Adonis Diaries

Posts Tagged ‘micro-economics


Micro-economics freak, Freakonomics…: Who is Steven Levitt

Note: updated this review book of 2011

Seven  D. Levitt made himself famous by focusing on micro-economics phenomena that macro-economics scholars would not touch with a long pole.

The macro-economists theorize about mathematical monetary issues, but Levitt says: “I don’t pretend to know very much about the field of economics, I am poor in econometrics (mathematical set of equations with an objective equation and a set of constraint equations, like in operation research field), I don’t know how to do theory. It would be a total fake on my part if I claim that I know how the stock market moves, or if the economy is shrinking, or if deflation is bad or good…”

Levitt’s point of view is that economics is a science with excellent tools for gaining insights, but it lacks and is short on interesting questions to ponder upon.

Steven loves to ask freaky questions and get on with the task of torturing data-bases in order to discover trends and correlations among the various factors.

For example, you ask a question that interest you, and you discover the story behind the problem, such as:

1) Why most drug dealers still live with their mothers?

2) Which is more dangerous: Having a gun at home or a private swimming pool?

3) Why crime rate plunged dramatically in the last two decades and is still witnessing a steady decline, though population increased and the economy has its feet flailing up?

4) Why your real estate agent sells his own home at a higher price and stay longer on the market?

5) Does your stock broker has your best interest in mind?

6) Why black parents give their children names that they know may hurt their career prospects…?

7) Do school teacher cheat to meet high-stakes testing standards?

8) Why police departments distort crime data and eliminate cases from the records…?

Do you believe that the problems of this modern world are not impenetrable, and can be resolved, if the right questions are asked, and people are dedicated in uncovering the real story?

Are you curious in divulging the real stories behind cheating, corruption, and criminal behaviors and activities?

Levitt just loves to play the economist investigator to questions that are related to criminal behaviors.

Levitt drives an aging green Chevy Cavalier with a window that does not shut close, and the car produces a dull roar at highway speed. Levitt notices a homeless guy and says: “He had nice headphones, nicer than mines. Otherwise, it doesn’t look like he has many assets…”

Levitt had an interview for the Society of Fellows, a Harvard clubhouse that pays young scholars to do their own work, for three years, with no commitments attached. Levitt was on fire and his wit crackled. A scholar member asked Steven:

“Do you have a unifying theme of your work? I’m having hard time seeing one underlying theme…”

The scholars volunteered offering what they thought could be a unifying theme, and Steven found himself agreeing with every alternative theme.

Finally, philosopher Robert Nozick interrupted saying: “He is 26 year-old. Why does Steven need to have a unifying theme at such a young age? A talented person take a question and he’ll just answer it, and he’ll be fine.”  Steven was awarded the grant.

Steven Levitt has contributed in giving micro-economics and edge over macro-economics or “homo economics” and this behavioral perspective has called into doubt many claims of mankind rational decision-making tendencies.

Real world problems demand to get immersed into various fields of knowledge such as psychology, criminology, sociology, neurology… in order to overcome mathematical theoretical shortcoming.

At 36 of age, Levitt is a full professor at the Univ. of Chicago’s economics department, and received tenure two years after starting to teach. He is an editor of “The Journal of Political Economy

Note 1Stephen J. Dubner, co-author of “Freakonomics”, covered the biography of Steven D. Levitt in a special chapter called “Bonus matter”

Note 2:  I have published 5 posts on chapters of Freakonomics and you may have a head start with

Neuro-Economics or homo economicus? (2010)

That’s correct.  It is no longer micro-economics, macro-economics, classical economics, or market economics. 

Two distinct disciplines realized that the time has come to combine their fields of interests into a new “scientific field” that they named Neuro-economics.

Economists were working on customer behavior (for example, how a competing product can acquire market share by evaluating combinations of quality, durability, price, flexibility, availability of affordable spare parts, repair facilities, guarantees, loaning facilities, perception of the external characteristics, varieties in color, and on.

A new breed of psychologists, sometimes called neuro-scientists,  are enamored with the technology of magnetic resonance imaging (MRI) that show brain activities in reaction to a behavior, and they receive ready funds to study economic factors on people behavior.

Neuro-economics is the study of people behavior related to economic games in experiments; it is interested of discovering how cooperation among team player, confidence, equity perception, justice, and punishment affect profitability and trading relationship. For example,

1. there is this game labeled “ultimatum”; you have two partners A and B starting each with a sum of money, say $10.  A offer B a sum of money; B can refuse and both lose the game;

2. B can accept and they continue the game with more complex rules.

MRI can predict B reactions; there is a section in the brain related to “disgust” that will light up when B has decided to refuse the offer.

There is another section in the brain related to “satisfaction” that will light up, especially when alternatives to punish non-cooperating partners are included in the game.

Another example,

If A has total confidence in his partner B then he may give B all his money. B receive five folds the sum that he has.

Theoretically, both partners have a joint account of $50 by simply showing confidence.  B can reciprocate confidence or do business solo with $50.

Well, these sort of games…  They are just psychological games with economic incentives.

Now, suppose the experimenter tell the subjects that whatever money being circulated are real money and they can keep them after the game , do you think previous behaviors will alter?

I bet they would, but experiments never mention this major defect in their game procedures.

For example, in the game of confidence, if money is not for the keeps then partners should logically proceed with total confidence and amass tons of money by reciprocating total confidence; that should be a silly game if the goal is to win just the game.

Actually, all normal teams will behave the same behavior and nobody will ever win.

Now, if money was to be retained as cash after the game then interesting and varied behaviors will be witnessed.

I lean toward the conjecture that subjects are told that the money is for real and for the keep, but this fact is never stated in research papers.

Otherwise, scientists will be chastised as encouraging gambling; possibly a few partners will be using physical means to get their share if they lose, and liability suits will flood and wreck the department.

I suggest that losers in the games be compensated with real money after the experiment: you don’t want experiments to be sources of animosities among subjects.

My hypothesis is that if real money reaches the level of hundreds of dollars then the experiment with MRI will become totally non-informative: the brain will emulate Time Square on New Year Eve, and every kind of human emotions in the subject will want to participate in the experiment and react with powerful activation.

Neuro-economics has demonstrated that the brain readily recognizes a valid currency, like the defunct Franc from the new Euro currency. How so?

The brain process money as real object and not a cultural abstraction.  Interesting results with no practical application; just another proof that homo sapience preceded homo-economicus.




March 2023

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