will be for a consumer to buy a DVD player and vice versa. Another example is the Wintel standard—added features on Microsoft’s operating system required more powerful Intel microprocessors, and more powerful microprocessors could support updated operating systems. Complementors make the added value pie bigger. Competitors fight over a fixed pie.

* * *

Mankiw offers another real world example:

Consider an oligopoly with two members, called Iran and Saudi Arabia. Both countries sell crude oil. After prolonged negotiation, the countries agree to keep oil production low in order to keep the world price of oil high. After they agree on production levels, each country must decide whether to cooperate and live up to this agreement or to ignore it and produce at a higher level. The following image shows how the profits of the two countries depend on the strategies they choose.

Suppose you are the leader of Saudi Arabia. You might reason as follows:
I could keep production low as we agreed, or I could raise my production and sell more oil on world markets. If Iran lives up to the agreement and keeps its production low, then my country ears profit of $60 billion with high production and $50 billion with low production. In this case, Saudi Arabia is better off with high production. If Iran fails to live up to the agreement and produces at a high level, then my country earns $40 billion with high production and $30 billion with low production. Once again, Saudia Arabia is better off with high production. So, regardless of what Iran chooses to do, my country is better off reneging on our agreement and producing at a high level.

Producing at a high level is a dominant strategy for Saudi Arabia. Of course, Iran reasons in exactly the same way, and so both countries produce at a high level. The result is the inferior outcome (from both Iran and Saudi Arabia’s standpoint) with low profits in each country.

This example illustrates why oligopolies have trouble maintaining monopoly profits. The monopoly outcome is jointly rational for the oligopoly, but each oligopolist has an incentive to cheat. Just as self-interest drives the prisoners in the prisoners’ dilemma to confess, self-interest makes it difficult for the oligopoly to maintain the cooperative outcome with low production, high prices and monopoly prices.

Other examples of prisoners’ dilemma’s include: arms races, advertising, and common resources (see the Tradegy of the Commons)

The Prisoners’ Dilemma is part of the Farnam Street lattice work of Mental Models.

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Justin Landis with an an interesting blog post he wrote in response to a Freakonomics podcast “Why Is ‘I Don’t Know’ So Hard to Say?”

The highlight:

[T]hose of us who live in the business world are certainly incentivized to focus on what we know over what we don’t know. And whether we’re talking about closing a deal with an important client or simply competing with peers for a limited number of positions in a given field, this holds true. By highlighting what we know and tactfully hiding what we don’t, we present the illusion of mastery, and this is thought to (and generally does) inspire confidence in our ability to execute. The incentive here is clear, and the results are pretty clear as well, at least in my experience. The unintended consequence is that while we’re all focusing on what we know and making sure others are aware of those things, there is still a lot that we don’t know. In some cases, we may not even really know what we don’t know. And this is the most dangerous place to be in.

(H/T Freakonomics)

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Free The Animal: Lose Weight & Fat With The Paleo Diet (5 stars)

A charming primer on the paleo idea, with an illustration through the authors own life. I read it in one sitting.

Why Everyone (Else) Is a Hypocrite: Evolution and the Modular Mind (5 stars)

This is a great synthesis of the modularity approach to cognitive science. It covers the entire field and has the right footnotes for the patches.

The style is readable, & the author has an attitude (with is a very good thing, but his jokes are often bland, not aggressive enough). While I strongly disagree with his treatment of morality (I am deontic), I can safely say, so far, that this is not just one of the best books in cognitive science, but certainly one of the most readable.

Explaining Social Behavior: More Nuts and Bolts for the Social Sciences (5 stars)

I read this book twice. The first time, I thought that it was excellent, the best compendium of ideas of social science by arguably the best thinker in the field. I took copious notes, etc. I agreed with its patchwork-style approach to rational decision making. I knew that it had huge insights applicable to my refusal of general theories [they don't work], rather limit ourselves to nuts and bolts [they work].

Then I started reading it again, as the book tends to locate itself by my bedside and sneaks itself in my suitcase when I go on a trip. It is as if the book wanted me to read it. It is what literature does to you when it is at its best. So I realized why: it had another layer of depth –and the author distilled ideas from the works of Proust, La Rochefoucault, Tocqueville, Montaigne, people with the kind of insights that extend beyond the ideas, and that makes you feel that a reductionist academic treatment of the subject will necessary distort it [& somehow Elster managed to combine Montaigne and Kahneman-Tversky]. So as an anti-Platonist I finally found a rigorous treatment of human nature that is not Platonistic –not academic (in the bad sense of the word).

The Discovery of France: A Historical Geography from the Revolution to the First World War (5 stars)

This book has wonderful qualities that I am certain will be picked up by other reviewers. But I would like to add the following. This is the most profound examination of how nationality is enforced on a group of people, with the internal colonization process and the stamping out of idiosyncratic traits. As someone suspicious of government and state control, I was wondering how France did so well in spite of having a big government. This book gave me the answer: it took a long time for the government and the “nation” to penetrate the depth of deep France, “la France profonde”. It was not until recently that French was spoken by the majority of the citizens. Schools taught French but it was just like Greek or Latin: people forgot it right after they finished their (short) school life. For a long time France’s villages were unreachable.

A great book, a great investigation.

Good Calories, Bad Calories: Challenging the Conventional Wisdom on Diet, Weight Control, and Disease (5 stars)

Gary Taubes is a true empiricist. I can’t believe people hold on to the Platonicity of the thermodynamic theory of diet (calorie in = calorie out).

Read it twice, once for the diet, once a a rich document in the history of science.

Plato and a Platypus Walk into a Bar: Understanding Philosophy Through Jokes (4 stars)

I read Plato and the Platypus by Umberto Eco, which I found brilliant and was sucked into buying this book thinking it was about the same problem of categories. But Philosophy this is not, or if it is, it is not deep enough to give satisfaction. This is like a brief drink in an airplane lounge with someone funny, smart, witty, but not too funny. So I would give it my lowest rating: 4 stars (as an author I can’t give below that –I just would not review).

Would I buy it again? Perhaps, but only for a plane ride. It left me very very hungry for both jokes and philosophy.

Seeking Wisdom: From Darwin to Munger, 3rd Edition (5 Stars)

A wonderful book on wisdom and decision-making written by a wise decision-maker. This is the kind of book you read first, then leave by your bedside and re-read a bit every day, so you can slowly soak up the wisdom. It is sort of Montaigne but applied to business, with a great investigation of the psychological dimension of decision-making.

I like the book for many reasons –the main one is that it was written by a practitioner who knows what he wants, not by an academic.

Enjoy it.

The Doctrine of Deification in the Greek Patristic Tradition (5 stars)

I initially bought this book as I was curious about the differences between Eastern & Western traditions, particularly with the notion of theosis –the deification of man. This book goes far deeper, and covers pre-Christian practices (like Stoic thoughts, the deifications of Kings, Roman Emperors, that of private citizens who committed symbolic acts –such as Antinous, Hadrian’s obsession, who drowned to “save” mankind and other sotirologies).

The book was initially Russell’s doctoral thesis, which, as far as I can guess from the dates, had to have been completed when he was in late middle age. But he made it very readable, free of the theophilosophical jargon of similar texts. He still has quotes in the original language and it is a true piece of scholarship.

Statistical Models: Theory and Practice (5 stars)

I spent my life focusing on the errors of statistics and how they sometimes fail us in real life, because of the misinterpretation of what the techniques can do for you. This book is outstanding in the following two aspects: 1) It is of immense clarity, embedding everything in real situations, 2) It uses the real-life situation to critique the statistical model and show you the limit of statistic. For instance, he shows a few anecdotes here and there to illustrate how correlation between two variables might not mean anything causal, or how asymptotic properties may not be relevant in real life.

This is the first statistics book I’ve seen that cares about presenting statistics as a tool to GET TO THE TRUTH.
Please buy it.

Happy Accidents: Serendipity in Modern Medical Breakthroughs (5 stars)

The Birth Stochastic Science: Rewriting the History of Medicine

Controlled experiment can easily show absence of design in medical research: you compare the results of top-down directed research to randomly generated discoveries. Well, the U.S. government provides us with the perfect experiment for that: the National Cancer Institute that came out of the Nixon “war on cancer” in the early 1970s.

“Despite the Herculean effort and enormous expense, only a few drugs for the treatment of cancer were found through NCI’s centrally directed, targeted program. Over a twenty-year period of screening more than 144,000 plant extracts, representing about 15,000 species, not a single plant-based anticancer drug reached approved status. This failure stands in stark contrast to the discovery in the late 1950s of a major group of plant-derived cancer drugs, the Vinca Alcaloids -a discovery that came about by chance, not through directed research.”

From Happy Accidents: Serendipity in Modern Medical Breakthroughs, by Morton Meyers, a book that just came out. It is a MUST read. Please go buy it. Read it twice, not once. Although the author does not take my drastic “stochastic tinkering” approach, he provides all kind of empirical evidence for the role of design. He does not directly discuss the narrative fallacy(q.v.) and the retrospective distortion (q.v.) but he certainly allows us to rewrite the history of medicine.

We did not realize that cures for cancer had been coming from other brands of research. You search for noncancer drugs and find something you were not looking for (and vice versa). But the interesting constant:
a- The discoverer is almost always treated like an idiot by his colleagues. Meyers describes the vicious side effect of “peer reviewing”.
b- Often people see the result but cannot connect the dots (researchers are autistic in their own way).
c- The members of the guild gives the researcher a hard time for not coming from their union. Pasteur was a chemist not a doctor/biologist. The establishment kept asking him “where is your M.D., monsieur”. Luckily Pasteur had too much confidence to be deterred.
d- Many of the results are initially discovered by an academic researchers who neglects the consequences because it is not his job –he has a script to follow. Or he cannot connect the dots because he is a nerd. Meyers uses Darwin as the ultimate model: the independent gentleman scholar who does not need anyone and can follow a lead when he sees it.
e- It seems to me that discoverers are nonnerds.
Now it is depressing to see the works of the late Roy Porter, a man with remarkable curiosity and a refined intellect, who wrote many charming books on the history of medicine. Does the narrative fallacy cancels everything he did? I hope not. We urgently need to rewrite the history of medicine without the ex post explanations. Meyers started the process: he provides data for modern medicine since, say, Pasteur. I am more interested in the genesis of the field before the Galenic nerdification.

Financial Derivatives: Pricing, Applications, and Mathematics (5 stars)

One of the author, Baz, gave me a copy of this book when it came out and it went to sleep in my library as I was not in a finance mood. I forgot about it until this week as I was stuck on a problem related to risk-neutral pricing and the Girsanov theorem concerning changes in probability measure. I looked at every passage on the the subject until I hit on it. Then I realized that I should have read it before: it is a condensed, but extremely deep , and complete exposition of the subject of theoretical finance.

No financial book has the clarity of this text.

Other quant books do not have such notions as “pricing kernel” and economic theoretical matters. I would recommend it as a necessary piece of the “quant” toolkit. Every quant should have it as a background tool as the usual quant literature is standalone and devoid of these concepts.

Thinking and Deciding (5 stars)

People vote with their wallet –particularly when they do it a second time, when they REpurchase. Those who believe in the “revelation of preferences” should note that there are books one buys again when a copy is lost –particularly when they are read cover to cover.

I am buying another copy of this book as mine was lost or misplaced. That should speak volumes.

Critical Phenomena in Natural Sciences: Chaos, Fractals, Selforganization and Disorder: Concepts and Tools (Springer Series in Synergetics) (5 stars)

As I am teaching the statistical mechanics part of a graduate class in mathematics,I was looking for a textbook on complex systems & statistical physics with derivations, intuitions, and some physical examples. I did not realize that I was looking too far –Sornette, with hom I correspond regularly, is well known for his contributions and his prolific output (actually some physicists make fun of the quantity of papers he writes). So his book did not come to mind. I once stumbled on a problem with the derivation of preferential attachments;he recommended his book, which I took with a grain a salt. After spending some time working the derivations on scalable laws, extreme value theory, renormalization groups in this book, I elected to use it as my textbook. There is no equivalent. I have a dozen such yellow manuals; this one is complete and ultimately clearest.

I do not know of a better textbook.

The Wisdom Paradox: How Your Mind Can Grow Stronger As Your Brain Grows Older (5 stars)

If you like the thinker’s prose, the so-called “romantic science”,a style attributed to the Russian neuroscientist A. R. Luria,which consists in publishing original research in literary form, you would love this book. Clearly intellectual scientists are vanishing under the weight of the commoditization of the discipline. But once in a while someone emerges to reverse such setbacks.

Goldberg, who was the great Luria’s student and collaborator, is even more colorful and fun to read than the master. He is egocentric, abrasive, opinionated, and colorful. He is also disdainful of the conventional beliefs in neurosciences –for instance he is suspicious of the assignment of specific functions, such as language, to anatomical regions. He is also skeptical of the journalistic “triune” brain. His theory is that the hemispheric specialization is principally along pattern matching and information processing lines:the left side stores patterns, while the right one processes novel tasks. It is convincing to see that children suffer more from a right brain injury, while adults have the opposite effect.

There is a little bit of open plugging of Goldberg’s for-profit institute;he would have gotten better results by being subtle. A fre minor points. I did not understand why Goldberg discusses “modularity”, of which he is critical, as if it were the same thing in both neurobiology and in cognitive science. In neurobiology, modularity implies regional localization, while cognitive scientists (Marr, Fodor, etc.) make no such assumption: for them it is entirely functional and they would be in great agreement with Goldberg. Also I did not understand why he attributes the language instinct to Pinker, not Chomsky, and why he makes snide remarks about behavioral scientists like Kahneman and Tversky. But these are very minor details that do not weaken the message (I still gave the book 5 stars). I am now spoiled; I need more essays by opinionated, original,and intellectual, contemporary scientists.

The Sunday Philosophy Club : An Isabel Dalhousie Mystery (5 stars)

If your interests are limited to mystery books, nothing else, this book is not for you.

I initially bought this book because of the title, thinking that we would have a female version of Her Professor Dr Dr (Hon.) Moritz-Maria von Igenfeld, the Pninish uberscholar philologist who wrote the seminal Portugese Irregular Verbs (“after which there was nothing left to discuss about the subject, Nothing.”). I was curious to see how he would present a female version of such scholar.

He did not. Nor was it a detective story, although there is an element of suspense. This book is about Applied Ethics, a subject about which the author seems to know a bit. It also makes you feel like leading a quite thinking life in Edinburgh.

I don’t want to spoil the story but I felt that I was reading a detective story until I realized what it was…

How Nature Works: The Science of Self-organized Criticality (5 stars)

This book is a great attempt at finding some universality based on systems in a “critical” state, with departures from such state taking place in a manner that follows power laws. The sandpile is a great baby model for that.

Some people are critical of Bak’s approach, some even suggesting that we may not get power laws in these “sandpile” effects, but something less scalable in the tails. The point is :so what? The man has vision.

I looked at the reviews of this book. Clearly a few narrow-minded scientists do not seem to like it (many did not like Per Bak’s ego). But the book is remarkably intuitive and the presentation is so clear that he takes you by the hand. It is even entertaining. If you are looking to find flaws in his argument his pedagogy allows it (it is immediately obvious to us who dabble with simulations of these processes that you need an infinite sandpile to get a pure power law).

Another problem. I have been ordering the book on Amazon for ages. Copernicus books does not respond to emails. I got my copy at the NYU library. Bak passed away 2 years ago and nobody seems to be pushing for his interest and that of us his readers (for used books to sell for 99 implies some demand). This convinces me NEVER to publish with Springer.

Social Cognition: Making Sense of People (5 stars)

I spent some time looking for a simple bedside aggregation of the various topics associated with the psychology of decision making and the various perceptual biases, without finding much. Most of the books are excellent; but, aside from this one (and Jon Baron’s) they are usually compilation of original research. I like to have a readable consolidation of the material not far from my figertips. I was lucky to have found this book, which provides a wonderful and comprehensive coverage of the topics.

It is limpid, precise, illustrative, showing a wonderful clarity of mind.

Now the bad news. The author passed away recently at the age of 48.

The (Mis)behavior of Markets (5 stars)

I have been involved in the professional practice of uncertainty for almost all of my adult life. I’ve seen and read books and papers on the subject of deviations, with “this is interesting” here and there. I closed this book feeling that it was the first book in economics that spoke directly to me. Not only that, but this astonishing simplicity, realism, and relevance of the subject makes it the only work in finance I’ve read that seemed to make sense.

I cannot make justice to the book other than say 1) MAKES SENSE, 2) EASY TO UNDERSTAND, 3) PRESENT SUCH EMPIRICAL VALIDY that it will make financial economists (charlatans) have to hide deeper from the common man with their complicated “mathematics”.

Mandelbrot brought fractals into mathematics by going to the general public. He is doing the same here: pleading to the regular man unburnded with knowledge of economics.

The Status Syndrome: How Social Standing Affects Our Health and Longevity (5 stars)

You are a hot shot in a company, though not the boss. You are paid extremely well, but, again you have plenty of bosses above you (say the partners of an investment firm). Is it better than deriving a modest income being your own boss? The counterintuive answer is NO. You will live longer in the second situation, even controlling for diet, lifestyle, and genetic predispositions.

Marmot spent years poring over data; he left no stone unturned and is well read in the general literature on human nature. This idea of people living longer when they exert control over their lives has not spread yet. That people lead longer lives when they trust their neighbors and feel part of a community is far reaching. Just think of the implications on social justice etc. Also think that everything you learn on human preferences and well-being in both economics and medicine is either incomplete (medicine) or bogus (economics).

The book is well written, humorous at times, and rigorous –it reads like a well-translated scientific paper. But it feels that it is just the introduction to a topic. Please, write the continuation.

The Paradox of Choice: Why More Is Less (5 stars)

I find it clear in its exposition of the problems of modern psychology. In addition to the ideas of “satisficing”, it displays the major ideas in the psychology of happiness (hedonic treadmill), along with the theories of choice & decision making.

Clearly this is not for scholars as it is extremely diluted and slow at times; this is a popular science book. Still, I could not put it down.

The Dream of Reason: A History of Philosophy from the Greeks to the Renaissance (5 stars)

I could not put it down. It hit me at some point that I was at the intersection of readability and scholarship. Clearly the value of this book lies beyond its readability: Gottlieb is both a philosopher and a journalist (in the good sense), not a journalist who writes about philosophy. He investigates and provides a fresh look at the material: For instance what we bemoan as the flaws of Aristotelianism during the scholastic period came 2000 years after his work. Aristotle had an empirical bent –his followers are the ones to blame.

I liked his constant questioning of the labels put on philosophers and philosophies by the second hand readers.

Clearly he missed a few authors who deserve real coverage like Algazali, but I take what I can get.

The only other readable history of philosophy is Russell’s. This one was less hurriedly put together.

Someone should bug the author to hurry with the sequel on Locke, Hume, etc.

Intellectuals in the Middle Ages (5 stars)

Excellent, be it only for the presentation of the difference between the pompous scholastic thinker laboring in the academy and the other nonacademic humanist laboring in the the “luxe calme et volupte” of his study.

Another of the attributes is the readability of the work Le Goff is a gifted writer.

Kant and the Platypus: Essays on Language and Cognition (5 stars)

I read the review of Simon Blackburn trashing the book: Eco made a few mistakes concerning the two dogmas of empiricism (he confused Davidson’s work with Quine’s first dogma). So I am sure many readers hesitated after a review by such a rigorous big gun thinker as Blackburn.

When I started reading the book I was taken aback by the combination of depth and the vividness of the style. Eco is sprightly and alive, something that cannot be said of many philosophers dealing with the subject of categories.

The notion of categories is not trivial: you need a simple conditional prior to identify an object; it is a simple mathematical fact. You need to know what a table is to see it in the background separated from its surroundings. You need to know what a face is so when it rotates you know it is still the same face. Computers have had a hard time with such pattern recognition. A PRIOR category is a necessity. This was Kant’s intuition (the so-called “rationalism”). This is also the field of semiotics as initially conceived. Eco took it to greater levels with his notion of what I would call in scientific language a compression, a “simplifation”. This leads to the major problem we face today: what if the act of compressing is arbitrary?

Not just very deep but it is a breath of fresh air to see such a philosophical discussion nondull, nondry, alive!

Confessions of a Philosopher: A Personal Journey Through Western Philosophy from Plato to Popper (5 stars)

This is not a polularization /adult-education style presentation. Magee sees things form the inside; it is his own formation of philosophical ideas & techniques that we witness.

Magee was close enough to Popper to present us with his ideas first-hand (nobody reads Popper; people read about him). He also debunks a few idiotic myths about Wittgenstein as an atomist (Magee read W and realized that people read commentary on him rarely the original).

Magee writes with the remarkable clarity of the English philosophers/thinkers.

Invariances: The Structure of the Objective World (5 stars)

Philosophy has been under severe challenge from science, literally eating up its provinces: philosophy of mind went to neuroscience; philosophy of language to Artificial Intelligence and Computer Science,etc. This book shows that there is a need for someone to just specialize in the TRUTH, its scructure, its accessibility, its INVARIANCE.

Aside from the purely philosophical answers that scientists were grappling with, the book is like a manual for a new regimen in philosophy. It reviews everything from epistemology to the logic of contingency, with insights here and there about such topics as the observer biases (about computing probabilities when our existence has been linked to a particular realization of the process).

I am not a philosopher but a probabilist; I found that this book just spoke to me. It certainly rid me of my prejudice against modern philosophers.

A History of the Mind: Evolution and the Birth of Consciousness (5 stars)

Humphreys is the only person I know of who can work on nonhuman primates, write philosophy, and edit a literary magazine.

The latter shows in this writing: I read this book in a single sitting. You may not agree with the ideas on consciousness (I don’t) but you get a clear exposition of all the work from Descartes to McGinn. Also if you want to figure out what Dennett is saying it helps to read this book first.

Bull! : A History of the Boom, 1982-1999: What drove the Breakneck Market–and What Every Investor Needs to Know About Financial Cycles (5 stars)

Maggie Mahar had the courage to take a look at what was behind all of this religious belief in markets. Clearly I do not understand how she was able to work as a journalist when she has the attitude and mindset of a truth-seeker. I spent some time looking at the difference between her book and Lowenstein’s: not even possible to start comparing. One needs to be a trader to value her work.

Read this book now; wait a while then read it again.

I Think, Therefore I Laugh (5 stars)

I found this copy last week at Waterstone in London . It made me feel the plane ride was very short! I should have bought a couple. This is a great book for a refresher in analytical philosophy: pleasant, clear. Great training for people who tend to forget elementary relationships.

I did not know that JAP was a logician. Go buy this book!

The only competition is “Think” by Blackburn (rather boring).

The Making of a Philosopher: My Journey Through Twentieth-Century Philosophy (4 stars)

This is a great book but I felt something cold inside of me while reading it. I don’t know if it is cultural (the modern English philosopher’s fear of displaying passion) but I had the feeling to talk to a plumber who developed expertise in abstract concepts and their relationships just as if they were small plumbing problems fitting together under a generalized plumbing theory. Perhaps philosophy needs to be treated like that, just like engineering –but not for me. At least I give myself the illusion of doing something more…literary.

Colin McGINN teaches us that we need nevertheless to master the art of clarity of both thought and exposition. He write with perfect clarity: a clear, unburdened, unaffected, UnFrench UnGerman philosophical prose.

The book has a presentation of the Kripke idea of naming as necessity of such clarity that I felt actually smart reading it.

Other than that there is the feeling of drabness in part of the book of the type I got once at a conference in an industrial city West of London.

Straw Dogs: Thoughts on Humans and Other Animals (4 stars)

I became interested in this book while reading a review panning it in The Nation by one Danny Postell (thanks to Arts & Letters Daily). Clearly it was visible that John Gray was after a definition of humans that integrates our discoveries from cognitive science, that we are just animals who are curse with intelligence, sufficient intelligence to figure out things but insufficient to control our actions –what I call the ability to rationalize (“much of the difference between us and other primates lies in our being considerably better than them at explaining our behavior”). Postel (I have no clue who he is and what kind of training he has in modern scientific thought but I am sure that he is sufficiently burdened with a knowledge of humanities verbiage to get the book wrong); Postel was panning Gray exactly for the reasons that would make this book insightful. So I BOUGHT THIS BOOK BECAUSE OF A BAD REVIEW!

What struck me with this book is that Gray converges in opinion to the discoveries of the New Science of Man –without quoting from neurobiology, cognitive science, evolutionary psychology, the Kahneman-Tversky Heuristics & Biases Tradition. It is remarkable that he identified the ills of the so-called humanist tradition without assistance from the works on rationality posited by Kahneman and his peers.

This book is worth 4 stars because here we have a literary intellectual who manages to break through the mud in his knowledge. It would have been worth 5 stars had Gray read a few more works in scientific thought beyond Darwin. Anyway I am very impressed with a literary intellectual capable of this empirical and realistic view of man.

Mapping the Mind (5 stars)

I started my interest in neurobiology in December 1998 after reading a discussion by Rita Carter in the FT showing that rational behavior under uncertainty and rational decision making can come from a defect in the amygdala. Since then I’ve had five years of reading more technical material (Gazzaniga et al is perhaps the most complete reference on cognitive neuroscience) and thought that I transcended this book.

But it was not so. I picked up this book again last weekend and was both astonished at a) the ease of reading , b) the clarity of the text and c) the breadth of the approach! I was looking for a refresher as I am trying to capture a general idea of the functioning of that black box and found exactly what I needed without the excess burden of prominent textbooks.

Very pedagogical.

I read here and there comments by neuroscientists dissing the book over small details perhaps invisible even to experts. I just realize that Carter should keep updating it, as it is invaluable in my suitcase when I travel! I do not conceal my suspicion of “science writers” and journalists more trained in communicating than understanding and usually shallow babblers but Carter is an exception. Perhaps the science of the mind requires breadth of knowledge that she has. She is a thinker in her own right not just a “medical journalist”.

The Mind Doesn’t Work That Way (5 stars)

This critique of the computational theory of mind and the pan-adaptionist tradition is clearly so honest that it goes after the ideas promoted by Fodor’s own 1983 watershed book “The Modularity of Mind”. In brief the essay is an attack on massive modularity by saying that there are things after all that escape the programming (encapsulation and opacity are key: how can we talk about something OPAQUE? We know nothing about a few critical things…).

Granted the book is horribly written (that is Fodor’s charm after all) but his argumentation is so ferocious that he ends up loud & clear.

The man is critical of his own ideas, and of the current in thought that he he helped create –one may use Fodor-1 against Fodor-2. Perhaps persons I hold in highest respect are those who go after their own ideas!

Bravo Fodor. Even if I do not agree I can’t help admiring the man.

Consciousness: An Introduction (5 stars)

I am glad to find a complete book dealing with all aspects of consciousness in CLEARLY written format, with graphs and tables to facilitate comprehension. The book covers everything I had seen before from Artificial Intelligence to Philosophy to Neurology to Evolutionary Biology.

Say one wants to get an idea of Dan Dennett’s theory of consciousness (without having to get through Dennett’s circuitous, unfocused and evasive prose) or Searle’s Chinese room argument or Turing’s test or Chalmer’s position or Churchland’s neurophilosophy or a presentation of research on the neural correlates of consciousness…Everything I could think about is there.

Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (1 star)

This is the first bad review I have written in my life; it took some effort on my part to do so and I would have not done it had I not thought that the ideas in the book were dangerously misleading and merit some warning in their interpretation –particularly that I look around me and see people close to retirement having to suffer from the consequences of such toxic ideas. That stocks (in the Anglo Saxon world) HAVE YIELDED high returns does not mean much for the future.

As a skeptical empiricist I believe that it is this kind of books that helped fuel the naive bull market and the naive belief in some stock market properties (which it my or may not have). The fact that the book was written by an academic gives it a credibility it should not have.

The book follow arguments that to a middlebrow seem compelling but fraught with what I call survivorship biases.

To get the argument read Maggie Mahar’s book on the boom; it shows why such ideas can be extemely destructive.
All I can say is that we have a catalogue here of the following :
1) naive empricicism
2) primitive inference/inductive fallacies
3) promulgation of dangerous ideas

Mean Genes: From Sex to Money to Food: Taming Our Primal Instincts (5 stars)

I read the book once when it came out. Since then I’ve had the chance to reread it a few times, discovering more and more layers as my interests take me in new directions(for instance the discussion on the happiness treadmill goes to the core of the current discussions in the economics of happiness). I now carry a copy on my trips as I can kill time in airports by perusing random sections.

The book is so readable as to perhaps set a standard. Yet it is complete in the sense that it covers more of the evolutionary thinking than meets the eye. I didn’t realize it until I went to the site www.meangenes.org and got into the more technical research material.
Reread it.

Why Stock Markets Crash: Critical Events in Complex Financial Systems (5 stars)

The author aside from the problem of crashes presents an insightful exposition of tipping points. I don’t know why his approach makes it clearer and deeper than those of Watts and Barabasi –is it due to his using financial markets as a base? or his being an expert at fat-tailed dynamics?

His work builds on the “abyssus abyssum invocat” (panic begets panics) and the dynamics of compounding disequilibria. In addition the notion of “CRITICAL POINT” is made very clear.

Honestly I don’t care for the idea of crashes; the same concepts can apply to sudden and unexpected euphorias.

I learned more from this book than any other on disequilibrium.

The New Financial Order: Risk in the 21st Century (5 stars)

Robert Shiller has the remarkable ability to think independently and the courage to propose ideas that to middlebrow thinkers may sound speculative.

Think of what your reaction would have been had someone discussed risk sharing (insurance) before it became popular. A lunacy people would have thought. Most risk management is like that: we think backwards with the benefit of past history and find these ideas obvious. They were not at the time.

Throughout his career Shiller stood for unpopular ideas and was proven right (his 1981 paper on volatility, his 2000 discussion of the bubble). I would read and re-read this book.

Strangers to Ourselves: Discovering the Adaptive Unconscious (5 stars)

The book that carried the most influence on my thinking this year (I went back to it half a dozen times).
This is a clearly written presentation of our inability to forecast our own behavior and to predict our emotional reactions to positive and negative events. One would think that the repetition of experiences with consistent forecasting biases would lead to some correction but this is not the case.

We are more resilient than we think (“immune neglect”). The book also discusses the reversion to baseline happiness after what we thought would bring a permanent improvement in our moods (yet we never learn from it).

The most important part covers the “hindsight bias” how we see past misfortunes as deterministic –and how we can confront negative emotions by making them even more so (by creating a narrative that make the events appear unavoidable).

The Blank Slate: The Modern Denial of Human Nature (4 stars)

The book is a great exposition of modern scientific thinking and understanding of the nature of man–but it spends some time on topics that are entirely obvious outside of the humanities academia. Indeed Pinker gives them too much respect by honoring them with such a lengthy reply.

His other two books are much better.

No Bull: My Life In and Out of Markets (5 stars)

As a speculator I learned to take the best from books and ideas without arguments (many readers seem to be training to be shallow critics)–good insights are hard to come by. One does not find these in the writings of a journalist. There are some things personal to the author that might be uninteresting to some, but I take the package. The man is one of the greatest traders in history. There are a few jewels in there.

The man did it. I’d rather listen to him than read better written but hollow prose from some journalist-writer.

The Statistical Mechanics of Financial Markets (5 stars)

Very useful book, particularly in what concerns alternative L-Stable distributions. True, not too versed in financial theory but I’d rather see the author erring on the side of more physics than mathematical economics. As an author I don’t ask much from books, just to deliver what they indend. This one does.

Clear historical description of Einstein/Bachelier. Hopefully one day we will call derivatives pricing the Bachelier valuation.

The book in short provides an excellent perspective on the statistical approach to asset price dynamics. Very clear and to the point.

Tartar Steppe (Verba Mundi) (5 stars)

I never understood why the book never made it in the Anglo-Saxon world. Il deserto is one of the 20th century’s masterpieces.

A Guide to Econometrics – 4th Edition (5 stars)

The best intuition builder in both statitics and econometrics. I have been reading the various editions throught my career. Please, keep updating it, Peter Kennedy!

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