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View Diary: Morning Feature: Animal Spirits, Part I - Irrational Economic Actors (72 comments)

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  •  They mean something a bit different. (7+ / 0-)

    Akerlof and Shiller argue that the stories are facts in themselves.  Here's an example I thought of while I was driving Springoff the Fourth to carpool....

    Let's say it's 12:50pm, and you're an office manager on the 10th floor of a high-rise office complex.  Someone in the next office says to someone else, "I smell smoke.  Do you smell smoke? ::sniff sniff::  I smell smoke.  I'm getting out of here."  The person then heads for the exit, telling everyone else along the way.  Will the meeting scheduled for 1pm in the 10th floor conference room begin on time?

    The answer to that question does not rest on the 'objective fact' of whether there is a fire.  The answer rests on whether people believe and act on the smoke-sniffer's story that there's a fire.  That story is itself a fact.

    Now how does the analysis change if last night's news was all about 25 people dying in a high-rise office fire because the smoke detectors didn't work?

    Objectively, there's probably no connection between the smoke detectors in the other building (it may be in another city) and the smoke detectors in your building.  But I'll wager people in your building - including you! - are a lot more likely to believe the smoke-sniffer's story, based on the story in last night's news.

    In that metaphor, economics is supposed to predict whether that 1pm conference will happen on time.  Too often, Akerlof and Shiller argue, economists do that by looking at 'objective facts' - whether the smoke detectors in your building signal a fire - and ignore the fact that someone claimed to smell smoke and that others are believing him/her.  The economists would say the conference will happen because the smoke detectors don't signal any fire and thus Rational Actors will disbelieve the smoke-sniffer's story ... but in reality the human beings will be out on the sidewalk and the conference will be late.

    If there was no fire, the economist might then say the conference was late due to a "false alarm."  Akerlof and Shiller would probably argue it wasn't a "false alarm."  The alarm was real, even if it didn't correlate to a real fire.

    In predicting peoples' behavior - and economics claims to do exactly that - we have to consider the stories people believe to be true, even if we lack empirical data to back up those stories.  In order to be useful, economics can't simply describe what people should do; it has to predict what people will do.  To make that prediction, the 'objective facts' are not sufficient.

    Good morning! ::huggggggggggs::

    •  But we are talking about the same thing! (4+ / 0-)

      The rules of evidence severely limit what can be introduced at a trial, and those limitations determine how the story gets told.  In your example, the person who smelled the smoke would be able to testify as to what she experienced.  Those who merely heard about the smoke could not testify about whether there was a smell of smoke -- but they could testify as to their relationship to the bearer of the tale, her veracity in the past etc., what she said about the smoke, but not whether she did or did not smell smoke, KWIM?  All that informs the reasonableness -- rationality -- of the actors.  Let's say that 1:00 meeting had to deal with selling the company; if the meeting was cancelled, the deal would fall through -- it had to be closed that day.  The issue would be: was it reasonable to rely upon the office manager's report of smelling smoke?  Did she have a rational reason to lie about it?  Or was there some other source from which the office manager could have smelled smoke?  A trial is all about the rationality of the actors based on the evidentiary facts -- but the story defines what is rational.

      A real life example: we handled a case in which a Catholic couple were accused of anti-Semitism based on tape recordings their Jewish neighbors had made of the Catholic couple's telephone calls, captured by a police scanner from a cordless telephone (such taping is now illegal, but the law changed right in the middle of the whole deal).  The basic fact upon which 10 years of litigation hung was 30 seconds of recorded conversation in which the Catholic wife made some truly tasteless jokes with her girlfriend about their horrible neighbors and how they might drive them out of the neighborhood.  It became a big deal when the Jewish couple, seeing an opportunity to more or less blackmail the Catholic couple into making a monetary settlement, went to the ADL.  Instead of a quick settlement, the ADL referred the Jewish couple to lawyers, and a federal ethnic intimidation civil lawsuit was filed with great fanfare and publicity by the ADL, who saw the whole idea of upper-middle-class anti-Semites as a great fundraising opportunity.

      But it was the story behind those 30 seconds that mattered.  By the time the thing got to trial, everyone had settled except the ADL, which was charged with defamation by the Catholic couple.  The ADL's lawyers thought they had a slam-dunk: they had that 30 seconds of recorded conversation admitted into evidence.  But the story of the couples' relationship to one another, their relationships to other people, their reputations determined the outcome of the trial: a huge verdict against the ADL.  The ADL claimed it had acted rationally in backing the Jewish couple; the story behind that 30 seconds -- properly told -- said otherwise.

      In a trial the story has already played out; in economics it has not.

      •  In the legal context ... (2+ / 0-)
        Recommended by:
        winterbanyan, FarWestGirl

        ... that there is a trial - a prosecutor or plaintiff is telling a story - is itself a fact that the jury will weigh in their deliberations.  (The "where there's smoke, there's fire" rationale.)  It's not simply that good lawyers fit facts into compelling stories.  That a story is being told is, itself, a fact that we weigh in our decisions.

        Does that explain the distinction?

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