Knowledge
is Fundemental
One of this week’s readings was on how every communist society was one filled with chaos and terror, leaving the residents of the nation scared and traumatized from witnessing countless of lawless acts, from killings in broad daylight to displaying dead bodies for a warning. These acts were a pattern that every communist society abided by, but for the sake of this review Ethiopia will be the focus. This piece of writing are personal accounts titled From the Gulag to the killing fields, highlighting the events that took place that were kept secret beforehand. The first account is that of D.W. Giorgis, who was “a senior member of the ruling party, deputy foreign minister, and head of the famine relief operation between 1983 and 1985.” He classifies this as the Ethiopian Holocaust and voices the fact that the regime objective was to save and build its people, but instead, it ignored their cries and caused limitless deaths resulting in the 2.5 million Ethiopians fleeing to other lands. This was the effect of incorporating Marxism in an Ethiopian reality, a place where religion and ownership was dominate; stripping that form the people would cause them to flee or rise up against the system and with rising up ends in the death of thousands. He begins explaining briefly the short story of how Mengistu rose to power forcefully by the suicide of Amman and then, with him being known for manipulation and cruelty, changed the theme of the revolution to revenge because he assumed the if this was not the message, “the revolution would never be able to bring reform.”
Mengistu based his speech and compass on an ideal, something that Marx was opposed to, which informs us that Mengistu, on some level, took what he wanted from Marx to justify his actions and threw away the scraps like making a society reform on the basis of an ideal; since ideals/transcendence do not exists, how can one try to bring reformation on the basis of it. This is an important matter because this has its implications on the metaphysical level, if Mengistu believed in ideals, in this case revenge, then he believed in a transcendence and with that comes the value and/or the importance of human life, resulting in his actions being truly inhumane. An example of this was the Red Terror that swept through Ethiopia, touching women, children, and the elderly. But if he did not believe in transcendence, even though his actions were still inhumane, then his ideology concerning human life would be on equal balance as a donkey, an animal that is very useful but an animal none the less. So, with Mengistu basing his reformation on an ideal but wanting to adopt the Marxist ideology, his actions were bound to have contradictions, saying the revolution was for revenge, an ideology, but then claiming that Marxism will fix every problem eventually.
D.W. Giorgis explained how despite the information that was showed to Mengistu concerning anything, Mengistu would hold the “inferior sort of man who make adherence to ideology…to justify [his] capricious policies… [resulting in] the most qualified people in the country [not being] consulted.” An example of this was when Mengistu wanted to relocate 300,000 families which would be roughly around 1.5 million people to southern Ethiopia within nine months. The qualified people, including D.W. Giorgis, told him that this was an impossible task and that the most they could do was 73,400 families in the span of two years, but he ignored them until someone assured him that it was possible and with that came separation of uncountable families. D.W. Giorgis stated the following, “of the estimated 700,000 settlers (250,000 families) still in the various camps, half are separated from one or more family members… with the husband dragged off to a settlement site, whatever was left of the family wandered into cities or villages where they thought they would be safer and were never heard from again.” Overall, this was a brief overview of how Communism swept through Ethiopia, tainting the mindset of the people in power, influencing them to commit monstrous acts against their own people repeatedly.
Behavioral Economics is an area where the traditional model of economics is altered, adopting material from other practices such as psychology to broaden its knowledge on the explanation of human behavior. Richard Thaler and Sendhil Mullainathan gave a brief overview of what behavioral economics is and how it can be applied to various areas of studies, but only using finances and savings as examples in their article. They begin by starting off with four terms: Behavioral Economics, which is the combination of psychology and economics, bounded rationality, willpower, and self-interest, meaning the things that are bounded, every agent has very little of (1). The authors use these ‘bounded’ terms to connect behavioral economics to finances and savings, among other things. For each of them, it contrasts with the traditional model of economics, which state that agents are completely rational in their decisions, they have the willpower to do the things that are rational, and they all only look to do things that are in their best interest. These assumptions are wrong, according to Thaler and Mullainathan simply because this model does not incorporate the human mind, which can only be factored in if psychological practices are adopted.
After the introduction and definition of the terms, they begin to briefly speak on how the belief that “markets would wipe out irrationality [was], well, optimistic” (2) simply because it does not have that type of power. Markets cannot force an agent to do anything, but it can influence them. This is an important distinction to understand because the human mind can be influenced and/or persuaded to do something, but it can never be forced; ultimately meaning that the “markets cannot be relied upon to make economics agents rational” (3). Thaler and Mullainathan mention an old argument that states how those who failed to maximize should have been weeded out by evolutionary forces” (3). They mention this because this argument can be used for weeding out rational behavior and quasi-rational behavior and they brought in an example of this in a hypothetical situation. Where if two men were playing a war of attrition, which is the wearing down of someone in a non-physical way, overconfidence will be beneficial, and the rational person would back down. They used this example to justify the uselessness of this argument leading to the last argument they addressed, people who make the same mistakes would learn the error in their ways. What they had to say about this can be summarized in one quote from them: “[this agent] will get stuck in a non-optimal equilibrium, simply because the cost of trying something else is too high” (4); overall, briefly saying about the things mentioned above, Thaler and Mullainathan said, “One cannot defend unbounded rationality on purely theoretical grounds. Neither arbitrage, competition, evolution, nor learning necessarily guarantees that unbounded rationality must be an effective model” (4).
The foundation to what Thaler and Mullainathan begins in their section named “Three Bounds of Human Nature” where they focus on three unrealistic traits concerning human behavior, unbounded rationality, unbounded willpower, and unbounded selfishness. The first use of the term “unbounded” being applied to the rest of the terms was from Herbert Simon, being furthered on by Conlisk by stating how “the failure to incorporate bounded rationality into economic models is just bad economics” (4). This puts pressure on the entirety of the standard model through simply adding irrationality into the mix, and one can begin to see how the removal of irrational behavior for any model, in itself is irrational. When one destroys rationality from the equation, Thaler and Mullainathan mention how people then begin to lean in their judgements/belief and choice. Resulting in the study of how and why people make choices, and the theory that delt with this is called the prospect theory; this theory became popular in behavioral economics because of the incorporation of important psychological practices. This theory fits perfectly with Thaler’s and Mullainathan’s three bounded terms through the examples given, like if “investors are overconfident in their abilities, they will be willing to make trades even in the absence of true information” (5) and that the stocks they buy does worse than the stocks they sold. This spoke on bounded rationality where the investor, blinded by his own confidence, makes decisions not on logic or true information, but on a cognitive bias. From this single example, we can witness the irrational behavior of humans despite what the market shows. This theory also speak on bounded willpower, not being able to control ourselves for the optimal outcome because of self-control reasons and Thaler and Mullainathan used the example of when nearly 90 million taxpayers paid more than they needed to ensure a refund because of their procrastination (they waited until the last day to file them, resulting in them paying more than they needed). And lastly, the prospect theory alters the area concerning agents having self-interest as their primary motive beings by implementing altruism, proving that people commit acts that do not benefit themselves. Thaler and Mullainathan used the example in “1993, 73.4& of all households gave some money to charity… [and how] 47.7% of the population does volunteer work” (6), proving that altruism can be applied to a majority of people and therefore should be considered concerning humans.
So far Thaler and Mullainathan informed us that the standard economic theory, that human beings are rational beings who have the willingness to choose the optimal choice to only benefit them, has a foundation made of glass and they offer their three terms of boundedness as a solution for the reconstruction of this model through behavioral economics. They then demonstrate the usefulness of their research in finance and savings, two things that every agent must be entangled in. For finances, it was mentioned earlier here on how investors would keep the stock that is doing horrible longer than they would with the stock that is doing good, they said the following: “investors were more likely to sell a stock that had increased in value than one that had decreased in value” (8), and this data was gathered by Odean while he was studying a discount brokerage firm. Thaler and Mullainathan mention why that is and state that the influence of mental accounting and loss aversion plays a huge role simply because the investors “are reluctant to realize capital losses (8). For savings, Thaler and Mullainathan summed it up in a single line speaking on why people struggle with it, “the primary for the lack of saving appears to be self-control” (9) and that the majority of people who do save does so because of “forced” saving vehicles such as IRAs and 401(k) plans. People tend to appreciate and respect these vehicles because it monitors their self-control through a tax penalty if the money is removed prematurely. Although these vehicles are in place, people must choose to use them, and Thaler and Mullainathan discovered that procrastination and are hyperbolic discounting are seen in people who are impatient for short horizon decisions, but much more patient at long horizon decisions. Meaning that these types of people have what it takes to save but in order to satisfy their instinctive urges, they halt the process or prolong it. This relates to saving because these types of people are more likely to use these vehicles, but they make up excuses for their short-term decisions, resulting in them prolonging optimizing saving options. But studies have shown that if companies automatically put their employees into the saving programs like the 401 (k), the percentage of people who participate increases significantly (10).
For both topics mentioned, finances and saving, Thaler and Mullainathan used the three bounded terms, rationality, willpower, and self-interest, to incorporate the usage and importance of behavioral economics in these areas. Thaler and Mullainathan showed that in finances, the usage of behavioral economics revealed the irrational actions an investor shows in spite of having little to no information or how much money they are losing. Meaning that with or without the market people will make irrational decisions, resulting in the necessity of including bounded rationality into the model. The talk of savings allowed the inclusion of bounded willpower because of the lack of it. People do not save, unless it is through a “forced” saving vehicle, because they are impatient for short horizons (investments that are shorter than five years) resulting in them spending the money that is being saved. An effective way to combat this was putting a penalty fee for withdrawing from the investment before its maturity date, which contributed to forcing people to have a stronger willpower. Meaning if people do not have something that forces them to obtain the willpower that is mentioned in the standard model, they will not have it, and this revelation came through the study of behavioral economics.
This week’s reading review is on “The End of Truth” where it speaks on the various topics of totalitarian governments that sparked my interest. The first thing that automatically took my eye was in the beginning when Carr mentioned how “the most effective way of making everybody serve…is to make everybody believe in those ends,” speaking on why totalitarian governments are so successful. This took my interest because it implies the amount of influence mental states have on an individual and a society; not only does this imply such a thing, but also hint on the topic of freewill, that the beliefs that were chosen and imposed upon the people must become their beliefs speaking as if they, the people, have the option to adopt or reject such things. The reading then goes into how the forms of propaganda tilt the scale in favor of the totalitarian government’s agenda because everything is “coordinated to influence the individuals in the same direction and produce the characteristic Gleichschaltung of all minds” (169). The implication behind this quote is that someone, in this case the totalitarian system, can instill and cultivate an ideology in the human mind, on the individual or societal level, resulting in the production of a certain characteristic in each human being within its proximity; ultimately implying that ideas indeed matter and have the certainty, with some time and excitation, of causing the human to act and think differently than before. Meaning that the use and control of information and what is shared can influence people’s decisions and mental states, and the people who think of themselves intelligent and independent cannot “escape that influence if they are long isolated from all other sources of information” (169), making everyone that is within the scopes vulnerable to this seed being planted.
Another thing that took my attention was a brief line on the same page of where the quotes above were mentioned, saying “that even the striving for equality by means of a directed economy can result in an officially enforced inequality” which will result in the disappearance of “elements of our morals, the respect for human life, for the weak, and for the individual. (169). The reason why this caught my attention was because of the confusion concerning this; I understood it as the following: the more society strives for equality by the means of directed economy, meaning the government controls economic activity, it will compel inequality to take place. If this is the correct interpretation then the question that should be addressed is, is the compulsion of inequality springing forth from the people and of so, why.
To keep it short, one more interesting topic was brought up in this reading, the consequence of totalitarian propaganda, and this was defined as the destructive and undermining of “the sense of and the respect for truth” (170). This was deemed as such because one would have to manipulate their speech that aligns with the views the people already have but that also align with the agenda, resulting in them, the totalitarian, claiming that the interpretation the people had of such views were “not properly understood or recognized” (172) and this is done by changing definitions. The reading mentions numerous words but here we will only look at one, freedom. When one thinks of freedom, they have the notation that it is applied to “the members of society” whereas the definition that is being applied when this word is used is “the unlimited freedom of the planner to do with society [as] he please” (173). These are the few topics I wanted to briefly touch on because of the implications some had that needed to be known while others needed to be defined.