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The Irrational Economist: Making Decisions in a Dangerous World

Book Description

Of the twenty most costly catastrophes since 1970, more than half have occurred since 2001. Is this an omen of what the 21st century will be? How might we behave in this new, uncertain and more dangerous environment? Will our actions be rational or irrational?

A select group of scholars, innovators, and Nobel Laureates was asked to address challenges to rational decision making both in our day-to-day life and in the face of catastrophic threats such as climate changes, natural disasters, technological hazards, and human malevolence. At the crossroads of decision sciences, behavioral and neuro-economics, psychology, management, insurance, and finance, their contributions aim to introduce readers to the latest thinking and discoveries.

The Irrational Economist challenges the conventional wisdom about how to make the right decisions in the new era we have entered. It reveals a profound revolution in thinking as understood by some of the greatest minds in our day, and underscores the growing role and impact of economists and other social scientists as they guide our most important personal and societal decisions.

Table of Contents

  1. Title Page
  2. Introduction
  3. PART ONE - IRRATIONAL TIMES
    1. 1 - Superstition
      1. RELIGION AND SUPERSTITION
      2. RECOMMENDED READING
    2. 2 - Berserk Weather Forecasters, Beauty Contests, and Delicious Apples on Wall Street
      1. BERSERK WEATHER FORECASTERS
      2. THE BEAUTY CONTEST AND DELICIOUS APPLE METAPHORS
      3. RECOMMENDED READING
    3. 3 - Subways, Coconuts, and Foggy Minefields
      1. THE FAILURE OF DECISION THEORY
      2. TWO TYPES OF UNCERTAINTY
      3. COMMIT ONLY AS FAR AS YOU CAN PREDICT
      4. FROM AIRPLANES TO FOGGY MINEFIELDS
      5. RECOMMENDED READING
    4. 4 - The More Who Die, the Less We Care
      1. BACKGROUND AND THEORY: THE IMPORTANCE OF AFFECT
      2. FACING CATASTROPHIC LOSS OF LIFE
      3. THE DARFUR GENOCIDE
      4. AFFECT, ANALYSIS, AND THE VALUE OF HUMAN LIVES
      5. THE PSYCHOPHYSICAL MODEL
      6. THE COLLAPSE OF COMPASSION
      7. THE FAILURE OF MORAL INTUITION
      8. WHAT TO DO?
      9. RECOMMENDED READING
    5. 5 - Haven’t You Switched to Risk Management 2.0 Yet?
      1. MANAGING AND FINANCING EXTREME EVENTS: A NEW ERA CALLS FOR A NEW MODEL
      2. A NEW RISK ARCHITECTURE IS STILL TO BE DEFINED
      3. WHY BEING SELFISH TODAY MEANS TAKING CARE OF OTHERS . . .
      4. RECOMMENDED READING
  4. PART TWO - ARE WE ASKING THE RIGHT QUESTIONS? ECONOMIC MODELS AND RATIONALITY
    1. 6 - A Two-Edged Sword
      1. WHAT IS EXPECTED UTILITY?
      2. NORMATIVE DEBATES
      3. WHAT IS BEHAVIORAL DECISION THEORY?
      4. LIMITS OF THE RATIONAL MODEL
      5. A PRACTICAL CASE FOR TEENAGERS: DECISION EDUCATION FOUNDATION
      6. IN CLOSING: A SPORTS ANALOGY
      7. RECOMMENDED READING
    2. 7 - Constructed Preference and the Quest for Rationality
      1. WHAT CHOICES ARE WISE?
      2. CONSTRUCTED CHOICE
      3. RATIONALITY IN THE CONTEXT OF CONSTRUCTED CHOICE
      4. RATIONALITY IN FLUX
      5. RECOMMENDED READING
    3. 8 - What If You Know You Will Have to Explain Your Choices to Others Afterwards?
      1. INDIVIDUAL DECISION MAKING AND LEGITIMATION
      2. LEGITIMATION AND DECISION MAKING
      3. A CONTEMPORARY CHALLENGE: CLIMATE CHANGE AND SUSTAINABILITY
      4. WHAT TO DO?
      5. CONCLUSION
      6. RECOMMENDED READING
    4. 9 - Neuroeconomics
      1. THE GOAL OF NEUROECONOMICS
      2. AN APPLICATION: EYE-TRACKING AND BACKWARD INDUCTION IN BARGAINING GAMES
      3. WHAT CAN NEUROECONOMICS DO FOR ECONOMICS?
      4. RECOMMENDED READING
    5. 10 - The Useful Brain
      1. SHAKING THE (IR)RATIONALITY TREE: WELCOME TO “EMO-RATIONALITY”
      2. THE CURIOUS CASE OF PHINEAS GAGE
      3. WHAT CAN WE LEARN FROM THE MARRIAGE OF ECONOMICS AND NEUROSCIENCE?
      4. FROM LABORATORY EXPERIMENTS TO DECISIONS IN EVERYDAY LIFE
      5. NEUROECONOMICS AND BEYOND
      6. RECOMMENDED READING
  5. PART THREE - INDIVIDUAL DECISIONS IN A DANGEROUS AND UNCERTAIN WORLD
    1. 11 - Virgin Versus Experienced Risks
      1. INTRODUCTION
      2. THE INABILITY TO USE BAYESIAN UPDATING IN EVERYDAY PRACTICE
      3. UPDATING AS A FUNCTION OF PREVIOUS EXPERIENCE AND PREVIOUS CONTEMPLATION
      4. CONCLUSION
      5. RECOMMENDED READING
    2. 12 - How Do We Manage an Uncertain Future?
      1. AMBIGUOUS CHOICES
      2. ATTITUDES TOWARD AMBIGUITY
      3. AMBIGUITY AND THE FUTURE
      4. CONCLUSION
      5. RECOMMENDED READING
    3. 14 - Dreadful Possibilities, Neglected Probabilities
      1. DEMONSTRATING PROBABILITY NEGLECT
      2. CONCLUSION
      3. RECOMMENDED READING
    4. 15 - Why We Still Fail to Learn from Disasters
      1. WHEN GOOD DECISION PROCESSES PRODUCE BAD CONSEQUENCES
      2. THE COMPOUNDING ROLE OF POOR MENTAL MODELS
      3. THE COUNTERPRODUCTIVE EFFECTS OF KNOWLEDGE
      4. THE AGENCY PROBLEM
      5. POSTSCRIPT: CAN LEARNING BE IMPROVED?
      6. RECOMMENDED READING
    5. 16 - Dumb Decisions or as Smart as the Average Politician?
      1. INTRODUCTION
      2. AVERSION TO DEDUCTIBLES
      3. CONSUMER WARRANTIES
      4. THE NONPOOR HEALTH UNINSURED
      5. INSURANCE AND A TRANQUIL LIFE
      6. CONCLUSION: WHEN RATIONAL AND BEHAVIORAL DECISION MAKING COMPLEMENT EACH OTHER
      7. RECOMMENDED READING
    6. 17 - The Hold-Up Problem
      1. THE CASE OF FLOOD INSURANCE DECISIONS
      2. BEHAVIORAL CONSIDERATIONS
      3. WHY WAS NEW ORLEANS, STILL HIGHLY EXPOSED TO FUTURE HURRICANES, REBUILT IN THE ...
      4. THE HOLD-UP PROBLEM
      5. POLICIES TO FOSTER ADEQUATE SELF-PROTECTION AND INSURANCE
      6. RECOMMENDED READING
  6. PART FOUR - MANAGING AND FINANCING EXTREME EVENTS
    1. 18 - The Peculiar Politics of American Disaster Policy
      1. A BRIEF HISTORY OF FEDERAL DISASTER RELIEF
      2. RELIEF OVER INSURANCE: A PROBLEM OF CONCENTRATED BENEFITS AND DIFFUSE COSTS?
      3. AN ALTERNATIVE EXPLANATION: THE POWER OF THE PRESS IN SHAPING DISASTER POLITICS
      4. CONCLUSION: REFRAMING THE DISCUSSION AS A PREREQUISITE FOR REFORM
    2. 19 - Catastrophe Insurance and Regulatory Reform After the Subprime Mortgage Crisis
      1. INTRODUCTION
      2. LESSONS LEARNED FROM CATASTROPHES AND GOVERNMENT CATASTROPHE INSURANCE
      3. RE-REGULATING LOAN MARKETS IN THE AFTERMATH OF THE SUBPRIME CRISIS
      4. GOVERNMENT REINSURANCE FOR MUNICIPAL BOND INSURANCE
      5. SUMMARY AND CONCLUSIONS
      6. RECOMMENDED READING
    3. 20 - Toward Financial Stability
      1. UNDERSTAND WHY THIS HAPPENED: TWO DIVERGENT VIEWS
      2. SOME PARALLELS WITH THE CATASTROPHE RISK MARKET
      3. UNDERSTANDING THE 2008-2009 FINANCIAL CRISIS
      4. THREE LESSONS ON MARKET BEHAVIORS
      5. RECOMMENDED READING
    4. 21 - Economic Theory and the Financial Crisis
      1. GENERAL EQUILIBRIUM AND CREDIT INSTRUMENTS
      2. GENERAL EQUILIBRIUM UNDER UNCERTAINTY
      3. LIMITED INFORMATION OF ECONOMIC AGENTS
      4. INFORMATION AS A COMMODITY
      5. INEFFICIENT INCENTIVES: AN ENDEMIC PROPERTY OF CAPITALISM?
      6. RECOMMENDED READING
    5. 22 - Environmental Politics
      1. RECOMMENDED READING
    6. 23 - Act Now, Later, or Never?
      1. THE PROBLEM OF DISCOUNTING THE DISTANT FUTURE
      2. THE PROBLEM OF DYNAMIC RISK MANAGEMENT
      3. IN CLOSING
      4. RECOMMENDED READING
    7. 24 - Climate Change
      1. INTRODUCTION
      2. CLIMATE CHANGE AS A COMPOUND LOTTERY
      3. ALTERNATIVE DISPOSITIONS OF STAGE 1 RISK
      4. CONCLUDING THOUGHTS ON INSURER SOLVENCY
    8. 25 - International Social Protection in the Face of Climate Change
      1. “A TRULY INTERNATIONAL ENDEAVOUR”
      2. WEATHER EXTREMES: WHY THE POOR SUFFER THE MOST
      3. INSURANCE FOR THE POOR AS SECURITY AGAINST WEATHER DISASTERS
      4. BENEFITS, COSTS, AND CHALLENGES OF INSURANCE INSTRUMENTS
      5. INTERNATIONAL SUPPORT FOR INSURANCE: EFFICIENCY AND EQUITY
      6. CONCLUSION: A ROLE FOR THE ECONOMIST
      7. RECOMMENDED READING
  7. PART FIVE - WHAT DIFFERENCE CAN WE MAKE?
    1. 26 - Are We Making a Difference?
      1. UNREASONABLE FRIENDS AND ENEMIES
      2. OUR PROGRAM?
      3. REINVENTING OUR PROGRAMS
      4. REINVENTING OUR INSTITUTIONS
      5. CHANGING THE TALK—AND PERHAPS THE WALK
      6. THE SCIENCE AND PRACTICE OF DECISION MAKING
      7. RECOMMENDED READING
    2. 27 - Thinking Clearly About Policy Decisions
      1. INTRODUCTION
      2. ARTICULATING AND UNDERSTANDING VALUE JUDGMENTS
      3. UNDERSTANDING THE STRUCTURE OF POLICY DECISIONS
      4. ASSESSING, UNDERSTANDING, AND COMMUNICATING ABOUT UNCERTAINTY
      5. THE AMPLIFICATION OF RISK
      6. EDUCATING POLICY MAKERS ABOUT DECISION SCIENCES CONCEPTS
      7. RECOMMENDED READING
    3. 28 - Decision Making
      1. A WIDER SCOPE FOR THE DECISION SCIENCES
      2. SOME OF MY DISAPPOINTMENTS
      3. THE INTERDEPENDENCY OF SURPRISE BAD OUTCOMES
      4. A PARADIGM SHIFT FOR ACADEMICS: FROM PROBLEM SOLVERS TO PROBLEM INVENTORS
      5. A FINAL WORD, TO THE NEW GENERATION
      6. RECOMMENDED READING
    4. 29 - Influential Social Science, Risks, and Disasters
      1. ARE ACADEMIC SOCIAL SCIENTISTS MAKING A DIFFERENCE?
      2. RISK MANAGEMENT AND DISASTER RESEARCH
      3. DISASTER RESEARCH AND PUBLIC POLICY ON MITIGATION AND RECOVERY
      4. SUPPORT FOR RISK MANAGEMENT AND DISASTER RESEARCH AT THE NATIONAL SCIENCE FOUNDATION
      5. RECOMMENDED READING
    5. 30 - Reflections and Guiding Principles for Dealing with Societal Risks
      1. REFLECTIONS OF THINGS PAST
      2. GUIDING PRINCIPLES FOR MANAGING SOCIETAL RISK PROBLEMS
      3. GUIDING PRINCIPLES FOR YOUNG RESEARCHERS
      4. RECOMMENDED READING
  8. Acknowledgements
  9. NOTES
  10. ABOUT THE CONTRIBUTORS
  11. INDEX
  12. Copyright Page