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Journal of Economics and Philosophy
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Te ransatlantic Journal
LSE Philosophy Society
c/o LSE Students Union
East Building
Houghton Street
London WCA AE
United Kingdom
Printed by: Caric Press Ltd., UK LSE SU Philosophy SocietyColumbia Economics SocietyLSE Students Union
Tis journal is a publication by students rom several universities,
the Philosophy Society o the LSE Students Union, and the Colum-
bia Economics Society.
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the transatlanticteam
Peer-reviewers and prooreaders:
David Abramsky (Kings College London)
Jaiseung Bang (Columbia University)
Philip Crone (Columbia University)
Claire Field (Kings College London)
Felipe Goncalves (Columbia University)
Hans Martin Hermann (Shanghai International Studies University)
Yuh Yiing Loh (Oxord University)
Eleonora Paganini (University o Edinburgh)
Luca Uberti (Kings College London)
Justin Vlasits (Columbia University)
Nicholas Evans (Kings College London)
Zhi Hui Ho (Oxord University)
Hannah Wilkinson (Oxord University)
Editorial Board:
Leoni Linek (University o York, Columbia University), Editor
Jakob Schaeer (London School o Economics), Co-Editor
Felix Holler (Academy o Visual Arts Leipzig), Editorial Design, Cover
Alina Lipcan (Oxord University), Corporate Relations Liaison
Ronan Bligh Sato (Oxord University), Special Events Coordinator
Eva Leung (London School o Economics), Institutional Support Ocer UK
Alexander Frantzen (Columbia University), Marketing Director US
Josephine Fogden (Cambridge University), Marketing Director UK
Rayna Coulson (London School o Economics), Copy-Editor
Simon Fuchs (University o York, York University),
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When the recent nancial crisis shook the world
economy, students belies in economics in economic
theory and economics as a science were out o balan-
ce, too. Many o us elt that they could not just carry on
business as usual. Tere was a need to come together
and discuss. But how do you discuss with people all over
the world?
Students in London and New York connected, and
the idea o a transatlantic journal dealing with Philoso-
phy & Economics was born. Soon students at Cambridge,
Oxord and even Shanghai got involved, and Te rans-
atlantic began taking shape. Te aim was not to give
consistent solutions to current economic problems but
rather to oster debate about economics in a not merely
technical, but, instead, in a philosophical way. We did
and do not wish to approach economics rom the view-
point that is so well known to undergraduate students:
a perspective that mistakes economics or a mechanical
method. Although methods, particularly mathematical
methods, are undeniably part o the eld, economics is
so much more than that.
Whether mathematics is in act crucial to economics
and its scientic status is a question that ony Lawson,
mathematician by training and proessor o economics
at Cambridge University, investigates into (p.9). Sir Ro-
bert Skidelsky, best known or authoring a multi-volume
biography o the economist John Maynard Keynes, is a
prominent critic o the way economics is taught at uni-
versities and proposes a diferent approach to teaching
(p.31). Te ransatlantic is pleased to present their
guest articles in this issue.
Te topics o the student submissions range rom
game theoretical approaches towards economics (p.39),
discussions o rational agency (p.35), and questioning o
current models o eciency (p.21), to an inquiry into the
practices o peer-review in science (p.15) and the elabo-
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editorialration o an identity model, determining an individuals
economic path (p.25). Emanuel Derman, ormerly a Ma-
naging Director at Goldman Sachs, and now a proessor
o nancial engineering at Columbia University, met
with us in New York to talk about models, theories and
the relation between physics and nance (p.42).
Te next edition o Te ransatlantic will be on the
topic Growth. I you would like to write an article on
economic growth, accumulation o knowledge, demogra-
phic economics, the growth o the nancial sector, or any
other related issue, contact us at submi@heransa-
lanic.org. Undergraduates, postgraduates and acade-
mics are welcome to write.
Jakob Scher & Leoni Linek t
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con he ransalanic eam
ediorial
economics & science
is science oo auhoriarian?
ha moraliy overrides he pro moive
o improve eciency
he role o ideniy and social neworks or
economic oucomes in poor counries
t
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tent whas wrong wih economics?
redening raionaliy
a concepual srucure or oensive and
deensive sraegy
inerview wih emanuel derman
call or aricles
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economics &science
B Y O N Y L A W S O N
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Many economiss accep ha he modern dis-
cipline o economics is no in a healhy sae (see
Lawson, 2003, chaper 1). Indeed wih he onse o
he recen crisis perhaps mos now do (see Lawson
2009b). Many even connec he problems o mo-
dern economics o he quesion o science, he opic
o his shor noe. Amongs hose who do so, how-
ever, here are signican dierences. Indeed here
are essenially wo opposed groups o be disingu-
ished. Te rs comprises hose who hink ha he
problems wih he discipline arise jus because an
economic science is ineasible, ha aemps o ren-
der economics scienic are misguided; i is he con-
cern o be scienic ha leads economiss asray.
Te second group comprises hose who, in conras,
hink ha problems arise jus because economics
has ye o realize is ull scienic poenial.
I also believe he parlous sae o economics
is conneced o sances aken wih regard o he
quesion o wheher economics can be a science.
Bu my assessmen diverges sharply rom hose o
proponens o boh sides o his debae, given heerms in which he laer ends o be cas. For, un-
damenally, boh groups associae science wih he
use o mahemaical mehods. And heir conrasing
expecaions concerning he possibiliy o an econo-
mic science primarily reec dieren expecaions
concerning he possibiliy o gaining insigh using
mahemaical models. My conrary view is ha he
use o mahemaics is irrelevan o he quesion o
wheher a discipline qualies as science.
Furher, wih a revised concepion o science o
hand, I do argue ha a science o economics is eni-
rely easible, bu I also conend ha he curren em-
phasis on ormalism in modern economics mosly
obsrucs he poenial o economics or realizing is
poenial as a successul science.
I hus side wih he rs group in being opimi-
sic abou he possibiliies o a successul economic
science, bu hold a conrasing concepion o sci-
ence. I side wih he second group in hinking ha
he emphasis on ormalism is unhelpul in modern
economics, bu do no suppose ha giving up on or-
malism impedes he possibiliy o economics being
scienic in he sense o naural science. Le mebriey elaborae.
t
Most typically, in ModerneconoMics, it is held that thesuccessful prediction ofevents is central to science.
the use of MatheMaticsis irrelevant tothe question ofwhether a disciplinequalifies as science.
Tony Lawson is Professor of Economics at Cambridge University. He has contributed in various are-
as including Economic Methodology, Heterodox Economics, Evolutionary Economics and Feminist
Economics, yet his focus lies on Ontology, in particular on Social Ontology. Lawson is a mathema-
tician by training and a severe critic of the way mathematics is used in economics. He has publis-
hed in numerous journals and is author of the books Economics and Reality(1997) and Reorienting
Economics (2003). A recent overview of his contributions can be found In Edward Fullbrooks
recent edited collection Economics and Ontology: Tony Lawson and His Critics (2009). Lawson is
a founder of the Cambridge Realist Workshop and the Cambridge Social Ontology Group and sits
on various editorial boards including the Cambridge Journal of Economics.
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What is science?
O course, he pracices o successul science
(where he obvious exemplars o successul science
are cerain naural sciences) are muliaceed, and
i is problemaic o single ou any one (se) as he,
or even as a, dening eaure. Neverheless such
singling ou is requenly aemped. And mos
ypically, in modern economics, i is held ha hesuccessul predicion o evens is cenral o science.
Predicion o evens is an aciviy whose success
presupposes he exisence o even correlaions,
ha is, regulariies o he orm whenever even x
hen eveny. Noably, such regulariies, where hey
occur, do lend hemselves o mahemaical ormu-
laion. And indeed he widespread reliance upon
mehods o mahemaical deducivis modeling in
economics presupposes heir ubiquious occurrence
in he social realm.
Whaever science may be, I wan o sugges ha
his associaion o i wih successul predicion is
misplaced. I here is a dening momen or eaure
o science, I wan o sugges ha a more susainable
conender is causal explanaion. By his I mean he
move rom a concepion o some even or phenome-
non o ineres o he idenicaion and undersan-
ding o an underlying causal acor ha (in par a
leas) produced i. I is he move rom, say, symp-
oms o an illness (such as a high emperaure) o he
underlying cause making he dierence (say a virus).
I is he move rom, say, observing cows maniesing
he sympoms o mad cow disease in he UK in he
1980s, o ideniying he prion as he cause.
Noice, ha causal explanaion is a sep ha
ypically canno be reduced o mahemaical mani-
pulaion. For i ypically involves a concepual move
rom phenomena o one ype o a cause o a quie
dieren (and perhaps previously unknown) ype.
Causal versus predictionist accounts o science
Tough I canno elaborae very much in a shor
noe such as his, le me a leas indicae why I ake
he causal concepion o science o be a more reaso-
nable accoun o wha goes on in science han hemore amiliar predicionis concepion.
Te mos obvious observaion o make here is
ha ouside asronomy mos o he even regulari-
ies regarded as o ineres o naural science (and so
aciliaing o signican successes a even predic-
ion) are resriced o condiions o well-conrolled
experimen. Te poin here is ha i is more or less
only in he laer experimenal scenario ha he pre-
dicionis world view even appears o hold up. Ye
successul naural science is hardly resriced o siu-aions o experimenal conrol.
Even so, he predicionis migh conend ha
he conrolled experimen is he mos undamenal
eaure o successul (naural) science and so he ac
ha he preerred concepion o science (based on
successul predicion) s here is sucien o regard
i as dening o science. Tere are various problems
wih such reasoning, bu or now le me poin ou
ha even he siuaion o he well-conrolled expe-
rimen, properly undersood, provides relaive sup-por o he causalis accoun o science. Ta is, even
he scenario ha prima acie mos lends suppor o
he predicionis accoun, ulimaely acually sup-
pors he causalis inerpreaion.
We can see ha his is so as soon as we quesion
why i is ha even regulariies are mosly resric-
ed o siuaions o experimenal conrol. Te only
enable explanaion o his phenomenon o which
I am aware is ha in well conrolled experimens,
sable underlying causal mechanisms are insulaed
rom counervailing causes, so ha heir unimpeded
eecs can be sraighorwardly idenied. Tus ob-
jecs all wih a consan rae o acceleraion in an
experimenal vacuum, because aerodynamic and
oher causal orces are prevened rom aecing he
oucome. So experimens, oo, are primarily con-
cerned wih underlying causal acors. Te poin o
he experimen is precisely o insulae and hereby
empirically ideniy sable causal mechanisms. Te
even regulariy ha is successully produced (when
i is) correlaes he riggering o a causal mechanism
wih is unimpeded eecs.
Bu hese causal orces ypically coninually ope-
rae even when counervailing endencies are in
play, as is he case ouside he experimen. Graviy
is operaing on he objecs now on my desk as much
as i would be i he objecs were dropped in an ex-
perimenal vacuum. In oher words, he undersan-
ding o causal mechanisms (ha can be backed up by
experimenal invesigaion), allows us o manipulae
or anyway rigger hose mechanisms ouside he ex-
perimen, where even regulariies ypically do nohold. A medicine may work o aid my recovery even
instead of existing inisolation alMost all
social phenoMena arein fact constituted in
relation to each other.
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Te Social Realm
Wha bearing does any o his have or discip-
lines such as economics concerned wih he sudy
o social phenomena (where by social phenomena I
mean hose whose exisence necessarily depends a
leas in par on us)? I wan rs briey o indicae
ha on he causalis concepion o science, he sudy
o social phenomena can aer all be scienic in hesense o naural science.
I have already indicaed ha he applicaion o
mahemaical ormalism has no essenial bearing on
he issue. I seems, raher, ha a condiion o any
discipline ha is o qualiy as a science, according o
he causalis concepion, is ha he objecs o sudy
be srucured. By his I mean ha he relevan do-
main o realiy is no wholly given in appearances. I
is srucured in he sense ha here are underlying
causal mechanisms working o bring abou he phe-
nomena o experience.
Graviy, or example, does no reduce o, and can-
no be direcly read o rom, he pah o he auumn
lea, even hough i inuences he laer. Similarly, i
seems clear enough ha social phenomena are no
reducible o he acualiies o experience. In paricu-
lar, social srucures do no reduce o he pracices
hey aciliae. Consider social rules. Cerainly hey
bear on human pracices. Bu in many counries,
mooriss on moorways, or example, mosly drive
aser han he local legal speed limis, a leas unil
a police car arrives on he scene or speed cameras are
spoed. Workers in he UK carry rule books and h-
reaen o work o rule when hey are unhappy wih
prevailing condiions.
Such consideraions reveal an onological gap
beween social srucures (in his case social rules)
and he pracices ha hey aciliae. I is possible
or he social scienis o ideniy rules, cusoms or
norms, ec., by observing pracices, especially on
criical occasions. However, he pracices canno be
reduced o hese norms and so orh; social realiy
is srucured. O course, underlying social srucureincludes no only rules, bu also social relaions, po-
siions, insiuions and so on (see Lawson, 1997,
2003). Te poin hen is ha in principle a successul
science o social phenomena, i.e., one concerned o
ideniy and undersand he causes o acual praci-
ces and oucomes o ineres, is enirely easible.
Modeling social phenomena
Te successul predicion and/or mahemaicalmodelling o social phenomena, however, seems less
easible. In he well-conrolled experimen, even re-
gulariies are produced by way o isolaing a sable
causal mechanism rom counervailing causes. Tese
wo condiions isolaion and sabiliy seem o be
required i even regulariies are o be sysemaically
guaraneed. Ye such condiions are likely o be rare
indeed in he social realm.
O course whereas experimenal naural scien-
iss work laboriously o achieve he isolaion o arelevan inrinsically consan mechanism, econo-
mic modelers eecively, i somewha opimisically,
assume ha such isolaions o inrinsically consan
causal acors occur quie sponaneously in he soci-
al realm, and indeed are even ubiquious. Bu here
is lile grounding o his opimism.
Consider rs he condiion o isolaion. Insead
o exising in isolaion almos all social phenomena
are in ac consiued in relaion o each oher. I is
easy enough in modern capialism o see he inernal
relaionaliy o markes, and money, and rms and
governmens and households, ec; all depend on and
presuppose each oher. Bu human individuals as so-
cial beings are likewise ormed in relaion o ohers.
All slo ino posiions, where all posiions are consi-
ued in relaion o oher posiions. Tus employer
and employee presuppose each oher, as do eacher
and suden, landlord/lady and enan, paren and
child, gendered man and woman, and so on. We all
slo ino, and are molded hrough he occupancy o,
a muliude o such posiions, deriving real ineress
rom hem, and drawing upon whaever powers or
righs and obligaions are associaed wih hose po-
siions. So social realiy is an inerdependen, ne-
work, i is an inernally relaed oaliy, no a se o
phenomena each exising in relaive isolaion.
Consider oo he requiremen o sabiliy. Once
more social phenomena seem no o conorm. For
everyhing social is consanly being ransormed
hrough pracice. Tink o a language such as Eng-
lish. A any poin in ime i exiss as a (largely un-
acknowledged) resource o be drawn upon in our
speech acs and so orh. Bu hrough he sum oalo all people simulaneously drawing on i in heir
social reality is aninterdependent network,it is an internally related
totality, not a set ofphenoMena each existing
in relative isolation.
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speech acs, he language is (largely uninenionally)
reproduced and in par ransormed. I hus exiss as
a process, as somehing ha is consanly being re-
produced and ransormed hrough pracice. Tis is
is mode o being; i is inrinsically dynamic and sub-
jec o ransormaion. Bu a momens reecion re-
veals ha all social phenomena share his mode o
being: universiies, owns, polluion, sociey a lar-
ge, each and every organizaion, our posiions andheir associaed powers, our embodied personaliies
and everyhing else. So sabiliy o social phenome-
na (which along wih heir isolaion seems required
o guaranee an even regulariy) seems unlikely and
cerainly is somehing no o be aken or graned.
We are now in a posiion, in ac, o undersand
jus how economics has come o be in such a parlous
sae. Economiss hope o be scienic in he sense
o naural science. However hey are inuenced in
his by a misconcepion o science. I science is hemove rom phenomena o ineres o underlying
causes hen his move is a easible in economics as
in naural science. However, in some special cases
naural scieniss can successully carry ou con-
rolled experimenaion. In such condiions, even
regulariies may be produced in he course o heir
evaluaing a heory abou an underlying causal me-
chanism.
Economiss, hough, have ypically no only re-
sriced heir ocus o his special case, bu also uni-
versalized he wrong aspec o i. Insead o seeing
he cenral momen as urhering our undersan-
ding o some underlying causal mechanism, econo-
miss have ocused on he experimenal producion
o even regulariies. And hey have generalized his
inessenial eaure o science o a conex, namely
he social realm, where ypically he condiions are
such ha even regulariies do no occur.
Tus alhough a science o social phenomena re-
mains enirely easible he reliance on mehods o
mahemaical modelling in economics, presuppo-
sing as i does a ubiquiy o even regulariies, mainly
serves as an obsacle o he disciplines realizing is
scienic poenial (or a more posiive elaboraion
o how an explanaorily successul economics can be
realized see Lawson, 2009a, 2009b).
Final Comments
I here is a laudable jusicaion or emphasis o
mainsream economiss on using mahemaical or-malism, i is he desire o be scienic in he sense o
naural scieniss. Te laer, aer all, do regularly
achieve success in advancing human undersanding.
A less laudable jusicaion is o pose as scieniss
merely in he hope o acquiring a cerain saus in
sociey. Whichever o hese or relaed moives is
mos pervasive in modern economics, he concepi-
on o science as necessiaing he use o mahema-
ical mehods is misaken. I have suggesed insead
ha a causal concepion o science is ar more enab-le. I he laer is acceped hen economics can inde-
ed ake is place as a science in he sense o naural
science, hough, given he naure o social maerial,
he curren emphasis on ormalism obsrucs his
oucome, and will have o be abandoned i a science
o, or indeed any explanaorily useul, economics is
o emerge.
Bibliography
Lawson, ony (2003),Reorienting Economics, Lon-
don and New York: Rouledge
Lawson, ony (2009), Applied Economics, Contrast
Explanation and Asymmetric Inormation, Cambridge
Journal o Economics, (Special Issue in honour o
Brian Reddaway), 33:3, May pp. 405-20
Lawson, ony (2009), Te Current Economic Crisis:
its Nature and the Course o Academic economics, Cam-
bridge Journal o Economics, 33:4, July, pp. 759-788.
econoMists havegeneraliZed thisinessential feature ofscience to a context,naMely the socialrealM, where typicallythe conditionsare such thatevent regularitiesdo not occur.
t
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is science too
authoritarian?an economics ofscienceperspective
B Y C H R I S O P H S I E M R O H
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Introduction
In wha ollows I shall invesigae a poenial
shorcoming in he curren sysem o science, na-
mely ha a srong reliance on scieniss wih repu-
aion crowds ou young scieniss work. I presen
empirical evidence which esablishes ha (1) young
scieniss are more producive and ha (2) well
known scieniss ge a disproporionae amoun o
credi and aenion. Hence, he saus quo is an in-
ecien allocaion o aenion and resources ha
may inhibi progress.In order o correc he bias in avor o repua-
ion raher han meri, I hen consider a sysem o
science ha does no rely on auhoriies a all. Tis
logical alernaive, however, is reued on grounds
o high inormaion coss. Tereore, in order o mi-
igae he problem, we have o improve he curren
insiuions raher han overurn hem.
Science oday: Authorities by Reputation and the
Peer-Review Process
Tere are a ew acclaimed scieniss who have a
huge inuence in heir peer group and even on he
public. I hey publish an aricle, people read i no
because o he conen, bu because o he auhors
name. Te public ollows hem no because o he
meris o heir argumens (oen ew can compre-
hend hem), bu because hey are perceived as au-
horiies. I is usually hese scieniss who inuence
public opinion or deermine he uure course o a
scienic discipline. Hence, i seems auhoriies are
sill a par o science oday, or example as spokes-
men o a school o hough or as a bridge beweenscience and he public.
Anoher eaure o odays science srucure ishe peer-review process. Te idea is ha expers
(auhoriies) assess he work o heir peers and i
deemed sucienly innovaive, correc and presen-
able accep i or publicaion in heir journal. In
eec, peer-reviewed journals monopolize1 access o
scienic discourse, or everyone expecs signican
conribuions o be published here.
Potential Problem #1: Te Input o Young Scien-
tists is Undervalued
Young scieniss are more producive han older
ones, or, phrased dierenly, scienic produciviy
ades wih age2. Levin and Sephan, or example,
invesigaed publishing aciviy o scieniss over
heir lie-cycle and concluded ha produciviy di-
minished wih age in 5 ou o 6 disciplines, even a-
er conrolling or acors like abiliy or moivaion
(Levin and Sephan 1991). Furher evidence is given
among ohers by Diamond and Kanazawa. Te
laer examined a random sample o scieniss rom
he 16h cenury o he presen (consising mosly
o male scieniss), which also included he year o
heir mos signican conribuion o science, i.e.
he peak o heir career (Kanazawa 2003). He ound
ha, in general, produciviy undergoes a sharp rise
a he very beginning o scieniss careers, peaks
around he age o 30 and hen declines coninuously.
Mos scieniss (65%) have made heir mos impor-
an conribuions beore heir mid-hiries and 80%
have done so beore heir early ories (Ibid., pp. 258-
60)3. See also gure 1.
I recogniion is only given o scieniss wih re-
puaions (i.e. older ones) or i aracing research
unds is dependen on repuaion (while unds are
oen a prerequisie or research in order o build
a repuaion), hen we have a problem. For in his
case, he high produciviy and creaiviy o young
scieniss would be inhibied and heir ideas sup-
pressed or delayed. In economic erms, he alloca-
ion o unds and credi (which is one o he major
incenives or scieniss) would be inecien. Con-
sequenly, he inpu o young scieniss may be un-
dervalued when publicaions are no exclusively ra-ed on grounds o meri, bu perhaps by he auhors
While acclaimed scientists receive most of the attention, evidence suggests that it is their younger
and still unknown colleagues who make the most significant contributions to science, thus challeng-
ing the quest for truth. Anarchy in science a suitable response?
t
it is usually acclaiMed
scientists whoinfluence publicopinion or deterMinethe future course ofa scientific discipline.
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name. In he ollowing secion i is argued ha re-
puaion is indeed given a lo o weigh in allocaing
aenion or aracing research unds, hus making
he aoremenioned concerns plausible.
Potential Problem #2: Te Matthew Eect
Meron learned rom inerviews wih Nobel lau-
reaes ha here appears o be a misallocaion o
credi in science; hose who are already well-known
are given more credi han would be adequae pure-
ly judged on meris (Meron 1968). He coined he
Mahew Eec, which describes he phenomenon
ha he rich ge richer, or in his conex, he reco-
gnized ge more recogniion. When, or example, a
Nobel laureae co-auhors a paper wih unknown
scieniss, hen i seems ha readers do no jus as-
sociae he paper wih his name, bu seem o hink
he ohers were mere bysanders and he laureae
conribued mos o he conen, even i his was no
he case. Tis leads o cumulaive advanage4 and he
already amous ge even more recogniion due o
heir populariy. Te eec is urher srenghened
by he ac ha research unds are mosly allocaed
according o repuaion in he peer group. Hence,
he already acclaimed ge more unding, which pro-
vides hem wih more research opporuniies, which
in urn add o heir repuaion. Moreover, given
ime consrains and he increasing number o pu-
blicaions, he readers selecion o aricles is, o a
signican par, based on auhor ideniy. Tis is one
o several reasons why here is a good chance ha
even good work rom unknown scieniss goes unre-cognized (Ibid., p.59).
Unorunaely, he inheren mechanism o he
aenion-award sysem may be awed. Scieniss
wih pas success ge aenion, because heir peers
seem o iner ha his warrans uure success. Ye,
he previous secion presens evidence o he con-
rary, namely, ha (on average) signican conribu-
ions o science are less likely wih older age. I we
acor in he Mahew Eec in he age-produciviy
prole rom above, hen young scieniss should beeven more producive (relaively), given ha hey
have less unding and opporuniies a heir dispo-
sal. In ligh o his, an excessive ocus on acclaimed
scieniss may no necessarily be a good hing, or i
crowds ou oher scieniss work even i i has equal
meris. Te consequence is a disorion o incenives
and scienic discourse, which in urn migh delay
progress.
Whats the Alternative?
Bu wha are we o make o his? Le us hink
drasically or a momen and consider he alerna-
ive in a binary choice beween a sysem o science
wih auhoriies (saus quo) and wihou auho-
riies. Choosing he laer wihou he apparen
cause o he ineciency (auhoriies) , we could hy-
poheically esablish a web-based plaorm, where
anyone would (need o) publish his heories, ideas
or daa and anyone could criicize available publica-
ions. In order o exinguish biases caused by repu-
aion or coercion, everyhing would be published
anonymously, only wih a number or reerencing.
One migh call i anarchy in science, or repua-
ions would be erased and previous auhoriies made
equals among equals. In heory, he non-coercive
orce o he beer argumen would prevail in his
unbiased environmen o criical scruiny. Te pro-
blems rom secion 4 and 5 are evaded, bu would imake science on he whole more producive?
in order to extinguishbiases caused
by reputation orcoercion, everything
would be publishedanonyMously, onlywith a nuMber for
referencing. one
Might call it anarchyin science.
Figure 1:
age (x)
productivity
(y) profileamong 280
scientists,
source:
Kanazawa
(2003)
Mean = 35.4 Median = 34.0 IRQ = 12.0
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17
Economic Justifcation o Status Quo Institutions
I wouldn. Tis is because i creaes new prob-
lems such as lack o incenives and prohibiively high
inormaion coss. Wha ollows is an argumen in
an inuiive orm.
Te anonymiy o he web-based sysem would
preven he associaion o an auhors ideniy wihhis work. Hence, wha may be somewha ineci-
en in realiy would be enirely impossible in he
hypoheical sysem: he allocaion o credi. Wih
he prospec o earning glory and recogniion aken
away, science would lose one o is major incenives.
Needless o say, i would be even harder o esablish
a meriocraic allocaion o research unds and aca-
demic posiions i scieniss could no be linked o
heir work. In his respec, he curren pracice even
wih repuaion bias is he lesser o wo evils.
Te more severe consequence, however, is ha
every scienis would have o read everyhing ha is
published in his eld himsel. Aer all, here would
neiher be peer-reviewed journals nor auhoriies
ha pre-selec aricles on behal o he reader. Sci-
eniss would no be able o acually do research,
because keeping up wih publicaions and el-
ling ruiul rom plain wrong would consume all
available ime. Giving up he inpu o ohers is no a
saisying alernaive eiher, since science is ar oo
specialized or ha.
Hence, a repuaion sysem would reesablish
isel because i is less cosly. I I know someone o
be compeen which requires an evaluaion o his
work or compeences hen I can be reasonably sure
ha his recommendaions (explicily or implicily
via ciaions) o aricles are somewha reliable. I se-
veral o my rused colleagues advance he same re-
commendaion, hen his migh even be beer han
my own judgmen, because I migh miss somehing
hey don. Now i does no require much anasy o
see he similariy o his raionale o he concep o
he peer-review process. I is in ac is insiuiona-
lizaion; scieniss ha we consider o be expers re-
view submissions and give us recommendaions by
lering ou he wase o ime aricles. Cerainly,
some o hese sill ge in and worhy ohers may be
denied access, bu his is ar superior o an anarchy
where everyone is on his own and excellen work is
drowned in a mass o mediocriy. Reurning o he
binary choice rom above, we are led back o a sys-
em o science wih auhoriies.
Conclusion
Firsly, i seems ha scieniss a he beginning
o heir careers in general he mos producive ye-
ars do no receive as much aenion as is warran-
ed, because aenion is allocaed according o re-
puaion, no meri, and repuaion is an expression
o pas success, no uure achievemen. Key acors
supporing his conclusion are (1) he robus empi-rical nding ha produciviy ades wih age and (2)
he Mahew Eec.
Secondly, his diagnosis does no mean ha
we should overhrow he principles o he curren
pracice o science alogeher. As he hough expe-
rimen illusraed, we need auhoriies and i is che-
aper in erms o inormaion coss o rely on hem.
Insead, he ocus should be on he specics o a
sysem o repuaion and peer-review, answering
quesions like: How do we urher reduce bias? Or,
how many reviewers are opimal, given he radeobeween accuracy o evaluaion and delay o publica-
ion?
Endnotes
1 In he conex o science, a monopoly does no
jus resul in higher prices. Insead, reerees migh
misjudge he meris o submissions or even ineni-
onally serve heir own agenda and urn down papers
which break wih heir own heories. In oher words,
papers wih meris migh be suppressed by denying
hem access o scienic discourse. In he cases whe-
re he review process is no double blind, i provides
room or avoriism. And even when peer-reviewing
is done double blind, manuscrips are oen publis-
hed as discussion papers or presened a coneren-
ces earlier, in which case i is easy o nd ou he
auhors ideniies. Moreover, expers in a eld are
oen able o recognize someones work rom inclu-
ded ciaions, syle ec. Subsaniaing his, Yankau-
er (1991) ound ha 39% o he auhors in a double
blind review-process were idenied correcly by
he reerees in his sample. Tereore, even i double
blindness is implemened, peer-review is no com-
pleely eecive in prevening biases or disorions
o scienic discourse.2 Due o ormal connemens I canno invesi-
gae why his is so. Possible reasons include, among
oher hings, ha older scieniss are more dogma-
ic, less creaive or have more adminisraive res-
ponsibiliies han heir younger colleagues. Also see
nex oonoe.
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3 I should be noed ha Kanazawa (2003,
pp.265.) provides an evoluionary psychology he-
ory, which can explain he daa. More imporanly, i
explains why emale scieniss seem o have a more
even age-produciviy prole han men (economic
human capial models, on he oher hand, do no di-
singuish beween he sexes). Since his daa almos
exclusively consiss o male scieniss, he overall
prole looks like he male scieniss age-produci-viy prole. However, his migh change because he
proporion o emale scieniss is on he rise. Tus,
considering all scieniss, he eec o produciviy
ading wih age migh weaken in uure.4 Allison and Sewar (1974) provide empirical
evidence or accumulaive advanage based on quan-
iaive analysis o cross-secional daa, in addiion
o he qualiaive daa rom inerviews used by Mer-
on (1968).
Bibliography
Allison, P. D. & Sewar, J. A. 1974. Productivity
Diferences Among Scientists: Evidence or Accumulati-
ve Advantage. American Sociological Review 39. 596-
606
Diamond Jr., A. M. 1986. Te Lie-Cycle Research
Productivity o Mathematicians and Scientists. Journal
o Geronology 41. 520-525
Kanazawa, S. 2003. Why Productivity Fades With
Age: Te Crime-Genius Connection. Journal o Re-
search in Personaliy 37. 257-272
Levin, S. G. & Sephan, P. E. 1991. Research Pro-
ductivity Over the Lie Cycle: Evidence or Academic Sci-
entists.American Economic Review 81. 114-132
Meron, R. K. 1968. Te Matthew Efect in Science.
Science 159. 56-63
Yankauer, A. 1991. How Blind Is Blind Review?
American Journal o Public Healh 81. 843-845
Christoph Siemroth is reading Philosophy & Econo-
mics at the University o Bayreuth, Germany. He has
previously studied at the University o Helsinki, Finland.
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This is you.
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In his essay, I will quesion he eciency o
modern economics, paricularly ha o he preva-
len neoliberal economics, ocusing specically on
he eciency o compeiion, he pro moive, and
privae propery. Subsequenly I will criique ha
view by adding a moral consrain o show ha e-
ciency solely in erms o markes and nancial pro
alone does no bene sociey generally, bu raher
promoes an increased wealh or a minoriy, oen
a he expense o he majoriy.
Te Right to Lie
Much o he ollowing argumen is based on an
imporan assumpion, ha he righ o propery is
secondary o he righ o lie. Lie precedes propery,
or no-one can own propery wihou rs owning
heir lie. Tough propery righs are oen con-
sidered o have developed ou o he need o hold
personal possessions, o consume ha necessary o
susain lie, he permanen righ o an exac posses-
sion in modern law has evolved, oen superseding
he righ o lie, as laer shown.
Wha ollows rom his is a new deniion o
pro. Troughou I will conras he moneary
deniion o pro wih a long-erm social pro
based around economics working or people raher
han people working or economics. Tis new ormo pro is based on he above assumpion and sug-
that moralityoverrides the profit
motive to improveefficiency
gess ha eciency isn jus o moneary value, bu
mus accoun or he inalienable righ o lie o each
person. Tis dierence is pivoal in undersanding
he ineciency o he pro moive, compeiion
and privae propery, as alhough i may be possible
o bring abou greaer nominal wealh, i is ine-
cien, according o measures o inalienable righs, o
concenrae wealh in he hands o a minoriy: his
social deniion o pro, hen, is he pracical appli-
caion o he righ o lie superseding propery.
Proft and the Proft Motive
Perhaps he mos popularized argumen or he
ree-marke is ha while he capialis intends only
his own gain... he is... led by an invisible hand to pro-
mote an end which was no part o his intention(Smih
1976, p.477). I is, however, also imporan o noe
Smihs concern or he capialiss greed, as All or
ourselves, and nothing or other people, seems, in ev-
ery age o the world, to have been the vile maxim o the
masters o mankind.(Ibid., p.437) Tough considered
he ounder o modern economics, Smih noed he
hrea o an unchecked and individualisic pro
moive, arguing ha markes do no always correc
hemselves; some conrol is necessary o proec he
marke rom monopolies and oher vesed ineress.
Many liberals consider sel-ineres as raionalor par o human naure. Since, in he ormulaic
So-called neoliberal economic assumptions of private property, competition and the profit motive
are established to increase utility and efficiency. However they are morally bankrupt and only benefita small elite, leaving most people in poverty. An impeachment. B Y R O Y M O O R E
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21
saisical approach o micro and macro economics,
uiliy is oen considered no more han sel-iner-
esed nancial gain, promoing moneary ineress
over ohers. Wih such assumpions o human na-
ure, he ineviabiliy o compeiion in producing
boh winners and losers leads hose winners o logi-
cally srenghen heir own posiion, creaing a kind
o supersrucure perpeuaing lile bu heir own
success. We mus, hereore, quesion he purposeo such assumpions, and i is here ha John Ruskin
noes he eecs o such economic principles, wri-
ing ha pro in economics is a zero sum game: or
every buyer, here is a seller; one receives only wha
anoher gives.
I he ar o making money is o ake all you can
rom he buyer perhaps You sold your bread well to-
day: [but] was it to a dying man who gave his last coin
or it and will never need bread more...?(Ruskin 2007,
p.44) Tus, a brie hisory o how such developed
counries nanced heir indusrializaion usually re-
veals some orm o slavery, colonialism or coercion.
Tus, while his means pro becomes he general
maxim o Buy in the cheapest market and sell in the
dearest, i seems ha such nancial pro usually
comes a a social cos no acored ino radiional
economic accouning: Charcoal may be cheap among
your roo timbers ater a re, and bricks may be cheap
in your streets ater an earthquake; but re and earth-
quake may not thereore be national benets. (Ibid.,
p.44)
I is no dicul o see, hen, how he ar o
pro is oen he ar o exploiing ohers, and eco-
nomics wihou such moral consrain leads o such
violaions o humaniy, o he poin a which: ...the
pluses, make a very positive and venerable appearance
in the world, so that everyone is eager to learn the sci-
ence which produces results so magnicent; whereas the
minuses have, on the other hand, a tendency to retire
into back streets, and other places o shade, or evento get themselves wholly and nally put out o sight in
graves: which renders the algebra o this science pecu-
liar, and diculty legible; a large number o its negative
signs being written by the account-keeper in a kind o
red ink, which starvation thins, and makes strangely
pale, or even quite invisible ink, or the present.(Ibid.,
p.79)
Wih such sel-ineres he capialis may sill,
as Smih noes, bene sociey. He argues ha he
armer, bucher and baker all ac in heir own sel-ineres bu sill provide a service o sociey, a beer
organizaion hrough he division o labor. Tough
such exernaliies do bene sociey, Ruskin noes
hose negaive exernaliies which are oen orgo-
en, producs and occupaions which damage soci-
ey, and he majoriy who suer due o he disribu-
ion o such goods. Ruskins hypohesis, hen, seems
ever more correc he wealhier sociey becomes;
despie increasing wealh, povery and inequaliy
coninue o grow: in 183, the ratio in average per
capita income was three to one, in 196 sixty to one, andin 1997 seventy-our to one.(Risse 2005, p.349).
Competition
Te incenive and pracicaliies o making money
can only exis in some sor o compeiive rame-
work. I is imporan o noe, hen, ha hose who
nish rs in any compeiion do so only in relaion
o hose who nish second and hird respecively.
As resuls are ound and winners receive heir prize,
heir posiion is srenghened and hus heir abiliy
o reinves wih greaer capial, gain greaer mar-
instead of an invisiblehand gently pushingtowards the benefit of
everyone, coMpetitionleads to an inequalitywhich is Much Moreof a vivid slap in theface for that Majorityborn into poverty.
John Ruskin
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ke share, or exrac more marginal produc rom
employees. In his ramework, Ricardo denes he
naural rae o wages as ha which mainains he
laborer, bu Ruskins appeal o moraliy shows ha
pro or he capialis does no mean gain or all.
Insead o an invisible hand genly pushing owards
he bene o everyone, such compeiion leads o
an inequaliy which is much more o a vivid slap in
he ace or ha majoriy born ino povery.Ruskin hus changes he prioriies o economics,
noing ha wenty people can gain money or one who
can use it; and the vital question, or individual and or
nation, is, never how much do they make? but to what
purpose do they spend?(Ruskin 2007, p.85) Where
Ricardo denes he naural rae o wages, Ruskin
quesions he very purpose o naural; wha is nau-
ral or Ricardo, according o such economic heory,
is ha which serves his ineress. I seeing laborers
as mere ools in heir acory and keeping a muli-
ude in povery or cheap labor is benecial, hen iis naural according o such a view.
I makes economic sense, hereore, or even
hose working in healhcare o es banned drugs on
children1 wih alsied documens o suppor ehi-
cal consen, and o make heir own produc appear
more eecive by lowering he recommended dose o
he conrol drug o paiens, even i his leads o he
disablemen and deah o children (Ahmad 2001).
Te enire relaionship beween capial and labor,
hen, beween hose who won he compeiion and
hose who have nohing, is based on a power srug-
gle o exploiaion. Wihou balance, one dominaes
he oher, heir ineress eecively deermining he
lie o he oher. Unil each person has an inviolable
righ o lie, such exploiaion can only coninue.
Where such exploiaion exiss, no inviolable righ
o lie does so.
Private Property
Wha ollows compeiive markes is inequal-
iy, bu wha permis he legaliy o he exreme in-
equaliy oday is he insiuion o privae propery.
Permanen propery righs allow one person he le-
gal righ o choose o wihhold even he means o
lie. Once we ake our rs assumpion, however, he
righ o lie is above propery righs requiring a morejus disribuion. Even Nozicks Enilemen Teory,
ulimaely driven by propery righs, acknowledges
his prioriy; a poin which when properly expound-
ed erodes properys permanence o agree wih our
assumpion:
an owners property right in the only island in an
area does not allow him to order a castaway rom a ship-
wreck of his island as a trespasser... the theory does
not say that owners do not have these rights, but that
the rights are overridden to avoid some catastrophe.
(Nozick 1974, p.180)Consequenly, in moderae scarciy should one
person no have jusly acquired enough propery or
heir own consumpion while anoher has jusly ac-
quired more han hey can consume, some disribu-
ion seems o be required o avoid such caasrophe:
he owners righ o deny a person hose means o
lie is overridden because o a greaer need. I is his
acknowledgemen, ha need is greaer han prop-
ery, which demands redisribuion or he sake o
social jusice, paricularly or hose who have been
born ino povery cycles and who had no choice in
heir acquisiions. In his sense, he eciency o
economics is judged by is abiliy o ulll hose ob-
ligaions o social jusice, raher han being a sum-
mary o collecive wealh by GDP, PPP or some oher
average saisical measure.
here is the conflict: whereonce, as ruskin argued,
profit had a purpose,Money was a Means to an
end, now it is the end. 22
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Endnotes
1 Children are dened as hose aged below ve years old, hushe saisics are greaer i children aged beween ve and sixeenare included. (You e al 2009)
Bibliography
Ahmad, K. 2001. Drug company sued over research trial in Nige-ria. Te Lance, Volume 358, Issue 9284. 815
Food and Agriculure Organizaion (FAO), InernaionalFund or Agriculural Developmen & World Food Program2002. Reducing Poverty and Hunger: the Critical Role o Financingor Food, Agriculture, and Rural Development. hp://www.ao.org/docrep/003/Y6265e/y6265e00.hm, accessed on 03/02/2010 a20:04.
Holloway, J. 1992. Crisis, Fetishism and Class Composition.Open Marxism: Volume II, Teory and Practice. London: Pluo.
Marx, K. 1970. Critique o the Gotha Programme. New Ed.Moscow: Progress.
Nozick, R. 1974.Anarchy, State, and Utopia. New York: Basic.Proudhon, P.J. 1904. What Is Property? New York: Cosimo.Risse, M. 2005. How Does the Global Order Harm the Poor? Phi-
losophy and Public Aairs 33. 349-76Ruskin, J. 2007. Unto Tis Last. Minneapolis: Filiquarian.Smih, A. 1976. An Inquiry into the Nature and Causes o Te
Wealth o Nations. Chicago: Universiy o Chicago.World Hunger Educaion Service 2009. World Hunger Facts
29. hp://www.worldhunger.org/aricles/Learn/world%20hunger%20acs%202002.hm, accessed 07/02/2010 a 20:31.
You, D., Wardlow, ., Salama, P. & Jones, G. 2009. Levels andtrends in under 5-mortality, 199-28. Te Lance, Volume 375, Is-sue 9709. 100-103
When lie precedes propery, i becomes logical
o conclude ha disribuion ollows need. I is no
a ar srech rom here o he amiliar slogan From
each according to his ability, to each according to his
need(Marx 1970): only hose who have can provide
he resources, only hose wih need will receive; any-
hing else is unjus, an inecien caasrophe. In
his vein Proudhon declares Property is robbery!
(Proudhon 1904, p.3) as i denies wha is he righo hose who need i. Te problem is no scarciy, as
here is enough ood despie a 70% global populaion
increase, as calories per person has increased 17%
(FAO 2002). Ta he required redisribuion canno
legally occur wihou he consen o he owner is
due o he insiuion o privae propery.
Economics as Morality
Eecively, he debae is reducible o one hing:
purpose; or wha purpose are modern economic as-sumpions esablished as law? Te answer is airly
clear given he hisorical basis o he evoluion o
power, ha even voing righs, or example, were
subjec o condiions o propery ownership. Com-
peiion, privae propery and he pro moive
all serve he ineress o a minoriy who won he
compeiion and hus consolidae heir wealh and
power. Almos all o hese are rom hose developed
counries, creaing a sysem o conrol, whereby en-
ire naions o people are classed as rs, second, or
hird world, according o heir respecive wealh,
where wo people rom dieren economic siua-
ions are considered alien o each oher based solely
on saisics.
Such deniions show he bankrup moraliy o
such principles. Perhaps his sems rom he evolu-
ion o economics as a separae subjec. Te eymol-
ogy o economics derives rom house, meaning
there was no clear distinction made between household
management and the economy, or between politics and
economics, or between economic theory and moral phi-
losophy. (Holloway 1992, p.160) When separaed
rom he poliical realm, as Holloway argues oc-
curred in he ransiion rom he Feudal o he Capi-
alis sysem, he end goal o economics becomes
moneary gain. Insead o ha ransiion leading o
greaer reedom, only greaer povery and inequal-
iy have been achieved; as capial and labor became
ree, masers could search he globe or cheap labor,
raher han being ied o any paricular ser.
Wihin such exreme inequaliy, jusice, airness
and even he righ o lie have been los. Bu i we re-
move he parialiy o hose who esablish pro mo-
ives or heir own ends we are le wih he conclu-sion ha all people are equal, ha lie is worh more
han propery, and we gain a purpose or wealh
beyond he rivolous and useless consumpion o
scarce resources (Smih 1976, p.437). Wih growing
povery and inequaliy i is surely becoming more
and more necessary o challenge hese assumpions
o neoliberal economics o sop, perhaps, he grea-
es injusice in he hisory o mankind.
I he purpose o economics is in he accumula-
ion o money we have our mehods. I, however,we nally see he moral imperaives in repariaing
economics wih oher disciplines we nd a new ra-
ionaliy and eciency. Where we nally accep he
inalienable righs o each person we allow ourselves
he chance o recreae our world and ashion sociey
in a manner air or all. Te nex sep in economic
evoluion is wih us: eiher we coninue o reap he
benes o he suering o so many, or we nd hose
moral imperaives and creae our own purpose, o
change he course o economics and he lives o mil-
lions o people worldwide.
Roy Moore is a third year Politics, Philosophy andEconomics (PPE) student at the University o York.
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the roleof identityand social
networks foreconomic outcomesin poorcountries - anapplication to
aspirationsB Y Z S O K A K O C Z A N
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Recently there has been an increasing tendency to incorporate in economic theory, as Keynes once
did, the great variety of norms that determine human behavior, expanding the homo economicus
assumptions. Identity and the role of social networks have hence increasingly featured in economic
discussions.
Introduction1
In a world o social diference, one o the most im-
portant economic decisions that an individual makes
may be the type o person to be. Limits on this choice
would also be critical determinants o economic behav-
ior, opportunity, and well-being.
(Akerlo and Kranon 2000, p.748)
Sociologiss, psychologiss and anhropologiss
have repeaedly emphasized he imporance o
relaive comparisons, role models or peer pressure
(perhaps mos vividly in Franks Choosing he Righ
Pond 1985). Economiss have ended o be skepical
owards such culural explanaions. However, em-
pirical sudies have brough up puzzles ha canno
be accouned or enirely by he usual maximizing
ramework. Numerous papers have ound unex-
plained neighborhood eecs hining a some re-
gionally and/or socially conned missing acor (e.g.
Borjas 1995; Jalan and Ravallion 2002; Becker and
Murphy 2000). Evidence also increasingly seems
o sugges ha human capial invesmen canno
be ully accouned or hrough rae-o-reurn
credi consrain analysis (e.g. Carneiro and Heck-
man 2002; Cameron and aber 2000; Marjoribanks
1999). Rooed in such empirical puzzles, his paper
aemps o hese acors ino a mainsream eco-
nomics ramework by linking human capial inves-
men o aspiraions and opimizaion under second-
bes consrains.
Te microoundations o aspirations
Mainsream economics has been based on meh-
odological individualism, he concepion o he indi-
vidual as a very privae person, unconcerned abou
he res o he world. However, as Dasgupa noed,
Robinson Crusoe aside, economic agens do no live
in isolaion (Dasgupa 2009). Tey do no exis in a
social vacuum as consumer preerences are oen as-
sumed o do. However, i a persons behavior is con-diioned by he experiences o oher individuals, his
becomes cenral o driving group dynamics, possibly
in a way quie dieren rom wha he simple aggre-
gaion o individual preerences would sugges.
Te microoundaions o he model discussed in
he ollowing secion can hus be se ou by linking
aspiraions backwards o an aspiraion window, in
urn deermined by he choice o a reerence group
inuenced by social neworks2.
Te noion o an aspiraion window is closelylinked o he discussion by Ray (2004) who argued
ha individuals have some cogniive sphere o
which hey compare hemselves, hus deermining
heir aspiraions. Tis can be ormulaed in more
saisical erms, as looking a he experiences o in-
dividuals close o an agen (spaially, economically,
socially) is like running an experimen wih beer
conrols. Te selecion o a reerence group can hus
be seen as a raional response o an inormaion
problem - he lack o perec oresigh.
Reerence may here be made o he recen work
o Akerlo and Kranon on ideniy (2000, 2002,
2005, 2007). Tey developed a ramework based on
he assumpions ha people have a view o who
hey are (a social caegory), and corresponding o
who hey are (his ideniy) hey have an ideal or
behavior, and lose uiliy insoar as hey do no live
up o ha ideal. While Akerlo and Kranons argu-
mens are based on he idea o merely exending
uiliy uncions, I rely on he noion o ideniy (in
he sense o behavior being deermined by an ideal)
as applied o aspiraions, closing he model by rac-
ing he deerminans o aspiraions back o social
neworks. Te essence o his argumen is ha he
individuals cogniive neighborhood, he group o
people he compares himsel o, is deermined by heneworks he is a member o3.
t
robinson crusoe aside,econoMic agents donot live in isolation.
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Te model
Te model is based on he graphical analysis o
wo curves in income aspiraions (human capialinvesmen) space. Is main predicions are (i) ha
including aspiraions may aec he locaion o he
povery rap hreshold and (ii) ha aspiraions can
consiue he binding consrain and may accoun
or raional ineria. Focus here is on human capial
invesmen since aspiraions could be more criical
or his orm o invesmen as (i) here may be less
uncerainy abou reurns o physical capial and (ii)
hese may lie in he nearer uure han reurns o e.g.
educaion. Tis disincion is however no essenial
o he argumens in he ollowing.
Te aspirations curve & the ability to invest curve
Te aspiraions side o he model is rooed in
he argumens brough orward by Ray discussed
earlier (Ray 2004), and is exended by inroducing
cosly invesmen in human capial. Te individuals
problem is hus o choose an invesmen eor ha
maximizes he dierence beween benes (higher
uure living sandards) and coss (curren sacrices
in erms o consumpion or leisure) - an iner-em-
poral choice in which social neworks deermining
he selecion o a reerence group become imporan
as he individual aemps o overcome he inorma-
ion consrain o a lack o perec oresigh.
Te aspiraions curve can hus be seen as a
uncion o he peer group seleced by he individ-
ual (S ) as well as personal characerisics (P ). Te
ormer in urn depends on acors such as income
(aecing socio-economic saus), bu also on per-
cepions o more macroeconomic variables such as
mobiliy:
urning o a qualiaive descripion o he curve
(which will be he driving orce behind he resuls
discussed in secionEquilibrium properties & transi-
tional dynamics) i can be assumed o ake he shape
o a logisic uncion: a a a low level or low lev-
els o income (as he individual is likely o selec a
peer group wih similarly low levels o income, lile
inormaion and low mobiliy), hen rising and a-
ening o a a higher level.Te second curve o he model depics abiliy o
inves as a uncion o income. Following ample em-
pirical evidence rom LDCs, he presence o an ini-
ial credi consrain is incorporaed in his curve.
Invesmen (as a proporion o income) is hen as-
sumed o rise (more han) proporionaely wih in-
come4:
Equilibrium properties & transitional dynamics
Examining he graphs o he above oulined
curves, analysis may be broken down ino hree cas-
es depending on wheher he wo curves cross wih
one, wo or hree equilibria, or dieren relaive
slopes o he wo schedules.
Te rs case is ha o a single, unsable equi-
librium accouning or he povery rap. Below his
poin aspiraions exceed abiliy o inves in human
capial, he credi/subsisence consrain is binding
(as could be expeced). Abiliy o inves is low, hus
so is invesmen, resuling in low uure income and
a povery hreshold ha is dicul o cross in he
absence o some large exogenous shock. I is, how-
ever, worh poining ou ha he povery hreshold
lies above he poin where he credi consrain is
relaxed, leaving a role or ineria in he adjusmeno expecaions. Pas he hreshold he individuals
Figure 1:The social
determi-
nants of
aspirations
aspirations = (S(Y, mobility ...),P)
ability = 0 or Y < Y and g(Y)otherwise5
the notion of anaspiration window is
closely linked to thediscussion by ray whoargued that individuals
have soMe cognitivesphere to which theycoMpare theMselves,
thus deterMiningtheir aspirations.
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27
ha along he ransiion pah o his nex equilibri-
um, human capial invesmen may acually be below
he individuals abiliy o inves. Aspiraions may lag
behind, holding back invesmen and growh. Tis
may be due o ineria or conex-specic acors a-
ecing expecaions. Such causes could be eiher a
he macro level (such as hyperinaion or wars) or
could be limied o changes in belies a he micro
level o social neworks e.g. in a village. Above he sable equilibrium, aspiraions have
caugh up (expecaions may have improved), and
credi may again be he binding consrain. Tis
could be due o overshooing in aspiraions, exceed-
ing he increase in abiliy o inves. Tis is reeced
in he iniially seeper slope o he aspiraions curve
and may incorporae he inheren uncerainy sur-
rounding belies (perhaps a rial-and-error adjus-
men o expecaions o equilibrium). While ineria
has requenly been impued o radiional culure
and habis or, in erms o he idea o ideniy, o hepsychological cos he poor/marginalized would pay
i hey were o adop he paern o behavior o he
rich/dominan group (Akerlo and Kranon 2000),
here raional ineria may be explained by he ac
ha i akes ime or he experience sock o he re-
erence group o grow, or heir expecaions o ad-
jus and or his o be considered by he individual.
Conclusions
I the individual cannot orm belies on a set o ully
specied contingencies, including her own uture tastes
given the big choice, how is she to decide?
(Heiez and Minelli. 2006, p. 3)
Tis paper has oulined a model buil rom mi-
crooundaions o how aspiraions may aec he
povery rap and accoun or raional ineria. Tus,
i may go some way owards elucidaing empirical
puzzles concerning unexplained neighborhood e-
ecs or he dominan role o social background char-acerisics or human capial invesmen.
abiliy o inves exceeds his willingness. Tough
invesmen will increase, i is held back by his rela-
ively lower willingness o inves as human capial
invesmen ou o equilibrium is always deermined
by he lower curve. Once he individual has escaped
he povery rap, emphasis shis rom credi con-
srains o aspiraions. Belies and percepions be-
come imporan, highlighing he role o inorma-
ion availabiliy and social neworks in aecingaspiraions, human capial invesmen and hence
urher growh.
Figure 2: First case with one equilibrium
Te second case is similar o he rs scenario:
alhough here are now wo equilibria, he dynamics
and predicions o he model are essenially as or
he rs case. Tere is a second equilibrium as he
wo curves are jus angen o each oher, however
his is sill unsable; abiliy o inves exceeds aspira-
ions boh below and above his poin; he aspira-
ions curve is binding on boh sides.
Figure 3: Second case with two equilibria
Te hird case is a scenario wih hree equilibria
(one sable and wo unsable). As in he above wo
cases, he low unsable equilibrium may accoun or
a povery rap. Once pas his poin, he individual
could slowly move up o he nex sable equilibrium.Aspiraions are, however, imporan as hey mean
Figure 4:
Third case
with three
equilibria
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How might
his aspira-
tions form his
future?
Zsoka Koczan received a BA First Class Honors De-
gree in Economics rom Kings College at Cambridge
University in 29 and continues at Cambridge as an
MPhil student in Economics. She has received the Gerald
Shove Prizes or distinguished perormance in Econom-
ics and was Scholar o Kings College in all three years o
her undergraduate studies.
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whats wrong witheconomicsB Y S I R R O B E R S K I D E L S K Y
Lord Skidelsky is Professor Emeritus of Political Economy at the University of Warwick. He is best
known as the author of a multi-volume biography of John Maynard Keynes. Skidelsky is a member
of the cross benches and frequently writes columns for newspapers and magazines such as the Fi-
nancial Times, the Economist or the New York Times. In response to the financial crisis he published
the book Keynes: The Return of the Masterin September 2009.
?
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Te recen economic collapse has produced wide-
spread dissaisacion wih he sae o economics
and calls or changes in he way economics is augh
a universiies and business schools. wo proes-
sional sraws in he wind are worh noicing:
In November 2008, he Queen Elizabeh II o Bri-
ain asked a he London School o Economics why
so ew economiss had oreseen he credi crunch.In Augus 2009, Proessor Georey Hodgson, edior
o he Journal o Insiuional Economics, draed
a leer, signed by en leading Briish economiss,
which ried o answer he Queens quesion.
Te main poins he signaories made were ha
economics had become a branch o applied mah-
emaics, wih lile conac wih he real world; ha
mainsream economics enerained a highly ques-
ionable belie in universal raionaliy and ecien
markes; and ha i was he narrow raining o econ-omiss which concenraes on inappropriae mah-
emaical echniques and he building o empirically
unconrolled ormal models which helped explain
he ailure o economiss o give adequae warnings
o he economic crises in 2007 and 2008. Te leer
concluded ha economiss needed a broader rain-
ing, involving allied disciplines such as psychology
and economic hisory.
Bu predicion, wroe Paul Krugman in he NY
on 2 Sepember 2009, was he leas o he elds
problems. More imporan was he proessions
blindness o he very possibiliy o caasrophic ail-
ures in a marke economy ... he economics proes-
sion wen asray because economiss, as a group,
misook beauy, clad in impressive-looking mahe-
maics, or ruh ... economiss ell back in love wih
he old, idealized vision o an economy in which
raional individuals inerac in perec markes,
his ime gussied up wih ancy equaions ... Unor-
unaely, his romanicized and saniized vision o
he economy led mos economiss o ignore all he
hings ha can go wrong. Tey urned a blind eye
o he limiaions o human raionaliy ha oen
lead o bubbles and buss; o he problems o insi-
uions ha run amok; o he imperecions o mar-
kes especially nancial markes ha can cause
he economys operaing sysem o undergo sudden,
unpredicable crashes; and o he dangers creaed
when regulaors don believe in regulaion. ... When
i comes o he all-oo-human problem o recessions
and depressions, economiss need o abandon he
nea bu wrong soluion o assuming ha everyone
is raional and markes work perecly.
An imporan criic rom ouside he proession
was he nancier George Soros who had long argued
ha nancial markes were prone o huge errors be-
cause o he exisence o reexiviy. On December
19, 2008 he wroe in he New York Review o Books:
Te salien eaure o he curren nancial crisis is
ha i was no caused by some exernal shock Te
crisis was generaed by he nancial sysem isel.
Tis ac ha he deec was inheren in he sysem conradics he prevailing heory, which holds ha
nancial markes end oward equilibrium.
Tere have been sporadic proess by sudens
agains he economics hey are augh. For example,
a suden movemen or he reorm o economics
eaching sared in France in May 2000 and spread
o Spain, he Unied Kingdom and he Unied Saes.
Te issues raised by he sudens ocused mainly on
he irrelevance o undergraduae and graduae eco-
nomics eaching or undersanding real economic
problems. Tey were agains imaginary economics
worlds being imposed on sudens. Tis hey called
auism, and called hemselves he pos-auisic
movemen. Bu economics sudens come and go
(mainly ino banking, accounancy, and nancial
services) and economics, i seems. goes on oblivi-
ous o heir presence.
I is dicul a his sage o say wha a pos-au-
isic economics would look like. Economiss hem-
selves are a war. Consider he ollowing clashing
schools.
1. Chicago economics (or shor). Agens have
raional expecaions. Ta is, hey ecienly uilize
all available relevan knowledge. Tere is perec in-
ormaion, perec compeiion, and complee mar-
kes. I hese condiions hold, shares are always cor-
recly priced, markes coninuously clear, money has
no uiliy.
2. Te New Keynesians. Agens have raional
expecaions bu imperec inormaion. Markescan hereore ail, and here is scope or governmen
t
econoMics students coMeand go (Mainly into banking,accountancy, and financialservices) and econoMics, itseeMs, goes on obliviousof their presence.
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inervenion o correc hese ailures, and rescue
economies rom savage downurns.
3. Keyness economics. Keynes himsel believed
ha humans behave raionally (or reasonably) bu
ha he uure is no jus risky, bu uncerain. Tis
makes invesmen very volaile. Because o uncer-
ainy money has uiliy as a sore o value. When
condence alls here is a igh rom invesmenino cash. Tis means ha economies can run down
as people curail heir spending. Once economies
have conraced, hey can say depressed a long
ime unless governmen increases is own spending
o ose he all in privae spending. Tis jusies
simulus policies.
4. Behavioral economics. Tis ses ou o heorize
on he basis o how human beings acually behave.
I uses cogniive psychology o reach a momenous
conclusion: humans are programmed o behave irra-ionally. Tey behave in ways which may have surviv-
al or social value bu do no conorm o raionaliy as
radiionally undersood by economiss. Some New
Keynesians have aken up behavioral economics in
heoreical despair wih convenional models.
Obviously, policy and regulaion will be di-
eren depending on which sory one buys. In he
las hiry years governmens and regulaors have
bough he rs sory, wih he resuls we now see.
So we need o change he sory. Ta means
changing he way sudens are augh economics.
A presen economics courses are highly mah-
emaical. In he rs wo years, ypical econom-
ics sudens in a Briish universiy would do hree
economics courses, hree mahemaical courses and
wo opional courses. In he hird year hey can se-
lec our courses rom a lis which includes modules
in urher mahemaical mehods, managerial ac-
couning, commercial law, and so on. Sudens who
are planning o go on o do posgraduae degrees
or research are encouraged o selec mahemaical
courses as heir opions as his would make i eas-ier or hem o ge ino op universiies o do heir
PhDs. So a disproporionae amoun o eaching is
allocaed o mahemaical echniques. Tis means
ha a suden can achieve a rs-class honors degree
on he basis o mahemaics alone. Indeed, provided
a suden can do he mahs, he or she can achieve
virually 100% on he mahs papers. A suden in
an Anglo-American op economics deparmen may
graduae wih he highes grades wihou having o
read a single word o Adam Smih or Marx or Mill orKeynes or Schumpeer or Hayek.
Mahemaics is no a problem in isel he con-
ribuion o mahemaics and saisics as an aid
o rigorous hinking and use o correc quania-
ive mehods in appropriae conexs is a skill ha
sudens should be augh. However, he exising
economics curriculum encourages overuse o inap-
propriae mahemaical echniques wihou under-
sanding o heir concepual underpinnings and
limiaions.
Sudens sudy micro and macro compleely
separaely. Tere is no course in he nal year ha
would bring he wo ogeher ino one coheren pic-
ure. Tey also have no way o relaing micro and
macro echniques o he wider conex o economic
hisory, poliical economy and so on.
Given he war among economiss, here is lile
chance, as ye, o a unied eld o economic heory.
Wha can be done is o ensure ha sudens can-
no obain a degree in economics on he basis o
economics and mahs alone. Some or all o economic
hisory, poliical economy, he hisory o economic
hough, psychology, poliics, sociology and (I would
argue) philosophy should no be opional exras bu
an inegral par o he raining o an economis, es-
pecially a rs degree level, and weighed according-
ly. Tis would give he budding economis an insigh
ino he way oher disciplines have sough o under-
sand human behavior. Specializaion can wai unil
laer, and only on he back o a broad rs degree.
Tis reorm would ensure a modes de-proes-
sionalizaion o he discipline. Given is lack o real
scienic sanding, his would be a good hing. No
only is economics cu o rom ordinary discourse,
bu i rarely engages in ruiul dialogue wih adja-
cen disciplines. An economics deparmen in which
broader rs-degree courses were augh would nec-
essarily have a more heerodox body o proessors,
and sudens would be exposed o clashing views
and mehodologies.
not only is econoMics cutoff froM ordinary discourse,
but it rarely engages infruitful dialogue with
adjacent disciplines.
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Even modes reorms o his sor will be im-
mensely dicul o achieve. Te whole sysem o
exbooks, learned journals, enure, job opporu-
niies is buil on an increasingly narrow echnical
concep o wha i is o be an economis. Tis will
need o be blown up. Perhaps he presen crisis will
conribue o ha. Bu I suspec we will need o have
more crashes in he real world beore he presen
srucure o economics comes crashing down.
Te models economiss use inuence he acions
o regulaors and governmens. So he sae o eco-
nomics is a maer o vial concern o us. One migh
almos say economics is oo imporan o be le o
economiss.
Students
studio
1915
t
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Te widely acceped neoclassical deniion o ra-
ionaliy has remained he cornersone o econom-
ics or decades. Te assumpion ha economic acors
are uiliy maximizing beings wih consisenly clear
preerences and access o perec inormaion, has o
a large exen enabled he mehodologies o econom-
ic sudies o resemble hose o he naural sciences.
While even Rober Lucas himsel has readily sub-
mied and acknowledged he severe shorcomings
o he raional acor assumpions, is applicaion o
he non-academic world did no noiceably hi a wall
unil he recen global economic crisis. An oshoo
o he raional expecaions heory is he ecien
marke hypohesis (EMH), which saes ha prices
reec all available inormaion. Te EMH spawned a
whole slew o nancial models, including he CapialAsse Pricing Model and he Black-Meron-Scholes
opion-pricing model. Sysemic acors in he global
nancial marke grew o accep and implemen such
models, which were based on ausere and unrealis-
ic assumpions o how reurns and variaion could
replicae Gaussian, lognormal and oher heoreical
disribuions.
Simon analogically ariculaes he core o he
maer. He uses he example o a moionless, ir-
regularly shaped bowl lled wih molasses (Simon
1959). When in a seady sae, or equilibrium, he
molasses will display characerisics akin o ha o
any oher liquid in a similar bowl. Under he earhs
graviaional pull, or example, a pliable subsance
o almos any kind will ac o minimize he heigh
o is cener o graviy. Te behavior o he molas-
ses in equilibrium is dependen only on is goal and
is environmen (Ibid., p.255). In his case, he goal
is he pursui o he cener o graviy and will be
oherwise compleely independen o he inernal
properies o he organism (Ibid.). I on he oher
hand, he said bowl were se in moion, he molasses
would sill evenually nd is cener o graviy as hebowl reached equilibrium. In order o ascerain is
redefiningrationality
B Y R A N I A R A G U N A H A N
The neoclassical definition of ra-
tionality, though continuously and
consistently debated, has remai-
ned the cornerstone of economics
for decades. How do current de-
velopments in areas ranging from
finance to the natural sciences,
necessitate and facilitate a depar-
ture from this paradigm?
t
antnio r. daMsio []observed patients who
had lost their abilityto experience eMotiondue to brain surgery.he observed that one
such patient, known
as elliot, also losthis ability to Make
rational decisions.
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behavior beore he bowl reaches his poin however,
he physical properies o he molasses, such as is
volume and viscosiy, would have o be known. Te
assumpion o raionaliy employed in neoclassical
economics, has eecively assumed away he physi-
cal properies o economic acors.
Ludwig von Mises, an inuenial Ausrian School
economis, once dened science as he endeavor
o aain a menal grasp o he phenomena o he
universe by a sysemaic arrangemen o he whole
body o available knowledge (von Mises 1963, p.21).
Proponens o he Ausrian School were, in general,
averse o he mahemaical mehods employed by
wha we have come o know as mainsream eco-
nomics. Von Mises ulimaely dismisses he neoclas-
sical deniion o raionaliy as nohing more han
a value judgmen, saing ha his was akin o de-
claring wha one person would preer based on wha
anoher would consider desirable. He assered ha
evenually, he observaion o all phenomena willreach a poin where i can no longer be analyzed and
measured by presen knowledge; he human psyche
beyond he ausere deniion o raionaliy being
one o hem. Von Mises argued ha irraional be-
havior wasn irraional per se, bu raher a reacive
response o simuli on he par o he bodily organs
and insincs which canno be conrolled by voliion
o he person concerned (Ibid., p.20). Wheher he
was aware o i or no a he ime, his saemen de-
scribed he basic ramework o a branch in he eld
which we would evenually come o know, as behav-
ioral economics.
Behavioral economics seeks o explain economic
aciviy in erms o marke players behavior and
has aken noe o various human endencies such
as herding, overreacion and loss aversion. Shiller
oulines he endency or invesors o be spurred
on by eedback, making invesmens based on he
observed successes o heir peers (Shiller 2003). He
goes on o ariculae how inerruped eedback dy-
namics simulaes herding behavior and has heendency o generae speculaive bubbles. DeBond
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and Taler ound ha invesors ended o overreac
o new inormaion and hereore caused marke
movemens more exreme han would be expeced
o raional agens (DeBond & Taler 1985). Teir
sudy o U.S. sock reurns concluded ha overre-
acion caused socks ha had previously suered aloss o become underpriced, and previously winning
socks o become overpriced. Prospec heory, devel-
oped by Kahneman and versky, is based on he idea
ha economic agens ended o evaluae invesmen
risks relaive o heir curren levels o wealh (Kah-
neman & versky 1979). Tis is inconsisen wih
he raional expeced uiliy heory, which assesses
possibiliies in erms o absolue nal wealh. Wih-
in his ramework, i was also ound ha invesors
placed greaer weigh on he value o poenial losses
han on ha o poenial gains.
Te human endency o submi o supposedly ir-
raional behavior is a quesion ha he developing
eld o neuroeconomics seeks o answer. By sudy-
ing he link beween reacions in he human brain
and economic behavior, neuroeconomics looks ino
he origins o he decision-making biases idenied
by behavioriss. Based on he brie overview o he
ndings o behavioral economics earlier in his ari-
cle, he propensiy or human beings o produce ir-raional reacions seems o be relaed o emoions.
Fear and greed, he mos common emoional reac-
ions in invesors, appear o orm he basis or mos
o he irraional behavior observed by behavioral
economiss. A sudy by Annio R. Damsio, a be-
havioral neurologis, observed paiens who had los
heir abiliy o experience emoion due o brain sur-
gery (Damsio 1995). He observed ha one such pa-
ien, known as Ellio, also los his abiliy o make
raional decisions. Te main implicaion o he sudy
was ha emoions and raionaliy are inexricablylinked. Zajonc ariculaes how aecive reacions
precede cogniive reacions in he decision-making
process (Zajonc 1980). He concludes ha aec and
cogniion are under he conrol o separae and par-
ially independen sysems ha can inuence each
oher in a variey o ways, and ha boh consiue
independen sources o eecs in inormaion pro-
cessing (Ibid., p.151). However, is i possible ha
his seemingly inricaely and incredibly inerwoven
web o reacions have is roos in he human evolu-
ionary consruc?
loss aversion and herding
can be seen as basic priMalinstincts; losses are Morelikely to deplete a species
than the lack of gains,and power in nuMbersis essential to greater
collective preservation.
Perfect
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Consider, or example, he human reacion o
jumping a he sound o a loud noise. I is only ol-
lowing his aecive reacion ha he human brain
seeks o esablish he source o he disurbance,
which is arguably, he raional hing o do. Tis
propensiy o jump, in preparaion o ake igh,
can be seen as par o our evoluionary consruc,
mean o aid he propagaion and preservaion o
he human race. Variaions in reacions can arisebased on inensiy o he sound, surrounding envi-
ronmen, and pas experiences o he individual in
quesion. Tis suggess ha human beings learn and
adap o whaever circumsances hey nd hem-
selves presenly in. By exrapolaing his noion o
invesor behavior in nancial markes, i can be in-
erred ha many o he observaions made by be-
havioral economiss are, a leas parially, aribu-
able o evoluionary human qualiies. Overreacion
in paricular, can be seen as analogous o human
responses o loud noises. Loss aversion and herding
can be seen as basic primal insincs; losses are more
likely o deplee a species han he lack o gains, and
power in numbers is essenial o greaer collecive
preservaion. Chen, Lakshminarayanan, and Sanos
conduced an experimen using primaes, in order
o uncover he evoluionary properies behind eco-
nomic decisions (Chen, Lakshminarayanan & San-
os 2006). Primaes were seleced or his purpose
due o heir neurological consruc being similar o
ha o human beings. Te experimen ound ha
he es subjecs displayed behavior consisen wih
Kahneman and verskys deniion o loss aversion
(Kahneman & versky 1979).
Tese ndings have remendous implicaions or
he microoundaions o economics. For he longes
ime, human idiosyncrasies were rendered negligible
in economic analysis; he argumen being ha on a
macro level, variaions would cancel each oher ou
o bring abou one very raional super-being ha is
he economy. However, his is proving o be less and
less he case in pracice. By no aking ino accoun
he eecs o herding or insance, we ailed o real-
ize how deviaions rom so-called raional behavior
wouldn necessarily cancel each oher ou. Finan-cial models mean o hedge and measure risk did
no work when all players were being on he same
sraegies. I has become eviden beyond a shadow
o a doub ha he eld o economics has o incor-
porae componens o he naural sciences ha ac-
coun or human behavior, as opposed o he ormer
convenion o solely employing generic mahema-
ics, rie wih unrealisic assumpions. However he
bigges challenge lying ahead or observaions o be-
havioral, evoluiona