Ormerod’s Beyond Nudge

Paul Ormerod is a respected economist with good insights into our current problems. Like Keynes he:

  1. Notes that the assumptions of classical economic rationalism and ‘homo economicus’ are not valid, and the difference makes a difference.
  2. Highlights the importance of copying .

Keynes was working in a different time. This may explain why Ormerod and Keynes emphasise different things. Ormerod emphasises network effects, and  – for example – the differences between random graphs, scale-free networks and small-world networks. Keynes’ world was, perhaps, smaller and more structured. In his discussion of network effects their structure seemed not to be an issue. (Or have I missed something?) On the other hand, Keynes emphasises both the issue of time-scale and his notion of non-probabilistic uncertainty.

Ormerod does not deeply address time-scales. He does mention uncertainty, but – like the behaviourists – seems to regard it as arising from imperfect human  decision-making (as below) rather than – as Keynes does – as being intrinsic. 

Paul Ormerod Beyond Nudge: A New Approach to Networks and Behavioural Economics

There have been a number of important and successful books on networks … and more recently we’…  some suggestive books on … behavioural economics or ‘nudge’ … But on their own, both theories have limitations. Mine will be the first book to attempt to combine the two. My contention is that the concepts complement each other, need one another, and that taken together they are much more powerful. Indeed, the combination has the potential to transform our understanding of the world. [Yes, but uncertainty matter too?] By contrast, network approaches are based on ‘social physics’. People do not so much evaluate incentives, or examine the price/quality of the products and services on offer ‐ they just copy what other people do. But in this view of the world, people are like particles in physics. …  If you are a fish, it makes sense just to move when the shoal moves … . But although people often copy, they are not particles or fish – they can clearly make up their own minds as well.

All scientific theories are approximations to reality. Conventional economics has appropriated the word ‘rational’ for the way it postulates that people behave. They have fixed preferences, and gather all available information. They pay no attention to the decisions of others, but evaluate the information and choose ‘rationally’, making the best possible choice given the prices/incentives which exist.

My book will offer an alternative, much more relevant model of rationality, which should prove important to all the social sciences. Yes, people often use networks to make decisions, solving the information overload by copying/imitating/going along with peer acceptance. But they can also innovate, make their own choices, evaluate a sophisticated range of ‘nudge’ incentives. … .

Perhaps people can also sense Keynes’ uncertainty and adapt their strategies to it, for example in the time-scale that they focus on. For example, if a speculative market seems to be ‘shoaling’ it may be time to adopt a contrarian strategy, or simply to hunker-down and wait for the storm to come and pass. Perhaps what Ormerod is doing is providing a model of the small fry behaviour, to be complemented by Keynes’ approach to ‘market-makers’ and the like.

See Also

N Squared Public policy and the power of networks

For over sixty years generations of policymakers have been raised to have a mechanistic view of the world, and a checklist mentality: to achieve a particular set of aims, draw up a list of policies and simply tick them off. It is a comforting environment in which to operate, being seemingly dependable, predictable and controllable.

Here Ormerod mirrors Keynes’ concerns.

But the principal cause of the failure of what we might call the social democratic model to achieve its objectives is not the size of the state but the intellectual framework in which it operates. … Clever, rational people believed that clever, rational people could devise written systems of rules and regulation that ensure risks are minimised. …

 Thus the politically acceptable form of regulation (with no discretion) has become a part of the problem. Ormerod gives an enlightening tale of two community officers failing to save a girl from drowning because they were not properly trained. (Except that sometimes people do take a risk.)

The future is fraught with risk and uncertainty, an inherent part of the human condition. The world is much more complex, much less controllable than ‘rational’ planners believe. Policy is very difficult to get right. There are two main reasons for this.

Firstly, human beings do not necessarily behave in rational ways. …
Secondly, tastes and preferences of individual agents are not fixed … but can be altered directly by observing and learning about the behaviour of others.  …

The introduction of these features of reality rapidly leads to great uncertainty about the consequences of any given action.

The failure of almost all existing social and economic analysis to take account of potential network effects underlies the apparent failure of the social democratic state.

Comments

Ormerod seems correct in so far as he goes beyond classic economics, behaviourism and econophysics, and he provides an attractive synthesis that can be used to show the folly of some current analyses and policies. But here and elsewhere Ormerod writes about ‘rules’ and behaviour ‘on’ networks, and generally seems to invite a similar fate to Keynes: of having his work somehow being interpreted not as a critical model but as a prescriptive model. In my view, it would at least have to incorporate Keynes’ uncertainty, cover relevant time-scales, and (my idea) provide some insights into the ways in which actors can gain insights into the networks, and can develop and exploit them (‘network capital’).

Dave Marsay

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